MINING IN MEXICO© REGULATORY FRAMEWORK CHALLENGES AND OPPORTUNITIES MINING IN MEXICO© REGULATORY FRAMEWORK CHALLENGES AND OPPORTUNITIES Abdon Hernandez-Esparza

MINING IN MEXICO©MINING IN MEXICO©REGULATORY FRAMEWORKREGULATORY FRAMEWORK

CHALLENGES AND OPPORTUNITIESCHALLENGES AND OPPORTUNITIES

MINING IN MEXICO©MINING IN MEXICO©REGULATORY FRAMEWORKREGULATORY FRAMEWORK

CHALLENGES AND OPPORTUNITIESCHALLENGES AND OPPORTUNITIES

Abdon Hernandez-EsparzaAbdon Hernandez-EsparzaLegal ConsultantLegal Consultant

Abdon Hernandez-EsparzaAbdon Hernandez-EsparzaLegal ConsultantLegal Consultant

INTERNATIONAL SCENARIOINTERNATIONAL SCENARIOTHE IMPORTANCE OF MINING IN THE IMPORTANCE OF MINING IN

MEXICOMEXICOKEY 2009 STATISTICSKEY 2009 STATISTICSLEGISLATIVE FRAMEWORKLEGISLATIVE FRAMEWORKCHALLENGES AND OPPORTUNITIESCHALLENGES AND OPPORTUNITIESCONCLUSIONSCONCLUSIONS

CONTENTSCONTENTS

INTERNATIONAL SCENARIOINTERNATIONAL SCENARIOINTERNATIONAL SCENARIOINTERNATIONAL SCENARIO

Worldwide 2009 was not a good year for the Worldwide 2009 was not a good year for the mining industrymining industry

• The world´s economy collapsed in the second The world´s economy collapsed in the second half of 2008 and adversely affected 2009.half of 2008 and adversely affected 2009.

• The worldwide recession impacted all industrial The worldwide recession impacted all industrial sectors.sectors.

• The industrial strength of China supports the The industrial strength of China supports the world´s demand for minerals.world´s demand for minerals.

• China has become the number one producer of China has become the number one producer of automobiles.automobiles.

• Latin America leads in investment in Latin America leads in investment in mining exploration (26%).mining exploration (26%).

• Peru is the third mining country in the Peru is the third mining country in the world.world. (Metals Economic Group)(Metals Economic Group)

• Mexico faced strikes and work stoppages, Mexico faced strikes and work stoppages, increased cost of energy and suffered delays in increased cost of energy and suffered delays in exploration projects.exploration projects.

INTERNATIONAL SCENARIOINTERNATIONAL SCENARIOINTERNATIONAL SCENARIOINTERNATIONAL SCENARIO

WORLDWIDEWORLDWIDE INVESTMENT IN MINING EXPLORATION: INVESTMENT IN MINING EXPLORATION:

U.S. $7.320 BILLION (- 42%)U.S. $7.320 BILLION (- 42%) WORLDWIDEWORLDWIDE INVESTMENT IN MINING EXPLORATION: INVESTMENT IN MINING EXPLORATION:

U.S. $7.320 BILLION (- 42%)U.S. $7.320 BILLION (- 42%)

16%

13%

6%

5%

5%

4%

3%

6%3%

Canada

Australia

U.S.A.

Russia

Mexico

Chile

China

South Africa

Brazil

THE IMPORTANCE OF MINING IN MEXICOTHE IMPORTANCE OF MINING IN MEXICO

Mexico’s tradition as a mining country goes back many centuries and since the pre-Columbian days

The search for gold was a driving force behind the Spanish conquest .

The miners spread throughout New Spain side by side with the Spanish conquistadors, the priests and missionaries.

Guanajuato Zacatecas

Taxco


Wealth from mining was the most important source of financing for the construction of architectural jewels .


Santa Prisca. Taxco


Mexico has a rich territory and a definite and well known mining vocation. 70% of the territory is favorable for the finding of world class mineral deposits

VILLA HERMOSA

OAXACA

TOLUCA

QUERETARO

GUANAJUATO

MORELIA

GUADALAJARA

COLIMA

AGUASCALIENTES

TEPIC

ZACATECAS

DURANGO

LA PAZ

SALTILLO

CHIHUAHUA

HERMOSILLO

D-44

A-51 A-53

D-68C-77

A-23

C-43 C-47

C-31

C-42 C-45C-46

C-54

C-64

A-16

A-26

A-46

B-34

A-44A-45

A-54A-55

A-65

D-32

B-22B-23

B-43

C-44

A-63

A-73

D-58

C-88

C-36D-34

B-27

B-36

B-46

A-74

A-84

D-51 D-53

D-61D-62D-63D-71

C-12

A-51

B-34

B-58

B-68B-69

A-72

C-25

A-65

D-58D-59

A-73

C-55

D-76

A-89

D-76

B-35

B-44B-45

C-15C-16

C-26

D-14

D-24

D-13

D-62

A-59

A-69

B-24B-25

D-52

B-78B-79

B-88B-89

A-24

A-34

A-51 A-55

A-33

A-43

B-59

D-79C-71

B-39

B-49

A-13

A-22

A-42

A-54

A-31A-32

A-72

C-85

B-23

B-14B-13

B-33

D-45

A-11

D-75

B-72

D-12 D-13

D-22 D-23

B-64 B-65

B-74 B-75A-89

A-69 B-61

A-79 B-71

C-29

C-39

B-66

D-32

A-57

A-46A-47

A-56

A-66A-67

B-88 A-85

A-41

A-51

A-73

A-83

A-52

A-84

A-58

C-82

D-71

C-11 C-17C-18C-19C-27

C-37

A-38

A-48

C-56

C-35

C-45 C-49

C-59

C-28C-21

C-79

B-69

A-75

A-85

B-33

A-64

A-53

A-63

D-69

D-78

A-71

B-82

D-12

D-67

C-53

C-84

D-69

D-59

B-78

C-48 D-42

B-59

D-63

B-53

B-62 B-63

B-73

B-79

B-65

C-61

C-51

Cu, Mo, Au

Au

Ag, Pb, Zn

Pb, Zn

Fe, Cu

F

Sr

C

S

P

Mn

En estudio

Source: Consejo de Recursos Minerales

Metallogenic Map

Ag

CuAu Zn

C

Fe

P

Sr

Pb

MnAg

Mo

Au

Cu

Bi

NaCl

Ti

Fe

Au Sb

Fl

S

Existing World Class DepositsExisting World Class DepositsFresnilloFresnilloTayoltitaTayoltitaCananeaCananeaReal del Monte y PachucaReal del Monte y PachucaCharcasCharcasSanta EulaliaSanta EulaliaLa HerraduraLa HerraduraLas CuevasLas CuevasMolangoMolangoPeñasquitoPeñasquito

The importance of mining in Mexico

Mining activities in 24 of the 32 states in Mexico and impact directly or indirectly 83 millon Mexicans.

2009 Key Statistics Annual value of production:

US $9,319 million

Share of GNP:1.6%

Direct Employment: 269,000

Indirect Employment: 1,500,000

Investment in mining: US $2,858 million

(- 22%)

Projected Investment 2010-2012:

US $3.083 billion

New mining operations: 15

Minerals in top 12 places: 18

TOTAL INVESTMENT IN MINING-MEXICOMillion Dollars

TOTAL INVESTMENT IN MINING-MEXICOMillion Dollars

380 258 348585

912

1,257

2,156

3,659

2,858

0

500

1000

1500

2000

2500

3000

3500

4000

2001 2002 2003 2004 2005 2006 2007 2008 2009

380 258 348585

912

1,257

2,156

3,659

2,858

0

500

1000

1500

2000

2500

3000

3500

4000

2001 2002 2003 2004 2005 2006 2007 2008 2009

SHARE BY METALValue of Mining-Metallurgical Production: US $9,319 Million

SHARE BY METALValue of Mining-Metallurgical Production: US $9,319 Million

9%

6%

5%

5%

22% 22%

16%

15%

Copper

Gold

Silver

Zinc

Molybdenum

Coal

Steel

Others

2008

18%10%

7%

6%

5%

18% 18%

18%

Copper

Gold

Silver

Zinc

Coke

Coal

Steel

Others

2009

FOREIGN INVESTMENT IN MINING IN MEXICOFOREIGN INVESTMENT IN MINING IN MEXICO

70%

30%

Foreign Mexican

Foreign Investment in Exploration: US$366 Million

40%

60%

Foreign Mexican

Value of Mining Production: US$9,319 Million

FOREIGN INVESTMENT IN MINING IN MEXICO BY COUNTRYFOREIGN INVESTMENT IN MINING IN MEXICO BY COUNTRY

75%

15%

2%3%

1% 4%Canada

U.S.A.

UnitedKingdom

Australia

Japan

Others

RESULTS IN 2009RESULTS IN 2009

Notwithstanding the adverse world environment and Notwithstanding the adverse world environment and internal problems faced by the sector, such as:internal problems faced by the sector, such as:

Strikes and work stoppagesConflicts in access to landHigh energy costsUnjustified attacks on MiningLegislative initiatives which would adversely affect the

competitiveness of the sector

15 important mining operations were opened or 15 important mining operations were opened or reactivated in Mexicoreactivated in Mexico

NEW MINING OPERATIONS- 2009NEW MINING OPERATIONS- 2009

BAJA CALIFORNIA– El Triunfo (US $23 M)– San Juan of Rofomex, recommenced operations (US$75 M)

SONORA– San Juan of Timmins Gold (US$40 M)– San Felipe of Minera Hochschild (US$40 M)

CHIHUAHUA– Dolores of Minefinders (US$450 M)– Pinos Altos of Agnico Eagle (US$240 M)– Palmarejo of Coeur D’Alene (US$30 M)

COAHUILA– La Encantada of First Majestic, expanded operations (US$30

M) DURANGO

– Cerro Las Minitas of Silver Dragon (US$40 M)– Velardeña of ECU Silver (US$10 M)

NEW MINING OPERATIONS- 2009NEW MINING OPERATIONS- 2009

ZACATECAS– Peñasquito of Goldcorp (US$1,700 M)– El Coronel of Frisco (US$71 M)

SAN LUIS POTOSI– Asientos of Frisco (US$44 M)

JALISCO– Cascaronal of Jaguar Mining (US$30 M)

MICHOACAN– Aquila of Terniun (US$30 M)

INVESTMENT: US$3,098 MINVESTMENT: US$3,098 M

EXPLORATION PROJECTSEXPLORATION PROJECTS

5858585851515151

11111111

1111

6666

8888

323213131313

4444

131355

1616161634343434

6635353535

1515

16162626 15151515

7777

14141414

111111111616161655

19191919

738 PROJECTS738 PROJECTS

232 Mining Companies232 Mining Companies

738 PROJECTS738 PROJECTS

232 Mining Companies232 Mining Companies


Foreign Companies

Company Country Company Country Goldcorp Canada Teck Cominco Canada Panamerican Silver Canada Alamos Gold Canada Farallon Resources Canada Gammon Lake Canada Agnico Eagle Canada Constellation U.S.A. Kinas Minerals Australia F Majestic Canada Frontera Copper Canada Glamis Gold Canada Arcelor Mittal India Hecla Mining U.S.A. Minco PLC U.K. Silver Eagle Canada

Foreign Companies

Company Country Company Country Goldcorp Canada Teck Cominco Canada Panamerican Silver Canada Alamos Gold Canada Farallon Resources Canada Gammon Lake Canada Agnico Eagle Canada Constellation U.S.A. Kinas Minerals Australia F Majestic Canada Frontera Copper Canada Glamis Gold Canada Arcelor Mittal India Hecla Mining U.S.A. Minco PLC U.K. Silver Eagle Canada

Investment Forecast 2010-2012: US$13.083 Billion


Mexican Companies

Grupo México Peñoles

Frisco Autlán

Grupo Alfil Fresnillo PLC

Minas de Bacis Las Encinas

Materias Primas GAN

MINING LEGISLATIONMINING LEGISLATION

Regulation of mining activity dates back to the 16th century colonial period of New Spain.

The Cedula Real issued on December 9, 1526 The Ordenanzas del Nuevo Cuaderno on August 22nd, 1584

The Ordenanzas de Aranjuez on May 22nd, 1783

Codigo de Minas de los Estados Unidos Mexicanos of 1884.Ley Minera de los Estados Unidos Mexicanos of June 4, 1892.

Ley Minera of 1909.

Independent MexicoIndependent Mexico

MINING LEGISLATION

The Political Constitution of the United Mexican States adopted in 1917.

Article 27 of the Mexican Constitution specifies that:“The nation has eminent domain over all natural resources in the continental shelf and islands; of all minerals and substances in veins, mantos, masses or beds which constitute deposits whose nature is distinct from the components of the lands, such as ores from which metals and metalloids used in industry are extracted, beds of precious stones, of rock salt and salt beds formed directly by marine waters…”

Ley Minera of 1930

Law Regulating Constitutional Article 27 on the Exploitation and Treatment of Mineral Resources of February 6, 1961

Law Regulating Constitutional Article 27 on Mining Matters, December 1975 Regulations enacted on November 30, 1976. New Regulations enacted on December 10, 1990.

MINING LEGISLATIONMINING LEGISLATION

Ley Minera of 1992. Regulations enacted on March 29, 1993.

The Mining Law amendments enacted on December 24, 1996.

The Regulations of 1993 were replaced by the new Regulations published on February 15th, 1999.

2005 AMENDMENTS TO THE MINING LAW2005 AMENDMENTS TO THE MINING LAW

On April 28, 2005 substantial amendments were made to On April 28, 2005 substantial amendments were made to the mining law.the mining law.The principal features of the 2005 amendments are:The principal features of the 2005 amendments are:

Reclassification of certain minerals, elements and substances, and updating of the terms used to identify some of them.

Changing the name of the Mineral Resources Council to Mexican Geological Service and strengthening and expanding its role.

Grants indigenous peoples and communities the (i) right to apply for and obtain mining concessions, provided they comply in all respects with the law and its regulations, (ii) the “preferential right” would apply in the case of “simultaneous” applications for concessions; and (iii) the “preferential right” would also apply in the case of bidding process upon disincorporation of an area as a National Mining Reserve.

.

Replacing the “exploration concession” and the “exploitation concession” with a single “mining concession” with a 50 year term, renewable for another 50 year term, provided the corresponding petition is filed within 5 years prior to the expiration of the initial term.

Regulates “gaps” or “voids” (huecos) and establishes rules for the preferential right to acquire a concession thereon

Establishes that, upon termination of a concession (through cancellation, expiration of term, or abandonment, a concession holder must provide to the Mexican Geological Service a complete geological and mining report including all exploration and exploitation work done, for incorporation in the “public geological survey and information system”.

Incorporates in the law, instead of the Regulations, the obligation of having a safety engineer in coal mines with more than 9 workers and in all other mines with more than 49 workers.


Emphasizes the obligation of concession holders to comply with all applicable Official Mexican Norms and Mexican Norms regarding safety and environmental protection.

Simplifies and deregulates bureaucratic procedures, which complicated compliance by mining companies and created unnecessary workload for the Bureau of Mines.

Increases penalties to concession holders who relapse in breaches of the law.



On June 26, 2006 amendments were made to the mining On June 26, 2006 amendments were made to the mining law.law.

The principal feature of the 2006 amendments are:The principal feature of the 2006 amendments are:

Allows the capture, storage and delivery of methane gas Allows the capture, storage and delivery of methane gas from coal mines, subject to certain requirements and from coal mines, subject to certain requirements and consents from the Ministry of Energy and provided the gas consents from the Ministry of Energy and provided the gas is delivered to PEMEX.is delivered to PEMEX.

OTHER LAWS AND REGULATIONS APPLICABLE TO EXPLORATION AND MINING ACTIVITIES


Importation, purchase, storage and use of Importation, purchase, storage and use of explosives:explosives: FEDERAL FIREARMS AND EXPLOSIVES LAWFEDERAL FIREARMS AND EXPLOSIVES LAW

Extraction, use and disposal of waterExtraction, use and disposal of water:: NATIONAL WATERS LAWNATIONAL WATERS LAW

Environmental matters:Environmental matters: GENERAL ECOLOGICAL BALANCE LAW FOR THE GENERAL ECOLOGICAL BALANCE LAW FOR THE

PROTECTION OF THE ENVIRONMENTPROTECTION OF THE ENVIRONMENT GENERAL LAW FOR THE PREVENTION AND GENERAL LAW FOR THE PREVENTION AND

MANAGEMENT OF WASTEMANAGEMENT OF WASTE NOM-120-SEMARNAT-1997NOM-120-SEMARNAT-1997 FOR EXPLORATION (Defines FOR EXPLORATION (Defines

environmental specifications for direct exploration environmental specifications for direct exploration activities) activities)



Environmental matters:Environmental matters:NOM-141-SEMARNAT-2003NOM-141-SEMARNAT-2003 FOR TAILINGS FOR TAILINGS

PONDS (Procedures, specifications and criteria PONDS (Procedures, specifications and criteria for the characterization of tailings and site for the characterization of tailings and site preparation, construction, operation and post-preparation, construction, operation and post-operation of tailings ponds) operation of tailings ponds)

NOM-147-SEMARNAT-SSA1-2004 NOM-147-SEMARNAT-SSA1-2004 FOR SOIL AND FOR SOIL AND LAND REMEDIATION (Establishes criteria for LAND REMEDIATION (Establishes criteria for determination of land contaminated with Arsenic, determination of land contaminated with Arsenic, Barium, Berylium, Cadmium, Chrome (VI), Barium, Berylium, Cadmium, Chrome (VI), Mercury, Nickel, Silver, Lead, Selenium, Talium, Mercury, Nickel, Silver, Lead, Selenium, Talium, and/or Vanadium)and/or Vanadium)

MAIN CHALLENGES AND OPPORTUNITIES FOR MINING IN MEXICO


Public PolicyPublic Policy Mining must be reassessed as a strategic industry.Mining must be reassessed as a strategic industry. Government Mining Office must be promoted to the Government Mining Office must be promoted to the

level of Undersecretary of Mines.level of Undersecretary of Mines. Regulations of the Mining Law related to 2005-2006 Regulations of the Mining Law related to 2005-2006

Amendments must be enacted.Amendments must be enacted.

LandLand Resolution of conflicts between mining operations Resolution of conflicts between mining operations

and local rural communities.and local rural communities. Ensure the Rule of Law when all permits and Ensure the Rule of Law when all permits and

authorizations have been granted.authorizations have been granted.



Labor ReformLabor Reform Flexibility of labor market and recognition of Flexibility of labor market and recognition of

productivity.productivity. Mine workers labor union must adopt internal Mine workers labor union must adopt internal

democratic procedures and accountability.democratic procedures and accountability.EnvironmentEnvironment Timely compliance with existing regulations.Timely compliance with existing regulations. Publicize the sustainable development measures Publicize the sustainable development measures

adopted by the mining sector and their high social adopted by the mining sector and their high social economic and environmental benefits.economic and environmental benefits.

Human ResourcesHuman Resources The severe shortage of geologists and mining The severe shortage of geologists and mining

engineers is cause for concern.engineers is cause for concern.



EnergyEnergy Current domestic prices of energy pose a clear Current domestic prices of energy pose a clear

disadvantage vis-a-vis our competitors.disadvantage vis-a-vis our competitors. Mining is the third largest energy consumer in Mining is the third largest energy consumer in

Mexico.Mexico. Need competitive energy.Need competitive energy. Optimize use of energy in each mining unit.Optimize use of energy in each mining unit.WaterWater This resource is increasingly more scarce and with This resource is increasingly more scarce and with

higher demand.higher demand. Need public policies which promote the saving and Need public policies which promote the saving and

efficient use of water.efficient use of water.

CONCLUSIONSCONCLUSIONS

2009 was a difficult year for Mexican mining.2009 was a difficult year for Mexican mining.

It faced the collapse of metal prices, shrinking It faced the collapse of metal prices, shrinking markets, strikes and work stoppages, delays in markets, strikes and work stoppages, delays in exploration projects and legislative initiatives exploration projects and legislative initiatives adverse to the development of the mining adverse to the development of the mining industry.industry.

22 thousand jobs were lost in the sector, total 22 thousand jobs were lost in the sector, total investment fell 22% and 52% percent in investment fell 22% and 52% percent in exploration. The value of production decreased exploration. The value of production decreased 11%.11%.

CONCLUSIONSCONCLUSIONS

According to the Metals Economic Group, According to the Metals Economic Group, Mexico fell from the 4Mexico fell from the 4thth to the 6 to the 6thth place as a place as a preferred location to invest in mining preferred location to invest in mining exploration. exploration.

Notwithstanding the adverse scenario, 15 Notwithstanding the adverse scenario, 15 important mining operations were opened or important mining operations were opened or reactivated in 2009. reactivated in 2009.

The mining sector is honoring its commitment The mining sector is honoring its commitment to Mexico with forecasted unprecedented to Mexico with forecasted unprecedented investment of US$13.083 billion in 2010-2012. investment of US$13.083 billion in 2010-2012.

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MINING IN MEXICO© REGULATORY FRAMEWORK CHALLENGES AND OPPORTUNITIES MINING IN MEXICO© REGULATORY FRAMEWORK CHALLENGES AND OPPORTUNITIES Abdon Hernandez-Esparza