Mexico Mining Report Q3 2012

We expect Mexico's mining sector to experience steady growth in the coming years as mining companies are attracted to large precious and base metals resources. We forecast the value of Mexico's mining sector to grow from US$13.7bn in 2011 to US$15.7bn by 2016. We expect the bulk of this growth to come from precious metals mining as the world's largest silver producer continues to attract investment. The country will benefit from a stable business environment and favourable mining regulations, despite some uncertainty surrounding the upcoming presidential election. Mexico's Chamber of Mines (Camimex) estimates total mining investment in 2012 to come in around US$5.0bn.

Increases In Metal Production Ahead While Mexico's mining sector will remain a relative laggard compared to Latin American peers such as Brazil, Chile and Peru, we expect exploration expenditures will reveal new deposits that will support the sector's long-term growth. Mexico's mining output will be driven primarily by precious metals such as silver and gold. However, we note the potential for large increases in lead and zinc as well as copper output over the forecast period as mine investment begins to diversify away from precious metals.

Mexico's vast silver resources will allow it to remain the world leader in mined silver production over our forecast period. As key silver mining companies develop and expand mines, we forecast silver production growth of 5.0% in 2012, with total output reaching 207moz by 2016. Silver miner Fresnillo will remain a sector leader, accounting for roughly one quarter of Mexican production. Junior companies will also seek to develop small- to medium-sized silver mines as elevated prices and large silver resources attract attention from precious metals miners.

As precious metals miners uncover new silver deposits, we expect increasing attention will be focused on the discovery of promising gold mines as well. Though Mexico is not a major global gold producer, we believe the favourable business environment and existing silver mining presence could encourage strong growth in gold production in the coming years. Major global miners such as Goldcorp are already well established in the country and could be a key player in acquiring junior resource companies that are able to uncover economically attractive gold deposits. That said, the gold sector remains in the early stages of development, which could weigh on output growth going forward.

Copper production in Mexico will continue to be driven by the Buenavista del Cobre mine operated by Grupo Mexico. The mine, which reopened in 2011 following a three-year strike is the country's largest.

We expect junior and mid-tier miners will also seek to develop copper projects as market prices remain elevated by historical standards. Projects such as Stockport Exploration's La Morena mine remain in the early stages but could attract interest from larger mining investors if the deposit is proved to be of sufficient size. That said, the lack of existing, large deposits suggests that growth in actual copper output will be modest over our forecast period, especially compared to other large copper mining countries such as Chile and Peru.

We caution that there remain risks to our metals production forecasts. Mexico's growth potential is restricted by continued violence in the country, relating to the drug trade, as well as relatively high levels of corruption and a fairly inflexible labour market. Political uncertainty surrounding the upcoming presidential election could keep investors on the sidelines until the new administration's policies become clear. While we do not expect a new government to enact unfavourable mining sector policies, growing political risks in key mining countries such as Peru and Argentina, may give some miners pause before entering the market.

Key Players Mexico's mining sector will remain fairly well split between domestic mining companies and foreign firms. The country's largest mining company is Grupo México, which owns the Buenavista del Cobre copper mine and also operates large copper mining operations in Peru and the US. Other key Mexican mining companies include Industrias Penoles, Fresnillo and numerous junior companies. Foreign mining firms include senior gold miner Goldcorp, which operates two of the largest gold mines in Mexico.