Industry Trend Analysis - Constructive On Mining Sector, Despite Major Challenges - MAR 2014

BMI View: Recently released data on foreign direct investment (FDI) into M exico's mining industry confirm our constru ctive view towards the industry, reaffirming our belief that the country will be a relative outperformer within the Americas mining sector. We expect positive macroeconomic trends, domestic advantages, and large mineral reserves to lead to continued investment into Mexican mining over the coming years .

We see recently released foreign direct investment data into Mexico's mining sector as indicative of the country's appeal as a mining destination and expect inflows to increase over a multi-year time horizon. Data released on February 25 from the country's economic ministry showed FDI hitting a five-year high in 2013, totalling nearly US$2.8bn. Given the country's significant, though underexplored, mineral resources, particularly of copper, gold, and silver, as well as its open investment climate, FDI into the sector will rise in the years ahead. Canada, which is home to many of the world's junior mining and exploration firms, is likely to remain the largest contributor to investment inflows.

We further note several domestic factors that will work in Mexico's favour. First, we maintain a positive outlook on Mexico's economy in the coming years. We currently forecast real GDP growth of 3.3% and 3.7% in 2014 and 2015, respectively, as the manufacturing and construction sectors regain momentum. This should support domestic demand for refined base metals, including copper, lead, and zinc. Second, Mexico has several advantages that keep costs relatively low for mining firms. These include low-wage, skilled labour, relatively good infrastructure, and lack of widespread social opposition to mining investment that continues to affect the regulatory environment in Chile and Peru. That said, ongoing security concerns will likely raise related costs for smaller miners operating in remote locations.

Long-Term Gains Likely
Mexico - Mining Sector FDI, US$mn (LHS) & Percent Change Y-o-Y (RHS)

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