Regulatory overhaul will weigh on Mexico's mining sector - Moody's

Water and open-pit regulations will weigh on Mexico's mining sector, heightening its operational risk and discouraging investment, Moody’s said in a report.

This environmental reform initiative was presented by former president Andrés Manuel López Obrador in February as part of a package of 20 proposals. It seeks to modify the wording of article 27 of the constitution.

One goal is to prohibit the granting of new concessions for open-pit mining.

Congress is currently debating the López Obrador bill to ban open-pit mining, which, according to mining chamber Camimex, threatens 60% of the value of the country's mining and metallurgical production.  

In mid-August, the lower house constitutional committee approved the executive's proposal to ban open-pit mining. However, neither chamber of congress has debated the initiative in full sessions, which suggests it may not prosper, at least in its present form.

Fresnillo 

“Mexico's regulatory environment poses risks for Fresnillo (‘Baa2’ negative), which is concentrated there, and whose higher operating costs compared to global peers dilute its benefits from high gold and silver prices,” Moody’s said.

The rating agency added that Fresnillo's 1.6mn concession hectares in Mexico ease its near-term risks, but none of its current projects will likely contribute to production before 2027-30. “Still, its free cash flow will turn positive with capital spending decreasing substantially in 2024-25 from 2022 levels,” said Moody’s.

Moody’s also noted that because Southern Copper Corporation (‘Baa1’ stable) derives around 60% of its revenues and Ebitda from Mexico through long-term concessions, regulatory uncertainty poses future business risks.

Negative judicial reform

In general, Moody's highlighted that Mexican companies and infrastructure firms face moderate credit risk in 2024-25, mainly because of a new constitutional overhaul that overturns the judicial system.

“That abrupt change to the country's judiciary and regulation places business confidence at risk, including foreign investment in Mexico, and creates bottlenecks that hinder its nearshoring potential,” the report added. 

According to the agency, as investors become more cautious about Mexico, companies will amass more of the cash they generate as they hesitate to commit to new capital investments. This will allow them to reduce leverage through 2025, but longer-term growth will remain limited.

“Mexico's economy will lose some of its vibrancy, expanding by just 1.5% in 2024 and 1.3% in 2025 after a better-than-expected 3.2% increase in 2023,” Moody's forecast.