Mexico: Land of Metals Opportunity (Puplava)
This is a transcript of Jim Puplava on January 20.
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JOHN: As most investors know, if you're involved in mining or oil exploration, the minerals (or the oil) is where you find it – including precious metals. And sometimes where you find it is not in a very desirable place of the world, simply because of the fact the governments are hostile to you. It used to be the natives were hostile. Now, it's the governments become hostile. Or, the governments allow you to come in and develop your mine and they treat you very nicely until you get everything up and running and they go, “oh, Senor, we are sorry, we think this will be better as an XYZ mine.” So there aren't very many safe areas of the world that are left out there, but looking south of the border, since we do a lot of that now days, that would seem to be one place which seems to be relatively safe for metals exploration.
JIM: John, you're absolutely right. We talk about the three-legged stool of investing here. We talk about fundamentals, technicals, and we also talk about politics or geopolitics because it does affect investing. And as many major oil companies have found out where they spend literally tens of billions of dollars in Russia and the Russian government just changed a whole deal on them. And as many oil companies have found over the years in Venezuela. And now Hugo Chavez plans on nationalizing the entire country. Originally, what he did is change the taxation rate and the percentage rate in terms of what the state owned. And so you've got to be very careful today.
And most of these governments are very clever. They wait for you to come in, discover the stuff, spend the money, put in the money for capital structure, and then they confiscate it when you're done. Well, the same thing is happening in the mining area, and that's why I think that the number of areas that are safe politically today from government confiscation, or contract changes where they don't honor law, is Mexico. It's one of my favorite areas.
And the thing about Mexico is a number of years ago, Mexico changed their mining legislation. And the basic reason was they wanted to bring investment into the country. So basically between 1990 and 1992, Mexico radically overhauled a nationalistic mining law structure that had been in place, for the express purpose of really attracting foreign mining investment. And it has been very successful in doing this. This overhaul was accompanied by, for example, privatization of virtually all of the Mexican government’s mining holdings. And as a result, John, it brought in a lot of exploration and development money into the country. Now, it started out slow because, let's face it, in 1992 or the mid-90s, people weren't thinking about the gold bull market or the metals market that we've seen in this new decade. And so it really began to accelerate in 2001 where a lot of money was raised in the junior sector for exploration. And now, as a result of the change in those laws, there are 80 foreign companies that are exploring for gold, silver, copper in Mexico. And there are currently 160 projects throughout the country. So my estimation, it's probably one of the safest and most mineral rich deposits in the world today. [3:32]
JOHN: Well, something that the Spanish discovered very early on, shortly after the conquest of Cortez in Mexico, Cortez versus the Aztecs, is that Mexico was very rich in metals – especially notably silver. I mean this was a source of wealth for the Spanish Empire at the time. They kept sending ship loads of it back to Spain. And of course, that issue came all of the way up through the Mexican revolution because the Mexicans felt at that time American companies had exploited them. And that's why we began to see this nationalization tendency. But it's as soon as they do that, then they run into trouble because they never seem to manage it well themselves.
JIM: And that's exactly why they redid this. They have a rich mining culture in Mexico, as you said, John, it goes back, you know, hundreds and hundreds of years. They've been mining for 500 or 600 years out of that region. And as a result of that, they've got exactly what they wanted. Change the laws, respect property rights and now there's an influx of companies coming into the country because Mexico is very rich in natural resources. It’s not only rich in metals but also it's been rich in oil. And so a lot of people don't realize, for example in the year 2005, which is the latest figure that we have statistics, Mexico was the world's largest producer of silver with an output of almost 103 million ounces. And John, that had increased almost 4% from 2004. And it is the 17th largest gold producer with mine production up almost 1 million ounces. That’s up a massive 40% from the previous year. So this upward trend we think is going to continue, stimulated by not only higher prices for gold and silver but also encouraged, as you look around the world, by political stability and a very mining friendly environment - and more importantly, proven geological prospects in the country. [5:34]
JOHN: Well, I'm curious, though, because there is mineral wealth all of the way throughout Latin America. As a matter of fact, the tragedy of Latin America – I read a number of books on this in the course of my studies – was that it hasn't been for a lack of intelligent people or resources. It's been from corrupt governments, to a large degree, that have prevented this, but why in particular Mexico versus some other Hispanic countries in Latin America?
JIM: I guess if you take a look at it overall it is their mining heritage. And as I just mentioned it is the world's largest producer of silver. It historically has represented probably the world's number one silver producer with historical production records, 10 billion ounces of sliver have been produced out of Mexico and a current annual production of well over 100 million ounces with now, you know, there's been almost a Canadian invasion. Most of the Canadian exploration companies are very heavily involved in Mexico. That’s not only exploration companies, but some of the intermediate companies and even the larger companies. So it's, number one, very opportunistic for producing silver as a precious metal. And most of the deposits of silver are high grade, and more importantly they are amenable to low cost underground and surface mining.
Secondly, I think Mexico is basically a textbook example of sustainable development. And as we’ve mentioned over 500 years of mining has been the foundation, and it's an ongoing and integral part of the nation's national and local economies. And this takes on increasing importance as migration from the rural areas to the cities increases due to lack of rural employment. So the Mexican government is saying, “Look, let's develop our mining industry because this creates jobs in rural areas where a lot of the metals are located.”
Politically, Mexico is probably the most stable country in Latin America. They have very favorable tax structures and a strong government commitment to natural resource development. I mentioned earlier that they had radically overhauled their nationalistic mining laws going back to 1992, as well as privatization.
The other thing too is, and this is important, the government has demonstrated a very strong commitment to an increasing transparency in all aspects of dealing with government in terms of regulation of the mining industry and is probably the most successful of this. Foreign companies now can compete in Mexico with not only the local companies. Also, I think culturally, Mexicans are friendly towards mining at all levels. This means mining explorationists and developers can expect to be welcomed when they enter an area – in stark contrast to their reception in many other parts of the world. The Mexican mining community (and this is very important because it's one of the problems that we have is finding qualified personnel) is very well trained at the professional and at the skilled-labor level.
And more importantly, and here's a greater risk, Mexico has very strong environmental laws and a commitment to uphold them. But you don't see the obstructionist environmental organizations. They are very few. And they have very [little] leeway. In other words, the greenies can't come in and stop development because the government wants development as this employs local populations. This is very much similar to what's going on in China today where the Chinese government is looking for ways to develop the rural communities rather than have all of the rural population keep moving into the city, and creating all kinds of problems. So this means that mining companies who follow Mexican laws and internationally accepted environmental practices can expect to advance their projects without undue interference.
And besides that, during this period of time when they had nationalized the mining industry, Mexico remains underexplored. So you have major discoveries that are being made now and especially in the years going forward as we apply modern geological and geophysical concepts and methods that were not used in the country for 30 or 40 years. And so you have a number of projects down there from polymetallic multiple metals type project to a lot of gold and silver properties. And to me, it just spells out a lot of opportunities. I mean this is one area that we are going into very heavily in terms of the companies that we're choosing for our funds. Not only intermediate producers who are going in and expanding their presence in Mexico, but also late stage development plays. There's a polymetallic mine that's coming on that's going to be extremely profitable. We're involved with a lot of silver and gold. And that's one thing that you see a lot of in Mexico, especially in the Sierra Madre gold belt, both the northern, the central and the occidental part of the Sierra Madres reminds me – what is it, John – the old Humphrey Bogart movie The Treasure of the Sierra Madres. [10:46]
JOHN: We don't need no steenkin’ badges
JIM: But you know the Discovery Channel, I think it was last year, they did a special on the Sierra Madre gold belt, which is my favorite area for mining in the world today (other than, let's say, the yellow knife area up in Canada and some of the other areas). It is probably one of the most prolific gold and silver belts in the world. And just turn on the television, for example, on Friday. CNBC's been doing this whole special on Hugo Chavez as the next great Fidel Castro. Well, think if you were going to spend a lot of money. And mining is a time consuming business. It's a capital intensive business. It requires highly skilled people. You go in and you discover, you stake, you spend years of development, you raise capital in the markets to put in a mine and a mill. And then all of a sudden you get that ready. Can you be assured once you do all of that that you will have a mine and the government doesn't change things? So that's one of the advantages that Mexico has today. And it's right at the top of the list of my three favorite areas of looking for places today which would be Canada, Nevada and Mexico. [12:07]
JOHN: And if we were going to invest in this area, Jim, what would you be buying right now as far as investments in Mexico?
JIM: Boy, I tell you, John, if I was looking at Mexico, there's two things that we think are very attractive. As I pointed out on this program – the majors aren't the place to be. These are the companies that are not going to grow their production. Late stage development plays, I'm talking about companies that are close to prefeasibility, they are proving out a property. I love – especially in the Sierra Madre belt – the combination of gold and silver companies because I think silver is going over $100, maybe $150 an ounce. And God knows how high the price of gold will be. So the combination of gold and silver late stage development properties is great. Also, consider some of the intermediate developers who are moving in that area. You take a look at what happened when Glamis bought Francisco Gold, and they developed El Sauzal and basically saved Glamis. Now that mine is producing 200,000 ounces a year at a cash cost of less than $100 an ounce.
So that whole area, I think, if you look at Sierra Madre gold and silver belt, any one of those companies in that area are grossly and I mean grossly undervalued in terms of the potential; and also in terms of what they can produce or explore for. A lot of these companies some of them are going into production this year, some will be going into production next year. And in addition to what they are bringing on line in production, they are also still doing some development drilling and exploring to enhance their deposits and make them even bigger. So anything in the Sierra Madre belt.
And also, we own a large position in a polymetallic company that will be big in some of the other base metals, in addition to having gold and silver. And of course that's going to be on the eastern end of the country. But some of those projects in the Oriental belt of the Sierra Madres are also very attractive to us. So Mexico is one of our favorite places; and also Canada and especially certain regions like the Yellow Knife area and a couple of other areas – because I just think they are the most stable.
As we talked about on the program with some of our experts in the first hour, it is much easier to get something done in Canada than it is in the United States. About the only place you can get anything done in the United States is Texas and Nevada, which tend to be pro industry. But if you're talking about Glamis I think it has had a mine prospect here in California they've been trying to bring on line for 10 years. So once again, that's where I'd put it.
I love the late stage development play because you're either a prospect to be picked up by somebody else, or if nobody picks you up like take a look at what's happened to Alamos. Take a look at what's happened at Gammon Lake. Now, let's take a look at what's happened to Mine Finders. Nobody bought them. So what they did, they decided to go it on their own and they are going into production. So that's why I like that combination possibility where I think a company has to pursue a dual strategy because you can't just sit back and say, “look, our objective is to be acquired.” Well, you may not be acquired. Why? Some of these companies are now coming on stream that weren't acquired – the majors are asleep. So that's what I'd do. [15:39]
JOHN: Well let's summarize this as we always do at the end of these segments. It seems like you have a lot going for this area and there's a lot of favorable geology, there's favorable political stability, et cetera.
JIM: First of all, you have a favorable political background. And as I mentioned, the laws are favorable. You don't have to run into obstructionist greenies that are going to come in and shut down your project, because you have a government that is intent on developing its rural population, and providing a means for them to support themselves. And a lot of these mining jobs are very well paid. So you've got a favorable legislative and political background.
Secondly, you've got a very strong geological background. It's a country that is very, very rich in not only multiple polymetallic deposits, but also in silver and gold deposits.
And as the price of metals move up, with this strong geological background, the third strength is you have: infrastructure, and you have trained personnel; you have laws in mining that help support, and that make what it is you're going to do highly economic. I mean if you take a look at El Sauzal, which was a junior (it was Francisco Gold) basically taken over by Glamis, which is now producing over 200,000 ounces a year, extremely profitable at a cash cost below $100. So think of gold today at $635 and you're producing gold at 100 bucks. Think of the cash flow and economics. So that's another aspect, I think, that's very favorable about the country is the economics of mining in the region. You may find gold in Mongolia or other places, but because of infrastructure, because of the weather, because of all of the legislative hassles, it becomes almost uneconomic where you need higher and higher prices of gold and silver to make a profit. That's not the case in Mexico. It has some of the most profitable silver mines, and is one of the few areas in the world where you can mine silver profitably. And also if you're mining other minerals such as zinc, lead, copper, you can also make a lot of money because your cost structure is so low down in Mexico. So to me and to sum it up: Mexico, land of opportunity. [18:03] |
