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Analysts: Sell-Off Of Mining Shares On Mexico Worries 'Overreaction'

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(Kitco News- The recent sell-off in shares of companies that have mining operations in Mexico, due to worries about possible changes in the country’s mining laws, may be exaggerated, some analysts say.

Investors were spooked by worries about more stringent rules under incoming President Andres Manuel Lopez Obrador. The slide began after a senator in Lopez Obrador’s Morena party called for new regulations, and Morgan Stanley downgraded some mining stocks, according to news reports. Concerns include the government withholding permits for new projects and perhaps even revoking existing ones when environmental or social concerns are raised.

Shares of base and precious-metals producers alike were hit.

“I think it’s an overreaction,” said Matt Badiali, senior analyst with Banyan Hill Publishing.

In particular, he said, there are worries that if legislation passes, it possibly could be used to take mining concessions away from Southern Copper Corp. because of a 2014 contamination spill.

“That’s a lot of ‘ifs’ related to Southern Copper,” Badiali said.

“I really feel like this is bad news that has fallen on an industry that has already been beaten up pretty hard. People are looking for reasons to leave the mining space right
now. Additional bad news on top of low base-metals prices and a general lack of interest in the mining by investors has continued to push these share prices down. It’s more bad news piling on.”

However, passage of any draconian mining rules “has a long ways to go,” Badiali said. “Clearly, there is going to be pushback,” he said.

Armando Guadiana, a Senator in Lopez Obrador’s Morena party, has already offered caution against changing laws “just for the sake of it,” according to news reports.

“The fears are speaking louder than the rational response. I think this is an overreaction due to the general angst in the mining space right now,” Badiala.

David Morgan, publisher of TheMorganReport.com, also used the word “overreaction” when describing the sell-off of shares of companies that operate in Mexico.

“The most likely scenario is an increase in the tax rate,” he said. “Usually governments are inclined to do what’s easy. And the easiest thing to do is to increase the tax rate on the miners.

“Are they going to nationalize the mines and take them over—stuff that a lot of people fear? It’s highly doubtful.”

Higher tax rates will still impact share prices, he added. For one thing, this reduces companies’ profits and cash flow.

“But it’s not as much to fear as having a mine nationalized and taken over by the government,” Morgan concluded.

Badiali said there still could be capitulation in prices. Yet, he continued, “I’m going to be looking at these guys [stocks],” commenting that some of the companies such as Southern Copper, Grupo Mexico (copper) and Fresnillo (silver and gold) are “great companies.”

“These are not inconsequential mining companies.”

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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