JosÉ AlmodÓvar
Mining Leader at PwC Mexico

 

 

MC: What is the role of emerging markets within the mining industry and how does Latin America contribute as a growing source of both supply and demand?
JA: The role of emerging markets is key for the industry worldwide. As the saying goes, “why should you sit on the ocean when there is a nice huge wave that you can ride and it will take you very far?” What is happening nowadays represents a unique opportunity for emerging markets, but they need to align their political systems and regulatory frameworks in order to be able to ride that wave. This is vital for the development of Latin America. Some countries that have a great mining potential turn out to be not that appealing given all the risks that are involved for potential investors, due mostly to political instability and land ownership exposures. It will take some time to build the stability needed to alleviate most of the current problems. There is nothing wrong with foreign investment as long as fair salaries and fair taxes are paid and measures are taken to grant sustainable operations. Our country understood this very well a few years ago and we are very well positioned in the global market in both supply and demand as a result, so does Chile, Brazil and Peru. As per the Latin America and Caribbean Economic Commission (CEPAL for its acronym in Spanish) 2012 statistic foreign investment shown, as illustrated below (millions of US Dollars), that out of 23 countries 6 of them accumulated 86% for reception of foreign investment, that shows there is still a long way to go for some other emergent countries in America to achieve a good position in the Mining markets and therefore to be able to significantly contribute to the development of their own economies.

MC: What are the main trends in the global mining industry and how do these trends impact Mexico’s competitiveness?
JA: A number of countries are trying to increase their GDP by exploring their mining capabilities, trends such as international pricing of minerals and country’s risk factors play a major incentive and / or challenge in that regard, since they spark off local and foreign investment as well as changes in regulations. Some other trends of factors that directly or indirectly significantly impact the industry are:
- the inability to raise financing which increases the project cost and delays the different stages of mining and some time the projects are dropped out, this has been mostly happening in the last few months with Canadian public junior companies which indirectly affects Mexico;
- Increase taxation and metals price decreases affecting mining profitability and the return on investment,
- The inability to properly deal with social and or community issues which may cause some blockades or interruption of operations and damage the companies’ reputation.
- The ability to timely and business wise secure the major parts and equipment supply chain securing the continuity of profitable operations.

MC: Even after deals are sealed, a large percentage of them subsequently lead into significant complications at high costs. What are the main factors within the mining industry that cause this and how does PwC avoid under-performing agreements?
JA: The main reason for this issue is that some mining companies are not getting the proper advice from financial advisory entities when performing acquisitions, expanding their operations or even when they are selling their companies to other corporations. Sometimes they do not even ask for advice at all. The best practice when you are buying, selling or expanding is evaluating economic feasibility, complying with technical standards as well as local and international regulations. The bigger the investment is, the bigger the consultancy firm or company hired to provide financial advice should be.

The above takes more relevance considering that In Mexico we have more than 600 projects at the exploration stage and approximately 1,100 expansion projects, recently M&A activity has been substantial since the total number of transactions went up from 340 in 2009 to 387 in 2010, 426 in 2011 and 495 in 2012, respectively.

In PwC, we have the financial, tax, legal and advisory capabilities to maximize profitability and mitigate pertaining risks involved in these sorts of transactions and when they are carried out by foreign parties, we incorporate our international net and / or our west mining cluster expertise as to make sure all the flanks are covered.

MC: In what way does your company deal with an ever-changing regulatory environment and what solutions do you offer to your clients?
JA: We have seen a few problems resulting from this. As it happens with all of the industries, some companies are more cautious than others, nonetheless we have noted that they are willing to meet the pertaining requirements and regulations; there are sometimes limitations in the process mostly because of the lack of sufficient human resources this as a result of the industry growing at an unprecedented high phase in recent years.
We help our clients to comply with their regulatory obligations either acting as their auditors or their advisors when the auditor is another Firm. As auditors while performing the audit we apply some procedures as to obtain reasonable assurance on our clients’ compliance with their main regulatory obligations. While acting as advisors we supported our clients with a number of services, eg:
• Tax support on reviewing or preparing their Income Tax provisions
• Due diligences financial and tax support
• Legal advice as to how to deal with land ownership issues
• Tax and Legal advice for complex transactions, such as “what to consider from a tax perspective when completing a joint venture arrangement” as to maximize their tax contributions without increasing the risk before the Tax authorities.
• Assistance to comply with the US Dodd-Frank Act
• Advisory assistance and certification (sustainability report) related to sustainability activities performed by mining companies
We are very well known worldwide for the abovementioned support that we have been providing for a considerable number of years for most of them; however we have been assisting our clients worldwide for the last five years in a number of areas related to the operational side of mining such as:
• Cost reduction, operating a cost effective mine
• Capital projects, avoiding cost overruns and delays
• Practical approach to implementing enterprise risk management,
• Internal audit assistance,
• Analysis of key performance indicators
• Technology and security support
• Managing a successful ERP implementation
• Mine workforce planning
• Successfully completing an IPO
• Anti-corruption trends
• Driving deal value in hostile and non-hostile environments

MC: PwC currently audits 32% of mining companies worldwide. Why do they choose you over other firms?
JA: PwC has been working in the industry for a very long time. Our firm has been putting a lot of attention into the development of the industry. We have created a network, (including the creation of our mining center of excellence locate in PwC Toronto,) to adjust to the mining companies’ needs around the world and acted accordingly. The mining industry is very complex. We had to invest a lot of time and resources in order to reach a full understanding on how it works and how we can help improve it. Nowadays, we deliver tailor-made solutions to our clients. Over the years, PwC has developed the working knowledge to anticipate the outcomes of the mining areas (accounting, tax, legal, operational) so that we can be proactive and dynamic as to find the best solutions possible working together as a team with our clients.

MC: The high levels of the transactions involving industry players of all sizes are rapidly changing the face of the global mining industry.  How does PwC identify and evaluate investment opportunities for Mexican companies?
JA: Mexico has a total geographic area of approximately 1,964,375 square kilometers. It is claimed that only about 30% of the area has been explored, and, as per the INEGI, approximately 60% of Mexico’s area has geological conditions for the existence of ore deposits; although only 4% of Mexico’s surface has been fully explored for ore deposits. Up to date 25,768 concessions were issued which protect an area 4.4 million hectares. The states that concentrate most of the concessions granted were Sonora, Durango, Jalisco, Chihuahua, Zacatecas, Coahuila and Sinaloa.

In the latest edition of Corporate Exploration Strategies, the Metals Economics Group indicated that of the 121 countries that received the highest amounts of both domestic and foreign investment in mining during 2012, Mexico ranked the fourth worldwide, only behind Canada, Australia and the United States. In that edition Mexico still remained one of the most competitive in tax for mining investors in Latin America.

Taking the abovementioned into consideration, Mexico is undoubtedly very attractive as a destiny for foreign investment, therefore we need to be ready to respond to business opportunities and when appropriate to promote them; to that end, we have broken down the different players that exist, in order to have a better understanding on what the opportunities are for each one of them. The big players, with an outstanding background and mature businesses like Peñoles, Minera Mexico and Goldcorp, have the cash flow to keep developing new projects, even if they have been going through some challenges resulting from changing prices of metals. Then you have medium-sized companies like Frisco, Fist Majestic and Minera Autlan, which are constantly searching to expand their operations; There are around twenty companies that fall into this category. Afterwards, you have the small mining groups which are myriad. We have mapped the category into which we believe the Mexican Mining companies fall into, and although not a core part of our business, whenever there is a potential buyer or seller, once we understand what they are looking for, we act as a liaison, between the interested players.

MC: What are the main benefits of successfully integrating sustainability and other types of compliance into the company’s overall strategies and which practices have the potential to leave a positive legacy?
JA: This is a big area of opportunity for Mexico. Improving communication to investors, community and government regulators on all of the efforts and investment made by mining companies not only to economically support the communities but also to protect the natural resources and reserves will definitely enhance transparency, reliability and accountability, decreasing the risk of community conflicts, potential strikes and higher taxation. Also, it would be worthwhile to consider the inclusion into the company’s reporting of all of the taxes paid and the corresponding amounts, which would strengthen the sustainability report purpose.

MC: What are the possible impacts of the recent change of administration for PwC and the development of the mining industry and its financial framework?
JD: As a result mostly of some worldwide events and some internal structural problems in Mexico, in the last few years the Mexican economy has not been growing to the expected levels, in the other hand considering that the price of minerals have been historically higher in recent years and the important investment drawn in the last five years in mining, it would be strange not to see taxes going higher for the industry.

This could remain a serious matter as the new Administration seems to be one prone to changes and innovation, actually, as part of the Pact for Mexico initiatives launched for our current President, there are currently some bills (mining tax royalty, tax consolidation, etc) being discussed in the Mexican congress that, if approved, would significantly impact some sector of the mining industry in Mexico. In December 2012, it was previously approved the new Labor Law that seeks more protection for employees in connection with their social security benefits and profit share distribution; all of the mining companies should do their assessment on the pertaining impact. So, dynamism and somehow complexities continue to grow.

This could be seen as a matter of fairness, perception of fairness or facts; therefore mining companies reporting policies and procedures should be strengthen, as suggested before (disclose efforts and investment made by mining companies not only to economically support the communities but also to protect the natural resources; and all of the taxes and amounts paid) as to mitigate any potential impact in this regard.