Mexico's Pivotal Election Could Boost Prospects for Silver Miners, All Eyes for Mining Policy Shifts

• Mexico's presidential election in June 2nd will shape the outlook for mining sector. Selective silver mining investment opportunities remain for investors in major silver producers with established assets, strong economics, and robust stakeholder relationships.
• Mexico's mining reforms created uncertainty, but major silver producers offer opportunities. Silver mining companies are optimistic conditions will improve under new administration regardless of winner.
• Companies with already permitted projects are best positioned to avoid uncertainty around regulatory environment
• Strong industrial demand growth expected for silver, especially in solar panels and EVs, supporting positive fundamentals‍‍
• Other key environmental issues include renewable energy development, controversial infrastructure projects like the Tren Maya, water crises, mining regulations, and conservation

Mexico's June 2 election will impact the mining sector outlook. What investors need to know about key silver companies positioned to benefit.

The Pivotal Mexican Election for Mining

Mexico's upcoming presidential election in June 2024 looms large. The outcome will shape the future regulatory environment for mining in Mexico. Despite near-term challenges posed by the reforms, selective silver mining investment opportunities remain for astute investors able to navigate the shifting landscape from mining companies operating in Mexico, the world's largest silver producing country.

As Mexico prepares for a pivotal election on June 2nd that will determine the president and the composition of both houses of Congress, mining companies and investors are closely watching the implications for the country's critical mining sector. In particular, the election outcome could have significant ramifications for silver, one of Mexico's most important mineral resources. The positions of the leading candidates are examined on mining and environmental policies, and analyzes the potential impacts on silver mining and investment in Mexico.

Regulatory Upheaval and Legal Challenges

The current administration of President Andrés Manuel López Obrador (AMLO) has taken an adversarial stance toward mining, implementing reforms increasing state power over the sector, freezing new mining concessions, and pushing a reform to ban open pit mining before leaving office in October.

The mining law reforms, which took effect immediately in May 2023, enacted the most significant changes to Mexico's mining regulations in decades. Key changes include:

• Awarding concessions via public auctions instead of first-come, first-served
• Reducing concession terms from 50 to 30 years
• Mandating government approval for concession transfers
• Restricting pledging of concessions as collateral
• Expanding indigenous consultation and mandating 5%+ profit sharing
• Introducing new criminal penalties for violations

The sweeping scope of the reforms has created substantial uncertainty and opposition from mining companies, who view aspects of the new laws as unconstitutional. Over 500 legal challenges have been filed in Mexican courts seeking to overturn or suspend the reforms.

The direction of mining policy and regulations could shift depending on the outcome. The presidential race is primarily between Claudia Sheinbaum of the left-wing Morena party and Xóchitl Gálvez of a right-wing coalition, with center-left candidate Jorge Máynez trailing as a potential third option.

The Candidates and their Stances

Sheinbaum, a mentee of current president Andrés Manuel López Obrador (AMLO), has pledged to halt open-pit mining concessions altogether and ban fracking. However, she also plans to continue supporting state oil company Pemex, while simultaneously investing over $13 billion in clean energy projects. This mixed approach leaves some uncertainty about her ultimate impact on mining. Some industry executives believe the outlook will improve under the next administration, regardless of whether the ruling Morena party retains power. Morena candidate Claudia Sheinbaum is expected to take a more pragmatic approach than AMLO.

In contrast, opposition candidate Xóchitl Gálvez has pledged outright support for mining. Gálvez has expressed general support for the mining industry as a key part of Mexico's economy. Opposition candidate Xóchitl Gálvez has criticized what she calls the "demonization" of mining and pledged to support the industry. "The mining industry will always exist, of course, as long as there's respect for the environment," she said at a recent forum. "I think what we have to do is see how to make any kind of industry sustainable." ^[1] However, critics argue her comments also showed a lack of understanding of the industry. Her policy proposals do not provide specific details on her mining agenda.

As for Máynez, he has not directly addressed mining in his platform. His main relevant policies are opposition to a controversial infrastructure project and a plan to gradually transform Pemex into a renewable energy company.

Mining executives express optimism that the operating environment will improve under the next administration. "I really feel that there is beginning to be a greater understanding of the needs, both within the government and among us," said Luis Humberto Vázquez, president of mining engineering association AIMMGM. "I believe that with the [government] that arrives, we'll have better prospects in mining, and that is for the benefit of Mexico."

Silver Mining Investment Opportunities

Despite the regulatory headwinds, selective silver mining investment opportunities remain in Mexico for astute investors. Mexico is the world's top silver producing country, responsible for nearly 25% of global mine supply. This world-class mineral endowment is simply too significant to ignore.

Major silver producers with established, permitted projects are best positioned to weather regulatory uncertainty. These larger companies have existing relationships, experience navigating Mexican institutions, and resources to adapt to changes. Selective opportunities exist in major producers with:

• Projects with secured long-dated concessions and permits
• Mines with strong economics (high grade, low costs) to buffer margin impacts
• Positive community relationships and ESG performance to mitigate social risks
• Assets nearing production to accelerate investment returns

Examples of major silver miners to watch include industry leaders like Fresnillo, Pan American Silver, First Majestic Silver, and Hecla Mining. All have significant operations and growth projects in Mexico.

Silver Miners Poised to Benefit

As the world's top silver producing country, Mexico's policy direction is especially consequential for silver miners. Despite the challenging regulatory environment under AMLO, several companies have advanced projects they believe are well-positioned for the future.

Vancouver-based Sierra Madre Gold & Silver (TSXV:SM) is focused on restarting production at its fully permitted La Guitarra mine in the historic Nayarit mining district. Having a permitted project provides a key advantage in the current uncertain environment.

"Mexico as a country obviously a lot of their GDP comes from mining, oil and gas," said Sierra Madre Gold & Silver CEO Alex Langer. "I think it would be impossible during this administration to permit an open pit...That's one of the reasons why we went for a fully permitted former producing mine where the permits were in place as opposed to going through that rigamarole which really takes a lot of time and a lot of money."

With over $50 million already invested in underground development and a 500 tonne per day facility, La Guitarra has a huge head start. Langer estimates it will only cost $10-12 million to restart production, limiting future dilution. The project has exploration upside across the wider district. Sierra Madre aims to generate cash flow while limiting shareholder dilution and use the funds to organically grow the company.

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Reyna Silver (TSXV:RSLV) is taking a hybrid approach with 4 projects: 2 in Mexico and 2 in the U.S. state of Nevada. It's Guigui project in Chihuahua, Mexico, covers a large area of the historic Santa Eulalia mining district, one of the world's largest silver carbonate replacement deposits (CRDs) which can host major high-grade deposits , whilst  thier other project -Batopilas - is one of the few mining districts where the major mineral is native silver; the purity level of this occurrence can be up to 75% Ag.

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Silver Tiger Metals has permitting well in hand, with an existing 800 tonne per day mill permit at El Tigre, an open pit mine silver project in Mexico, showing strong economics including $287M NPV, 55.8% IRR. The company has filed for an amendment to accommodate the larger PEA scale scenario and aim to have permits in place around the time of making a construction decision this year.

Vizsla Silver is developing the Panuco silver-gold project in Sinaloa, where it has consolidated a historic mining district for the first time. An aggressive 400,000-meter drill program has delineated a high-grade resource of over 200 million silver-equivalent ounces, with substantial exploration upside remaining across the district. With a preliminary economic assessment expected in the third quarter of 2023, Panuco has the potential to rapidly become a major low-cost silver mine.

Endeavour Silver is an established mid-tier producer with two underground silver-gold mines in Mexico. The company is nearing completion of its largest and lowest-cost mine yet, Terronera, which is expected to double production to 15 million silver-equivalent ounces per year while halving unit costs. Beyond Terronera, Endeavour has a robust project pipeline to potentially become a senior silver producer this decade.

Implications for Silver Mining

The June 2 Mexican presidential election is shaping up as a pivotal moment for Mexico's mining industry, especially silver mining companies operating in the country. Mexico is the world's largest silver producer, responsible for nearly a quarter of global output. The election results will therefore be critical for companies mining silver in Mexico and for the global silver market.

Sheinbaum's proposed ban on open-pit mining would likely have the most negative impact on silver production, since open-pit methods are common in silver mining. However, if she maintains AMLO's policies of increasing profit-sharing for local and Indigenous communities affected by mining projects, that could provide a countervailing boost by easing community opposition. Much will depend on the specifics of how she actually governs if elected.

Gálvez and Máynez appear more likely to maintain a status quo supportive of mining investment, but their lack of detailed mining policies creates significant uncertainty. Gálvez's general pro-business orientation suggests she would be unlikely to enact major new restrictions, but her environmental policies like expanding conservation areas could indirectly impact mining access.

One wild card is the concurrent congressional elections. Even if Sheinbaum wins the presidency, gains by opposition parties could constrain her ability to enact sweeping changes to mining policy. The most mining-friendly outcome would likely be a Gálvez presidency combined with a right-wing majority in congress.

Other Environmental Factors

Beyond direct mining policies, the election could impact silver mining through changes to broader environmental regulations. A key issue is the candidates' stances on a controversial major rail project known as Tren Maya. Gálvez and Máynez oppose the project, while Sheinbaum supports it. Blocking Tren Maya could be positive for mining by reducing pressure on sensitive ecosystems where mining also occurs.

Water is another crucial environmental factor for mining viability. Both Sheinbaum and Gálvez promise action on Mexico's urgent water crisis, but Gálvez's policies are far more robust as her plans to fix infrastructure and promote wastewater reuse could help ease water constraints that often pose challenges for mining operations.

Finally, all three candidates have pledged to increase renewable energy development to varying degrees. An expansion of renewable energy could have mixed impacts for mining - increasing energy access but also potentially imposing stricter environmental standards. Sheinbaum's target of adding 13 GW of renewable capacity could be most significant.

Regardless of the election outcome, executives point to silver's robust fundamentals as a tailwind for miners. Silver demand is poised to accelerate due to its use in fast-growing green technologies like solar panels and electric vehicles.

Conclusion

Mexico's mining industry is undergoing a profound regulatory transformation that has escalated uncertainty for mining investors. The sweeping reform enacted in May 2023 has sparked legal challenges from mining companies and clouds the near-term investment climate, especially for junior explorers.

However, Mexico's position as the world's top silver producer means selective investment opportunities remain for investors able to navigate the new landscape. Astute investors will focus on major silver producers with established assets, strong economics, and robust stakeholder relationships.

Close monitoring of regulatory and political developments, particularly the June 2024 presidential election, will be crucial. Investors would be prudent to maintain diversified mining portfolios to manage jurisdictional risks as Mexico's mining sector adapts to the new regime.

Despite near-term challenges, Mexico will likely remain a key jurisdiction for silver. Disciplined analysis, strategic positioning, and active risk management will be essential for investors aiming to generate returns from silver mining opportunities in Mexico's transformed regulatory environment.

Bright Future for Silver

Solar could account for 50% of silver consumption within a decade as global photovoltaic capacity continues to scale up, while the average EV uses 25-50 grams of silver. This industrial offtake provides a demand floor for silver prices, while the metal's traditional monetary haven status offers potential upside during times of economic uncertainty.

On the supply side, global silver production slipped in 2022 amid falling grades and reserves. Analysts forecast this will lead to deepening supply deficits in the coming years. This provides a bullish price backdrop for silver equities, especially companies with near-term production and exploration upside.

Jurisdiction is key, with operators in mining-friendly countries like Mexico standing to benefit from any post-election regulatory easing. Alex Langer, CEO of Sierra Madre Gold & Silver, sees big potential for gains:

"I've seen incredible silver bull runs, with Fortuna and Endeavour Silver, where the share prices appreciated immensely. At these $22-23 prices there's a lot of money that can be made."

Investor Implications

Mexico's mining reforms mark a tectonic shift in the country's regulatory framework, escalating uncertainty and challenges for mining companies and investors. The sweeping changes disproportionately impact junior miners and early-stage exploration, clouding the near-term investment climate.

However, Mexico's world-class silver endowment and strategic position in global silver supply chains mean opportunities remain for astute investors. The June 2024 presidential election will also be pivotal for the industry, shaping the regulatory environment for the next six years.

Investors are wise to monitor political and legal developments closely while selectively evaluating opportunities among major silver producers. Focus on companies with established assets, secured concessions, strong economics, and robust community relationships. Disciplined analysis and risk assessment will be essential to navigating Mexico's transformed mining landscape in the years to come.

The Investment Thesis for Silver

• A Sheinbaum victory would create the most uncertainty and potential downside risk, especially if she enacts tougher mining restrictions. However, silver prices could get a boost if supply is constrained.
• A Gálvez or Máynez win would likely mean a steadier trajectory for silver mining investment. If they spur an overall increase in mining activity through business-friendly policies, that could weigh on prices.
• Congressional election results will be important to watch as a signal of policy constraints on the new president. Divided government could mean more stability.
• Aside from direct mining policies, the Tren Maya decision and water policies are important environmental factors to track for mining feasibility and costs.
• Renewable energy expansion could cut both ways - providing opportunities through increased energy access but also potentially increasing regulatory pressures.
• Industrial demand for silver forecast to grow strongly, driven especially by solar panels and EVs
• June 2 Mexican election could boost silver miners if friendlier administration takes power
• Mexico is world's top silver producer and key jurisdiction for silver mining companies. Companies with permitted projects and exploration upside are best positioned
• Silver has monetary metal status and tends to perform well in times of uncertainty as silver equities provide leverage to rising silver prices

While regulatory risks remain, the upside opportunity is attractive for investors willing to take a long-term view. Companies with proven management teams, robust balance sheets and asset-level catalysts could be poised to outperform as silver's structural supply deficit collides with booming industrial demand. The key is careful stock selection to identify miners positioned to create value through the cycle.

Several silver companies are well positioned with permitted projects and exploration upside. Silver's strengthening fundamentals, driven by growing industrial demand and monetary tailwinds, bode well for its future prospects. Though political/regulatory risk in Mexico remains an overhang in the near-term, drilling success could be a major catalyst to grow resources and investor interest. Funding and capital allocation will be key to watch.

Close monitoring of regulatory and political developments, particularly the June 2024 presidential election, will be crucial. Investors would be prudent to maintain diversified mining portfolios to manage jurisdictional risks as Mexico's mining sector adapts to the new regime.

Despite near-term challenges, Mexico will likely remain a key jurisdiction for silver. Disciplined analysis, strategic positioning, and active risk management will be essential for investors aiming to generate returns from silver mining opportunities in Mexico's transformed regulatory environment. The Mexican election outcome will be pivotal for mining permitting and investor sentiment. A pro-business outcome would accelerate development timelines and likely boost valuations. The alternative, though seemingly less likely, could further delay projects. Regardless of the outcome, the silver miners appear to have strong underlying assets and are taking the right steps to create shareholder value through the drill bit. The silver price should have a bright future with growing industrial demand and constrained global supply, boding well for well-positioned silver miners in stable jurisdictions.

References:

1. BNamericas (2024), Mexican opposition candidate rails against 'demonization' of mining

2. Maxwell Radwin (2024), Mongabay. What’s at stake for the environment in Mexico’s upcoming election?

3. Crux Investor (2023). Mexico's Mining Industry Under Reform: Legal Challenges and an Uncertain Future