Mexico Lures Junior Miners; Investors Encouraged to take Another Look
As a venture capital broker, active in the resource market, I look worldwide for the best opportunities for my risk tolerant clients. One country that keeps coming to my attention is Mexico. Junior resource companies grow and create shareholder value by discovering and developing mineral deposits, ideally ones rich enough to attract the attention of acquisition-minded senior producers. Some juniors aspire to become producers by reviving historic mines or partially developed projects with near-term production potential. Many of these companies have found that Mexico is one of the best places in the world to pursue their goals. It offers many advantages -- vast geological potential, a favorable investment climate, and an enduring mining tradition.
Mexico is experiencing an exploration boom and a mining renaissance led by junior companies, and fueled by robust prices for gold, silver and other mineral commodities. This bull market for metals pushed global exploration spending to a new high of US$7.5 billion in 2006, the fourth consecutive yearly increase since the bottom of the cycle in 2002. Junior companies led this recovery and now account for more than half of global exploration spending, with almost 50% of this directed at precious metals. The latest survey tracking industry spending shows that exploration dollars flow to countries with good geology and favorable mineral policies. And the traditional big three -- Canada, Australia, and the United States -- topped the list of favored destinations in 2006 for these reasons. However, Mexico jumped to fourth from sixth place in this latest survey, and also made the "top-ten" lists for best investment climate and best mineral potential in another recent survey by the Fraser Institute.
It is important to note that while mining in Mexico dates backs centuries -- to the times of Aztec and Mayan cultures -- the industry stagnated for much of the 20th century because of restrictive nationalistic policies. This began to change in the early 1990s when Mexico opened its doors to foreign ownership in the mineral sector, reformed its mining laws and signed the North American Free Trade Agreement. By the late 1990s however, low metal prices and a devalued peso caused many Mexican mines to close. However, a new boom was just beginning as Canadian companies acquired and revived many of these mines and made a series of discoveries in established mining camps. Their success attracted others. In more recent years, political uncertainty in nations such as Bolivia and Venezuela triggered another influx of Canadian junior companies to Mexico, boosting the total number to more than 200.
PRECIOUS METALS IN MEXICO
Mexico is prospective for many types of mineral deposits, but precious metals were the main attraction for most of its history. When the Spanish Conquistadors arrived in the early 1500s, the Aztecs were already sipping from golden goblets. A series of rich silver deposits were discovered in the mid-1500s that led to a silver mining boom in the central states of Zacatecas, Guanajuato, Chihuahua, and Durango, among others. Mines within Mexico's Silver Belt currently produce about 100 million ounces of silver annually, and several mines have operated continuously for centuries. Mexico's Silver Belt is the most productive in the world, with more than 10 billion ounces of silver and about 75 million ounces of by-product gold produced over the centuries. Mexico was the world's leading silver producer for many decades and was only recently surpassed by Peru. Canadian junior companies are actively exploring projects within the Silver Belt, which offers good infrastructure, an experienced mining workforce, and excellent potential for new discoveries using modern exploration techniques. The mines in this region are also benefiting from new capital investment and new technology to boost production and improve profits.
Most of the historic and recent gold discoveries in Mexico have been found in the prolific Sierra Madre mineral belt, a geological structure straddling several states in central and western Mexico. Canadian juniors have revived this highly prospective yet under-explored belt, which hosts most of the new mines and advanced exploration projects in Mexico. Many of these companies have advanced from an initial public offering to production faster here than anywhere else in the word.
Many Canadian juniors have encountered success in Mexico, but one of the most remarkable examples involves a junior company with a dormant Canadian mine and $10 million in its treasury that came to Mexico just five years ago. The company acquired a large but struggling Mexican mining company that needed new capital to expand and modernize its operations. This bargain-priced transaction transformed Wheaton River Minerals into a mid-tier producer just as metal prices began to rise. The company acquired other Mexican operations in 2003, also at bargain prices, and then quickly became a global miner. As its resources grew, so did its share price. As metal prices rose, so did its profits. Wheaton River subsequently merged with Goldcorp in a transaction valued at more than $2 billion. Goldcorp then merged with Glamis Gold to create one of the world's largest gold and silver producers in a transaction valued at $8.4 billion. Goldcorp also spun out Silver Wheaton, which markets silver production from Goldcorp's mines, as well as from other mines.
Several juniors that ventured into Mexico early as exploration companies are now producers, with their share prices jumping from pennies to dollars.
Mexico's mining renaissance could continue for decades given the bullish outlook for most metals. Silver prices, for example, climbed from an average of US$4.39 per ounce in 2001 to more than $13 per ounce in 2006. This increase is attributed to a persistent shortfall between supply and demand, increased demand from investors and new "high-tech" industrial uses for silver. According to the Silver Institute, industrial usage is now the largest component of silver demand, surpassing the traditional jewelry, silverware and photographic sectors.
The outlook for gold is also bullish and most experts agree that the gold rally experienced over the past six years is sustainable. While low gold prices in the past mirrored the secular bear market for commodities (1973-2001), the current rally mirrors what many believe is the early days of a secular bull market for commodities driven by the new economic powers of China and India. Prices are down from their peak of US$730 per ounce in 2006, but new prosperity in China and India provides a base of stability as jewelry fabrication still accounts for about 70% of gold demand.
According to a gold survey published in early 2006, the current gold rally is strongly driven by an "impressive expansion in investor interest in the metal," notably from western nations. One reason is gold's inverse relationship to the US dollar and the perception that the dollar is still overvalued on currency markets. Others drivers are concerns about a weakening US economy (coupled with high levels of US debt and deficit spending) and geopolitical uncertainty in places such as the Middle East.
Precious metals have stood the test of time and retain an important monetary and investment role in today's modern world. Mexico has the potential to provide the next generation of gold and silver mines, while Canadian junior companies have the expertise and resources to accelerate this process. In addition, this new era of mining in Mexico is being conducted in an environmentally and socially progressive manner. I strongly recommend that anyone wishing to invest in the mining exploration/development sector take a serious look at Mexico.
Although the rewards which can be generated by investing in junior mining companies are tremendous, the risks involved in getting there are just as great. Please ensure you discuss the suitability of any planned high risk investment with your investment advisor prior to purchasing.
For more information on junior mining companies active in Mexico, please contact the author @ Harold_leishman@canaccord.com. Although the author is a registered investment advisor at Canaccord Capital Corporation ("Canaccord Capital"), this is not an official publication of Canaccord Capital and the author is not a Canaccord Capital analyst. The views (including any recommendations) expressed in this newsletter are those of the author alone, and are not necessarily those of Canaccord Capital, Member CIPF.