KUDOS: Mining companies like Canada's Goldcorp are receiving kudos for its environmentally and socially responsible behavior in Mexico. (Photo: Kroll Tendencias) CANADIAN FDI IN MEXICAN MINING 2000-08 CLICK TO ENLARGE CANADIAN FDI IN MEXICO MINING 2008 CLICK TO ENLARGE        Font Size ..... Small Normal Big Very Big

BY SILVIA CHAVEZ
AND DAVID ROBILLARD

For nearly 15 years, Cerro de San Pedro, an open-pit gold mine 20 kilometers from San Luis Potosi in north-central Mexico, was a case study in risky foreign entanglements gone bad. The mine-owner Minera San Xavier, part of Metallica Resources, a publicly-traded Canadian mining firm, faced constant legal challenges and opposition from local citizens’ groups, as well as environmental organizations across the country. Opponents claimed that the project’s cyanide leach-pit process harmed the environment and that the use of explosives was damaging centuries-old buildings and churches considered part of the region’s historical patrimony. Over the years, Mexican courts suspended or revoked various permits for Metallica's Cerro de San Pedro project.

What a difference a year makes. Since the mine was sold last year to New Gold Inc., another Canadian company headquartered in Vancouver, Minerva San Xavier has taken a different approach, joining forces with – rather than against -- local authorities and interest groups. The company worked with the Mexican mining association, Camara Minera de Mexico, to draft a new law regulating the operation of gold and silver mines. The company also set up a transportation system for local school children and bought new computers for the schools. Finally, the company created the Cerro San Pedro Preservation Foundation to administer the company’s local assistance programs.

SUSTAINABLE DEVELOPMENT

Minera San Xavier’s new approach was not only aimed at rebuilding its tarnished reputation but also at laying the foundation for sustainable development, by winning the trust and support of the community. The result? The once virulent opposition to the Cerro de San Pedro project has been largely silenced. Although some hard-core protesters remain undeterred, the company’s investment in so-called “corporate social responsibility” efforts has minimized the risks in which the company operates.

The Minera San Xavier tale of redemption is a lesson for all foreign mining companies, which routinely face hostile environments in Mexico and other developing countries. The absence of basic public services, the lack of strong government regulatory bodies and sustainable social programs, together with widespread poverty, are a standard recipe for trouble. Under these conditions, foreign mining companies face political, regulatory, security and reputational risks. Companies that focus solely on the extraction of minerals, do so at their peril.

The relationship between the mine operator and the local community need not be an antagonistic one, as long as there is conscious effort by the company to foster economic development and improve social conditions in the community. Call it corporate social responsibility or common sense; either way, the result is to reduce the considerable risks of doing business.

BALANCE OF BENEFITS

The main objective of any social responsibility program is to build a sustainable balance of benefits that create strong ties with the community and an optimal working atmosphere. Mining companies need to understand the challenges as well as the actions needed to overcome them. By creating a set of policies and best practices, companies enhance their chances of ensuring sustainable development for the future.

Manufacturing and service sector firms have options as to where to establish international operations; extractive industries have no such luxury. They must operate where the natural resources are located. As a result, they have to be prepared to deal with limited government services, a shallow labor pool, widespread poverty and, in some cases such as in northern Mexico, growing lawlessness, as a result of the burgeoning illegal drug trade.

The challenge for foreign mining companies in Mexico is to convince the communities where they operate that they will contribute to local economic prosperity and social growth. Given Mexico’s vast mineral wealth, getting corporate social responsibility right can have a huge pay-off for foreign firms.

Mexico is endowed with a great variety of minerals. With some 27 metals, 47 non-metals and 18 other minerals, it ranks as the 12th most important mineral producing country. Mexico is the world’s second biggest producer of silver and bismuth, a mineral used in the production of cosmetics and medicines, the fifth largest producer of lead and the sixth largest producer of zinc.

RECENT PHENOMENON

Foreign investment in the Mexican mining sector is a recent phenomenon, dating to reforms of the country’s mining law in 1990. Since then, the government has issued a total of 628 titles to foreign companies for mining exploration and production. Thanks to aggressive promotion of Mexico’s mineral potential both nationally and internationally, the sector is attracting large inflows of foreign investment, second only to the financial services sector. In 2008, foreign investment in Mexican mining projects accounted for 25 percent of all foreign investment inflows. More importantly, foreign investments in mining doubled from the previous year, while foreign investment in other sectors has been declining since 2006.

Canada is the largest source of foreign investment in Mexico’s mining industry. Of the 257 foreign mining companies currently operating in Mexico, over 75 percent have their head offices in Canada, compared to 14 percent in the United States and the rest in England, Australia, Japan, China and Korea. Together, Canadian firms invested more than US$ 1.3 billion dollars in Mexican mining projects in 2008, accounting for almost 60 percent of all Canadian investment flows to Mexico. According to the Mexican economy ministry, the trend is expected to continue, especially with new investments in gold mines in the northern state of Zacatecas.

Canada is not only the biggest investor in the Mexican mining sector but also sets an example as a good corporate citizen. Goldcorp, another Vancouver-based gold miner, has emerged as the poster child of corporate social responsibility. With more than $500 million invested in mining operations in the states of Chihuahua, Guerrero, Morelos, and Zacatecas, Goldcorp is the largest single foreign investor in the Mexican mining sector.

DAILY MANTRA

In 2007, Goldcorp earned the title of “Socially Responsible Company” from the Centro Mexicano para la Filantropia (CEMEFI), a civil association whose task is to promote corporate philanthropy. Goldcorp’s community outreach efforts are focused on five areas: health, education, safety, environment and construction projects. Corporate social responsibility has become part of the company’s daily mantra and it actively promotes its CSR credentials.

While Goldcorp is receiving kudos for its environmentally and socially responsible behavior, however, some smaller Canadian mining companies have yet to embrace corporate social responsibility as part of their business model and, as a result, continue to face a series of problems.

According to the Canadian watchdog group Mining Watch, mine operators in the states of Oaxaca and Chiapas have caused the displacement of indigenous people, increasing violence within the communities. This violence, along with political conflicts in the area, has resulted in local opposition to Canadian mining exploration firms such as Linear Gold Corp., headquartered in Halifax, Nova Scotia, and Fronteer Development Group, based in Vancouver. In many cases, mining exploration companies such as Linear and Fronteer receive permits from the federal government to begin mining operations without any previous consultation with the communities where the mines are located, which almost always ensures a cool reception from the local authorities.

ENVIRONMENTAL INTEGRITY

A continuing challenge for Canadian mining companies in Mexico, as in other developing countries, is to combine their commercial activity with environmental integrity, as well as social development. Companies have to be aware that sustainable development is built by including all the stakeholders in the discussion and by understanding the needs of the communities where they operate.

While New Gold’s successful handling of the Cerro San Pedro conflicts was a watershed event for the Canadian mining industry in Mexico, and while leaders in the sector, such as Goldcorp, win praise for their efforts at community-building, it remains to be seen if other Canadian mining companies -- especially smaller companies that may lack the resources, the knowledge or the right incentives -- will follow these example by pro-actively developing corporate social responsibility programs to address social, political or environmental issues in local communities before they threaten to undermine their considerable investments.

David Robillard is Managing Director and Head of the Mexico City office of Kroll Inc, a global risk consulting firm. Silvia Chavez is a Senior Analyst with the Mexico City office of Kroll. This article is republished with permission from Kroll Tendencias, the company’s monthly newsletter.