Mexico's drug violence reaches the mining industry

Here's another excerpt from IKN76, out last weekend, that catches up on the latest developments in the Mexico drug violence as pertains to mining companies there. We first noted the rising political risk for miners operating in the North of Mexico in our September 5th edition and since then things seem to have got a little worse. This is one of the themes that we hope doesn't start developing into a major factor for investors going forward.

Mexico’s drug violence now affecting junior exploration mining companies

A very interesting report came out of Reuters last week (15) that we’re going to reproduce here in its entirety (and thanks to JS for the headsup). Your author has heard plenty of underground rumblings over the last year about this-or-that project that isn’t moving forward very quickly in the northern part of Mexico due to the threats of violence from drug gangs but this report, I believe, is the first time a mainstream news source has picked up on the story, got quotes from a mining executive whose company is exposed to the region (which probably was’t easy either) and shone a light on the potential problem.

 (Reuters) - Mining firms have shuttered a handful of exploration projects in remote areas of Mexico as the industry grapples with threats from drug cartels and rising security costs, Mexico's mining chamber said on Thursday.

Cartels are threatening mining operations not just in the violent corridor along the U.S.-Mexico border but in isolated, mountainous regions in other parts of Mexico, where traffickers grow marijuana and heroin poppies, the chamber said.

Executives belonging to Mexico's National Mining Chamber have reported cases of drug traffickers extorting, kidnapping, attacking and selling drugs to their workers.

Theft of precious metals is on the rise in Mexico, executives said. The government also said this week it caught one cartel member selling iron ore to firms exporting to China.

"We are living a very difficult situation," said Ramon Davila, the COO of Vancouver-based First Majestic Silver Corp.

"There are more and more specific cases of threats from organized crime trying to penetrate areas of mining exploration and operation," he said.

Miners have long seen Mexico, a major copper and silver producer, as a top destination for investment in Latin America. Spending on new projects is on the rise and the industry sees investment at over $13 billion from this year through 2012.

But as bloodshed mounts in Mexico's war on drugs, which has killed over 29,000 people since late 2006, there are some cases of small companies fleeing the country's most perilous areas.

Davila said he knew of at least two companies in Durango state that had shut down exploration projects due to fears of drug violence.

President Felipe Calderon has pledged to crack down on drug cartels and says spiraling violence is a sign the government is making progress as it captures capos and cartels splinter.

But some analysts warn drug violence could eventually undermine the economy as Mexico struggles out of a deep recession and courts international investors.

"Unfortunately, where we operate the response from authorities has not been as fast as we would have liked," Manuel Luevanos, the mining chamber president, said.

STOLEN GOLD, ORE

About two weeks ago, 150 gold and silver bars worth $3 million were stolen from a mining company in the central state of Zacatecas, said Luevanos, also an executive at top silver producer Fresnillo.

Canadian mining giant Goldcorp built a landing strip to fly gold out of its Los Filos mine as the country's highways become more fraught with banditry, said Salvador Garcia, the company's Vice President.

Garcia said security costs had risen 5-10 percent this year compared to last year.

Some traffickers have started their own side business in illegal mining, the attorney general's office said this week.

Steel giant ArcelorMittal recently lodged a complaint claiming iron was being sacked from its concessions in the western state of Michoacan, Jesus del Campo, an official at the economy ministry, told Reuters.

He said some foreign mining companies were encouraging illegal mining by paying cash for tonnes of iron ore, used to make steel in China, without asking for permits.

Mining executives said drug traffickers were encouraging drug use among some of their employees who make relatively high salaries in poor areas.

"A mining camp is an attractive market for drug dealers," Luevanos said. Companies have taken to giving workers drug tests and firing those who turn up positive.

Drug violence around mining facilities has caused concern for the industry. Fresnillo had a case of workers gunned down in front of their families at a mining camp where employees live, Luevanos said.

"This is not just worrying the management. It is sowing terror among (mining) families and many have fled," he said.

IKN back. This, I believe, is a story we’ll need to watch very closely going forward. The only company on our ‘Stocks to Follow’ list that would fit into the potential danger zone right now is (name removed from public blog) so our own exposure is low. Also, let’s be absolutely clear and say XXX.XX has not reported or mentioned any problems vis-á-vis the drug gangs. However, it’s definitely a factor that we need to consider as part of the political risk melting pot going forward, something we made a point of mentioning the last time we ran our regional political risk table in IKN70, September 5^th. This is what we wrote on that occasion, by way of a reminder:

Mexico: We drop Mexico down to 31 this quarter, taking two points from the ‘political stability’ column due to the ever-worsening image problem Mexico has with its so-called “narco-war”, which is hardly a real war but more a three-cornered fight between narcogroup, narcogroup and police/army that’s spiralling a little too far out of control.

The problem is mainly one of national image right now compared to any direct threat to the mining industry, but that’s still something we need to take into account. Also, the risk is clear for any junior mining company operating in the North of the country and it wouldn’t take much more than an unfortunate incident between the narcos and a mining camp or exploration geologists to get really bad looking headlines in the mining trade papers.

Be clear that the vast majority of Mexico is unaffected by this current escalation of drugs related violence, with business continuing as usual. The problem for juniors is mainly one of negative image (the potential investor asks the company IR person, “You’re in Chihuahua/ Sonora/Coahuila/etc State? Oh, any cocaine problems around your way?”) but the risk of future direct problems has grown somewhat, it must be admitted.