Surprise: mine spending grows in Mexico despite new law, Obrador’s populist tilt

What’s happening in Mexico? Corporate mining project investments soared this year in the world’s largest silver producer even as the government targeted companies in a tough new law a year after it effectively nationalized the lithium industry.

Exploration, development and working capital spending by public companies jumped to US$122.4 million in this year’s first quarter, 55% more than the previous three quarters combined, according to data compiled by Mining Intelligence, part of The Northern Miner group. Then spending increased even more in the second quarter to US$137.7 million, the data show.

Last year, the government of President Andrés Manuel López Obrador approved legislation giving the state exclusive rights in lithium, although Mexico doesn’t have any producing mines yet. Then in May, the ruling Morena party passed a new mining industry law that shortened concessions to 30 from 50 years, tightened rules for water permits, boosted local community benefits and imposed a public tender system for all concessions instead of claims staking.

Mexico’s national mining chamber, Camimex, said the new law could cost US$9 billion in investments and up to 420,000 jobs. But companies with existing projects, such as Torex Gold Resources (TSX: TXG), which has operations in Guerrero state, and Grupo Mexico, the world’s fourth-largest copper producer, expressed confidence they won’t be affected.

“Given that the tenure of Torex concessions has been granted on a 40- and 50-year basis, we see minimal impact to our operations in Mexico,” a spokesperson said in a statement to The Northern Miner in May. “We are confident that discussions between industry and government will be ongoing.”

If established projects are protected to a point, it begs the question of whether new entrants will gamble contending with the jurisdiction at all. Just three companies accounted for more than half of the second-quarter spending mentioned above: Discovery Silver (TSX: DSV, US-OTC: DSVSF), Prime Mining (TSXV: PRYM; US-OTC: PRMNF) and Luca Mining (TSXV: LUCA; US-OTC: LUCMF).

Discovery spent US$38.4 million during the quarter as it advanced drilling for a feasibility study on its US$455 million Cordero project in Chihuahua state. It has a database of 310,000 metres of drilling in 800 holes, including assays released this month that cut 52 metres grading 51 grams silver per tonne, 0.2 gram gold, 0.6% lead and 0.9% zinc from 102 metres downhole.

“The additional drilling we have completed, including this current set of drill results, has demonstrated the potential to further grow reserves at what is already one of the largest silver deposits globally,” CEO Tony Makuch said in a release on Aug. 2.

 

Cordero holds 716 million measured and indicated tonnes grading 20 grams silver per tonne, 0.1 gram gold per tonne, 0.3% lead and 0.5% for 467 million oz. silver, 1.3 million oz. gold, 4.5 million lb. lead and 8.5 million lb. zinc.

Prime Mining, backed by a 17% stake held by Franco-Nevada (TSX: FNV; NYSE: FNV) founder and former Newmont chairman Pierre Lassonde, is advancing its Los Reyes gold project in the western state of Durango. A resource update in May showed 27.2 million tonnes grading 1.2 grams gold, 40.4 grams silver for 1 million oz. gold and 35.3 million oz. silver.

In July, Prime said drill results extended mineralization beyond the open pit outlined in the resource update. Drill hole 23NB-46, 150 metres along strike from the bottom of the pit, cut 9.1 metres grading 4.1 grams gold and 67.9 grams silver.

“Our expansion drilling continues to encounter wide intercepts of high-grade mineralization outside of the current resource pits, this time in the Central Area,” CEO Daniel Kunz said in a release. “These results parallel what we recently reported at the Z-T Area.”

Luca is halfway to reaching 1,000 tonnes per day of commercial production at the Tahuehueto gold project in Durango expected by year’s end. The company spent US$18.8 million in the April-through-June period. The project has a capital cost estimate of US$61.2 million, according to a prefeasibility study released in March 2022. Luca raised nearly $25 million through a private placement in June.

Bumps on the road

It’s not all clear sailing for some projects in Mexico. A strike at Newmont’s (TSX: NGT; NYSE: NEM) Penasquito gold-silver mine since early June prompted the company to declare force majeur on some metal deliveries last month and withdraw its annual outlook for the mine. The world’s largest gold miner has said it can’t estimate when the work stoppage will end.

In June, López Obrador tasked new Labour Minister Marath Bolanos to sort out worker disputes with mines stretching back more than a decade. These include with Grupo Mexico, where a union called The Miners claims a strike that stopped production from 2007 to 2018 at the San Martin lead-copper-zinc-silver mine in the central state of Zacatecas is legally still in place.

The United States, under the continent’s free-trade agreement, has asked Mexico to investigate the claim. The company says a majority of workers voted to lift the strike.

“We have to seek conciliation, truly thinking of the workers, not the interests of the business leaders or the union leaders,” López Obrador said in June.

Companies that do run into problems with Mexico’s new mining statutes should consider the Comprehensive & Progressive Trans-Pacific Partnership, a trade agreement that allows for investor-state arbitration, Toronto-based law firm McCarthy Tétrault said in a report after the legislation passed. It might be better for resolving disputes than the Canada-United States-Mexico pact (formerly NAFTA) which relies upon diplomatic channels between governments.

“The new laws create significant risks for long-term investments in the Mexican mining sector,” McCarthy Tétrault said. “Many Canadian miners with investments in Mexico are contemplating possible legal remedies, including challenges under Mexico’s constitution.”

Lithium project

Other projects going forward despite new Mexican rules include the US$800 million Sonora, the world’s sixth-largest lithium project, in the northwest namesake state. China’s Ganfeng Lithium started construction in late 2021. It’s estimated to hold 8.8 million tonnes of lithium carbonate equivalent. López Obrador said in January he hoped to reach an agreement with Ganfeng under regulations that presumably give the government sole control of the battery metal. 

Sonora plans to produce 35,000 tonnes a year of lithium at US$4,000 per tonne, a low cost for the industry, and 28,800 tonnes annually of potassium sulphate for the fertilizer industry. The open-pit mine site on the 1,000-sq.-km property holds 243 million proven and probable tonnes grading 3,480 parts per million lithium and 1.5% potassium for 4.5 million tonnes lithium carbonate equivalent and 4 million tonnes potassium, according to a 2017 feasibility study.

The US$842 million San Nicolás copper-zinc projectin Zacatecas state, a 50:50 venture between Agnico Eagle Mines (TSX: AEM; NYSE: AEM) and Teck Resources (TSX: TECK.A/TECK.B, NYSE: TECK), is submitting an environmental impact assessment and permit application this year and plans to complete a feasibility study in early 2024. The project has a 2.6-year payback period and an after-tax internal rate of return of 33%. 

One of the world’s largest undeveloped volcanic-hosted massive sulphide deposits, it holds 105.2 million proven and probable tonnes grading 1.1% copper, 1.5% zinc, 0.4 gram gold per tonne and 22 grams silver, according to a 2021 study by Teck. It proposed an open-pit operation with first production in 2026 and a mine life of 15 years. Annual production during the first five years would be 63,000 tonnes of copper and 147,000 tonnes of zinc in concentrate, it said.

First Majestic Silver (TSX: FR; NYSE: AG), which has three producing mines in northern Mexico, has total proven and probable reserves of 11.3 million tonnes grading 169 grams silver and 2.1 grams gold, for 61.5 million oz. silver and 781,000 oz. gold at its La Encantada, San Dimas and Santa Elena mines.

Drill results reported last month to expand the past-producing San Dimas intersected 8.4 grams gold and 763 grams silver over 3.9 metres and 15 grams gold and 89 grams silver over 4.1 metres.

Also in July, a drill program at Santa Elena to convert inferred to indicated resources at the Ermitaño vein included: 4.3 grams gold and 127 grams silver over 13.3 metres; 6 grams gold and 222 grams silver over 15.6 metres; and 13.7 grams gold and 150 grams silver over 6.4 metres.

“Results from the Elia and Santa Teresa veins at San Dimas highlight the potential to add new, high-grade ounces,” First Majestic CEO Keith Neumeyer said. “At Santa Elena, the results from the Ermitaño vein are in many cases better than expected and will provide a solid foundation for reserve replacement.”

McEwen Mining (TSX: MUX; NYSE: MUX), which operates mines from northern Ontario to southern Argentina, may start building its $42 million Fenix redevelopment of the El Gallo gold complex this year in Sinaloa state. It’s expected to provide a nine-year mine life.

“We continue to advance towards a formal construction decision,” CEO Rob McEwen said on a conference call about second-quarter earnings on Aug. 10. “During the quarter, we initiated a sonic drilling campaign, advanced permitting applications and engaged a project manager.”

Correction: An earlier version of this story stated 0.1% gold at Cordero, which should have been 0.1 gram gold per tonne. The Northern Miner regrets the error.