Australian’s mining south of the border: The Mexican oportunidad 29 November, 2012 Alex Heber 0comments
Oportunidad is Spanish for opportunity, something Australian gold and silver exploration company Cerro Resources is grasping with both hands in their Mexico operations.
And they aren’t alone, in 2011 it was estimated there was already around 300 to 400 Canadian companies alongside about 35 Australian mining companies operating in South America.
At the time Dan Sullivan, trade commissioner at the Australian embassy in Lima Peru told Australian Mining that Australian companies were missing out on valuable opportunities.
“The Canadians are all over South America, which means that Australian mining companies are missing out on the opportunities here, and this worries me,” Sullivan said.
Mexico’s long running mining history dates back to the 1500’s when the Spanish mined the Guanajuato region in 1540.
At the height of production, the La Valenciana silver mine located underneath the Guanajuato township produced 66 per cent of the world’s silver. Over a period of 250 years from the 17th century it continued to produce 30 per cent of global silver and amazingly is still in production today.
In terms of nominal gross domestic product (GDP) Mexico’s economy is the 13th largest globally; combine this with a wealth of undeveloped resources, cheap labour costs, and their ascension to the North American Free Trade Agreement (NAFTA), the viability of Mexican projects looks good.
Cerro Resources managing director Tony McDonald told Australian Mining that resources operations in Mexico have precedence over lots of other things.
“It’s quite a unique jurisdiction, it has a big workforce that understands mining, and they meet international standards,” he explained.
Mexican Safety Back in 2011 Australian Mining reported safety standards in South America were questionable at the best of times, using the example of Bolivia’s Potosi silver mine which experienced on average a major accident every day, with at least three of the approximately 12 000 miners killed every month, mainly due to tunnel collapses and/or toxic gases.
In the case of Mexico McDonald disagrees, saying that most of the western companies operating in the country including Canadians, Australians, and Americans rigidly comply with international standards, so there is no cutting corners
“If you don’t meet international standards you can expect to be fairly harshly dealt with in Mexico.
“International standards are a must, workplace health and safety, environmental; all of those things are an absolute must,” he said.
Discussing safety standard compliance in Mexico, Cerro Resources general manager Greg Germon said in their case being a dual international listed company sets a higher benchmark as investors have the expectation of first world operations no matter where the operation in conducted.
“It sets you to the global best practice because ultimately you’re at reputation risk if your listed, particularly because we’re on TSXV and ASX, we have to adequately meet investor queries about those [safety] aspects of the operations.
“Nobody would be trying to cut corners just to make small wins because in the long term it just doesn’t bear out,” he said.
Combating safety issues head on and managing perceptions are two ways Cerro Resources plans to safely operate its Mexican Cerro Del Gallo operation.
“We educate the Australian market by making representational promises, we will meet international standard in terms of workplace health and safety, environmental and all of those sorts of best practices.
“We’ve come a long way these days and it’s the exception rather than the rule that someone will take a risk with people’s lives. You don’t want to do it, you don’t have to do it and we hear of some of those deaths and it’s really unfortunate,” McDonald said.
The fact that Cerro Del Gallo is a brand new open cut mine, not an underground one with legacy issues also plays in the company’s favour when planning safety processes Germon added.
“Safety is normally the number one, before profit, before everything else, safety is the number one benchmark, everybody holds themselves to it and I don’t see us as any different,” Germon said.
Cerro’s Mexican venture
Cerro Resources Mexican move is largely being driven by their Cerro Del Gallo gold and silver mine located in the Guanajuato province.
With an expected mine life of 14 years, a low strip ratio, and estimated production of 94,500 ounces of gold each year at $516 per ounce the project is not only looking viable, it will also be of huge financial benefit to Cerro Resources, especially if gold continues at its current rates.
“It’s a large resource, 14 years, about 100,000 ounces a year and has a reasonably low capex,” McDonald stated.
“It’s almost impossible to find 100,000 ounce gold projects that can produce for under $700 per ounce,” Germon added.
The Company also has two other potential gold and silver exploration projects namely the Namiquipa silver project in the country’s north, and the Espiritu Santo greenfield package in neighbouring Jalisco state to the west of Guanajuato.
“We’re already seeing veins exposed at the surface carrying gold and that’s opportunity,” McDonald said about the Espiritu Santo project.
“Once we get this project off the ground we’ll have plenty of cash to spin off and fund these other projects, it opens the doors to opportunity."
The Cerro Del Gallo mine’s feasibility study was released earlier this year and McDonald said the company is continuing to work towards the mine’s construction.
“We’ve been firming up to try and get it now to a stage of development. All of the pre construction work, preparation for permitting, land acquisitions are being done and now importantly we’re working on funding to meet that capital expenditure.
“We’ve had talks with debt providers, equity participation and all sorts of things so we’re working our way towards that now,” McDonald said.
Cerro is currently in the middle of negotiations with senior gold miner Goldcorp and said they are hopeful Goldcorp will finalise the deal soon.
“The most critical thing is our Goldcorp joint venture partner; we’re working with them to sort out how best to proceed.
“Once Goldcorp are across the line then I’ve got a much clearer passage to determine whether we’re going to fund 100 per cent of it or fund our 69 per cent share of it. So as soon as that happens I think we can move fairly quickly,” McDonald said.
Cerro’s jump into Mexico hasn’t all been smooth sailing: two of the biggest challenges the company has faced to date developing the Cerro Del Gallo site have been metallurgy and the timing of the global financial crisis (GFC).
“Financier levels of comfort have gone far more conservative. Everyone’s trying to eliminate any risk,” Germon explained.
McDonald added that although the depths of the GFC were quite some time ago it has left a lasting impression on the industry.
“I think the GFC changed the nature of things but the metallurgy of any mining project is the cruncher and you have to convince people, you have to do enough work on it to make sure you’ve got it right.
“Every project is unique, with its own set of challenges and the financiers and others will always want to see you do more metallurgy than you might have thought was necessary and that’s what we’ve done.
“So that’s probably the biggest issue to continually deal with and our recovery is good, we’ve shown that, the feasibility has been signed off and we’re ready to go,” McDonald said.
Despite these hurdles, McDonald said after more that 20 years operating in Mexico they’re still confident.
“I can honestly say we haven’t had too many surprises. We’ve worked in Mexico as a broader group for 20 odd years so we’re pretty comfortable in knowing what we have to do, knowing the standards of what Mexican’s require and I think we’ve been able to execute,” he said.
Cerro Del Gallo is surrounded by undulating land with a few hills, when looking at the photographs one could easily mistake the location for somewhere in Australia.
“You’ve got the wild mountains in behind where that photo was taken, it’s beautiful country and it does look a lot like Australia,” McDonald explains.
As yet there are no confirmed dates for the project’s development, however McDonald told Australian Mining stage one will consist of a heap leach and stage two a carbon-in-leach phase, with continued heap leaching. After which there will be some valleys to fill in with waste.
“Mexico is a great part of the world, if you ever wanted to have a project in Mexico; we’ve got to be close to where the best place is. It really does work beautifully, the community is behind us and there’s no drug trade in the area,” McDonald said.
Financial risk versus reward Financiers are still reporting a fair amount of risk with Australian companies entering into operations in South America.
McDonald said Mexico has its own set of challenges and shouldn’t be put in the same basket as the rest of South America.
“One of the things that distinguishes Mexico from South America as such is that they haven’t changed the rules, they haven’t changed the laws, there are no royalty changes and they haven’t signalled any.
McDonald added that “Mexico is seen by the North American markets as having very little sovereign risk and no greater then Australia’s sovereign risk”.
“So I think Mexico is fairly stable. In discussions that I’ve had in North America and in Toronto, they’re all very positive about Mexico, just a little more cautious about some of the other South Americas,” he said.
Germon supports this view: “I don’t think Mexican’s see themselves as South American, they’re not North America either, they sit somewhere in between.
“I wonder whether because of Mexico’s proximity to the US, people thought it had been picked over,” he said.
Continued instability in world markets has kept gold prices buoyant and positive, firming up Cerro Resources’ confidence that they’re in the right game.
“Europe’s still unstable; gold is an alternative currency and an alternative investment. It’s one of the few things that are looking fairly positive and the other one is silver. Between the two of them we’re in the right market,” McDonald stated.
Mexican labour As Cerro’s Guanajuato project ramps up they will be looking to enlist both skilled and unskilled labour, McDonald said the location of the mine in Mexico means a labour force won’t be hard to draw.
“There’s plenty of labour, most of it unskilled in Mexico. We’re fortunate for our project because we’re in an area where there are lots of large and small industry engineering companies based,” he said.
Already Cerro has a qualified team of six Mexican born and educated geologists who McDonald said are an integral part of the ground team in Mexico; however the company is looking to fly in specialists as the project progresses.
“We’ll take some of the specialist skills from Australia, Canada, and the USA and work with the Mexicans,” McDonald said.
Committing to projects outside your national jurisdiction can be challenging at the best of times, however McDonald stated that for Australian projects to reach their full potential in Mexico top level management needs to be across the details.
“It’s critical you have good people at the top of your organisation being based in that country and we do. That’s one of the huge differences is the ability for management to be across it,” McDonald said.
Projects like Cerro Del Gallo also create employment opportunities in areas where community members would otherwise have to leave in search of work.
McDonald said that without the mine residents “would have to leave” to gain employment.
“There are a number of absentee land owners, the husbands or fathers are up in the United States working, otherwise it’s pretty primitive, they have to leave to go to one of the closer cities to try and get work doing whatever they can,” he added.
Running Mexican projects with Australian knowhow Apart from the notable sovereign differences between Australia and Mexico, the other difference to consider is the time permitting takes to be completed.
“Sometimes things do take a little longer in Mexico but I don’t think there have been any real surprises.
“The positive difference is the attitude and time that you can get permitting done. We expect our permitting to be done 6 to 9 months after we lodge our application, whereas for the same thing in Australia you’d be looking at 2 or 3 years so that’s a really positive difference,” McDonald said.
Currently Australian approval processes differ from state to state; speaking out on this issue has been member for Mount Isa Robbie Katter who is currently calling for red and green tape to be cut.
Earlier this year Katter tabled the Environment Protection (Greentape Reduction) and other Legislation Amendment Bill 2012 which focuses on "streamlining and clarifying [of] information requirements".
It also seeks to combine the single application requirements that previously applied separately to mining and chapter 5A projects.
The bill aims "to ensure that projects are assessed as a whole, rather than separate environmental authorities being applied for and assessed at different times".
Murray Hutton, technical manager at Geos Mining is also calling for collaboration between the Australian state governments, Hutton recommended a standard set of mining and exploration procedures needs to be drawn up.
“The various state governments really need to get together and come up with a standard set of procedures with regards to mining and exploration. At Geos Mining, we have dealt with projects in all states of Australia and coming to grips with differences in the rules and regulations between States is an administrative nightmare,” he said
When it comes to streamlining approval processes McDonald said “consultation periods need to be far more realistic” and recommended Australia learns from Mexico.
“Take the responsibility from the states and put them right at the top with the federal government and you’ll find mistakes won’t happen. They won’t cut corners and then I think you will be able to push through the system.” McDonald said.
Being Australian counts Australian mining companies are generally quite well received internationally and according to McDonald Mexico is no different, Aussies are considered to be technically adept and respectful to local cultures and international standards.
“I think that the Mexicans look upon the Australians as being very capable scientifically, particularly in a geological sense.
“Quite frankly the Australian’s and the Canadian’s are the most respected in that part of the world.” McDonald said.
Austrade's Dan Sullivan stated that “Australians are recognised as being great at bulk mining and transportation, as well as supplying remote mines, due to their experience in the harsh Australian mining industry.
“Our engineers are so used to doing bulk mining projects for demanding clients in rough conditions that they often bring their own technology and innovations with them," he told Australian Mining.
However, there was a time when the Canadians went into Mexico, spent a lot of money, the market tanked and they left as equally as quickly as they came.
“The Mexican’s didn’t quite understand that, so the Canadian’s have worked very hard since then,” he said.
Sullivan added that these South American countries are looking for miners that interact with the local communities.
“People in Latin America are used to dealing with North Americans, so they typically find dealing with Australians a ‘refreshing change’ in terms of attitude, as they tend to not come with the same preconceptions of working in South America as other might.”
Why so slow Australia? Although Australian interest in South America is increasing, there is already are large Canadian contingency in South America and Australian’s seem to be a little slow off the mark.
This can primarily be accounted to the abundance of resource opportunities readily available at home McDonald said.
McDonald added that North American companies have primarily been attracted to South America for practical and logistical reasons.
“I think the North American market is attracted to South America because it is in the same time zone and they understand the country risk,” he said.
South America and in particular Mexico has to date been under explored according both Germon and McDonald.
McDonald explained that Mexico “haven’t had the sort of boom that we’re having for a long, long time and it hasn’t corresponded with the laws of those countries being open to foreign investment”.
“Mexico itself, go back 25 years it was only just opening up and at that stage you had to have 51 per cent local ownership and 49 per cent foreign ownership which meant Australian companies couldn’t get control of there own projects,” McDonald said.
Once Mexico began to develop they entered NAFTA and opened up to foreign investment, however the timing was wrong internationally.
“It’s only been in recent times with modern explorations that it’s really opened up and people are finding the Sierra Mardre chain of mountains just bleeds opportunity,” he said.
McDonald added that the Mexican nationals have been aware of the resource rich hills for hundreds of years.
Building sustainable communities Cerro Resources highlighted that being involved in the local community is very important to the projects success, however figuring out how big a role the company should play is a little tricky.
“We play a role in all of the communities and it’s a role where you balance respect, you don’t want to be interfering and you don’t want to be removed so it’s finding that balance,” McDonald said.
Establishing genuine relationships seems to be how this balance has been found, the company makes a point not to interfere or tell the locals how they should live.
“We have locals who work for us, we have advisers who talk about community, we establish relationships with the leaders, and we establish relationships with the schools,” McDonald continued.
“We will have a couple of kids turn up at our office at Cerro de Gallo because the school’s run out of pencils. They’ll turn up, be very respectful, one of the teachers would’ve sent them to see if there are some spare pencils.
“That sort of thing means you’ve reached a level where the community feels comfortable with you and they feel they can do that.”
The company says it is important to assist local communities, but to do it publically so there’s no suggestion of improper conduct.
“We are buying water rights to use for our mine; we’ll buy more than we need because we can assist the community. Once those are there, it costs us very little and it’s something that is very meaningful to have fresh running water that sometimes they won’t have.” McDonald said.
When designing the Cerro Del Gallo mine the company was aimed to keep its physical affect on the locals to a minimum.
“Our design has been very careful to keep away from their creek systems because the little communities rely on those creeks running through. The environmental control dam will be at the base so if there are any big storms it will pick up any spillage or cyanide that might leak out,” McDonald said.
Looking ahead Cerro Resources also has interests in the Espiritu Santo Mine in Jalisoco and the Namiquipa silver project in Chihuahua, both in Mexico.
Back home in Australia they have farmed out their Mount Isa project to Syndicated Metals and their Mount Phillip operation is currently being transferred to a mineral development licence but will remain on hold until the economics work out.
“We’ve turned ourselves towards precious metals and Mexico, our Australian projects we’ve really turned aside, there’s still money there but we’ll let someone else run those” Germon said.
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