In Mining

Mining Spotlight

Companies across the mining value chain face many forms of above-ground risk in Latin America and the Caribbean. AMI publishes these brief, independent assessments titled ‘Mining Spotlight’ to showcase how those risks have been analyzed, anticipated, or mitigated by companies operating in the region. We mean to promote the importance of leveraging coordinated and continuous market intelligence to ensure long term success.

Grupo México is a conglomerate with interests in mining, transportation, and infrastructure. It runs Mexico’s largest and most profitable railway, transporting over a third of all the rail cargo in the country. It is continuously ranked among the five largest companies in Mexico measured by market capitalization. And its mining division is the leading copper producer in Mexico, with subsidiary or wholly owned operations in Ecuador, Chile, Peru, Spain, and the US, that when combined turn it into the third largest copper producer in the world.

There are countless vigilant eyes discerning every portion of its operation. Its sheer size, combined with its transparency requirements as a publicly traded company, hold it accountable to the highest standards. In this edition of AMI’s Mining Spotlight we discuss how Grupo México is analyzed by external parties, especially investors – and the challenges that come with such assessments.

The 2022 Latin America Mining Risk Index


The 2022 Latin America Mining Risk Index

A qualitative and quantitative analysis of the risks facing both miners and investors in the region’s 16 leading jurisdictions

Rating criteria as plentiful as blackberries

An English idiom meant to indicate that something is abounding, “plentiful as blackberries” is analogous to how ample is the range of standards used by stakeholders of mining operations to measure how companies interact with their surroundings. The words ‘environmental, social, and corporate governance’ (ESG) give light into the key (although by no means only) aspects that people want to know about:

  • Environment: Environmental stewardship tends to revolve around a company’s awareness of climate change issues. In mining there is a specific interest into conscientious water management and the protection of ecosystems, which are distinct criteria not necessarily applicable to other industries. Decarbonization trough electrification of mining equipment, such as diesel trucks and gas-consuming appliances, is increasingly of interest.
  • Social: Companies across the mining value chain are required to, at a very minimum, demonstrate a commitment to the protection of human rights, rise above poverty wages, prevent Indigenous peoples from being dispossessed of their ancestral lands, and overall avoid modern day slavery. For the more established operations already ensuring those standards, expectations shift towards guaranteeing appropriate working conditions. Extractive industries are expected to comply with particularly comprehensive safety and health management systems correlated with the hazards concomitant to their activities. There is also an expectation that companies promote diversity and inclusion among employees and related third parties, such as suppliers. Acts of goodwill are also measured, such as charitable works and prioritization of goods and services provided by local vendors. The later brings an impressive trickle-down effect, AMI has found.
  • Corporate governance: Perhaps the most nebulous standard of all because stringent regulations by governments worldwide already require companies to prevent money laundering and corruption, and to protect minority shareholders. When and how do companies go beyond merely complying with the law? Companies in extractive industries hoping to ingratiate with their stakeholders will be measured by their commitments to transparency, such as establishing independent committees to oversee development and implementation of key policies; compliance with all possible regulations even if not immediately applicable, such as data protection; and appear genuinely stalwart towards sustainable development.

Topics frequently overlap, and investors (especially those specializing in publicly traded companies) are keen on quantifying as many variables as possible. For a multinational conglomerate like Grupo México, this means being permanently assessed on all fronts – often subjectively.

The shortcomings of averaging variables

There are key benchmarks that investors in publicly traded companies have come to rely on. A notable example, S&P’s Corporate Sustainability Assessment (CSA) quantifies crime, corruption, fraud, illegal commercial practices, human rights abuses, labor disputes and workplace safety, catastrophic accidents, or environmental violations. The CSA leverages artificial intelligence and machine learning to systematically analyze public information in two dozen languages – all while addressing the challenges of aptly evaluating incidents involving thousands of companies all over the world.

2022’s CSA rating for Grupo México displayed an 11% improvement over 2021, although the group still lags behind comparable companies. The ranking could be the result of averaging distinct variables, which tends to reduce the distinctness of each identified scenario.

For example, Grupo México’s Peruvian subsidiary has struggled in recent years to appease local communities at its Cuajone mine, and has been at times forced to suspend operations due to protests that cut the company’s water access and blocked a key railroad. Protesters at one point demanded $5 billion in compensation as well as a share of 5% of the company’s profits, which is an increasingly common phenomena in Peru since President Pedro Castillo took office with overwhelming support in the country’s impoverished mining regions.

2022’s CSA rating for Grupo México displayed an 11% improvement over 2021

Simultaneously although independently, Grupo México has made it a corporate goal to implement the ISO 14001 in all mining operations to reduce their environmental impact. A similar effort has been made with ISO 45001 to provide safe and healthy workplaces, and overall prevent work-related injury and ill health. There are few instances of mining companies enacting one, let alone both management systems. The systems will apply to the Cuajone operation.

The use of more than one ranking methodology is commonplace in the investment community. Grupo México has also been included in the FTSE4Good Index Series, which computes a different set of ESG practices intended to help create or asses sustainable investment products. The group’s sole presence in the index places it above the market average for ESG compliance measurement in the region, without turning a blind eye on opportunities for improvement.

Dealing with events that spread out over time

Grupo México has been marred by its unavoidable responsibility in the 2014 spillage of copper sulphate and sulfur dioxide into the Sonora and Bacanuchi rivers in Mexico. This has been considered the largest environmental spillage in Mexico’s history, affecting more than 20,000 people as far as the U.S. state of Arizona.

In addition to criticism towards the ecological cleanup effort and the monetary compensation provided by the company to those affected, local communities have turned to Mexican authorities to express their desire to be consulted of any expansions to the Buenavista del Cobre mine, the culprit of the spillage. Mexican law does not require such consultations.

When roundtables and townhalls mediated by government officials have taken place, concerns expressed by communities have revolved around repairing roadways and the provision of social services, especially health. As of 2020, Grupo México had invested $824 million in water infrastructure, health, education, and other social services to communities in Sonora and Zacatecas states – the largest investment of this nature by any mining company in the country.

Measuring these events and their relation to one another is already a complex task, compounded by the difficulty of accurately presenting changes (positive or negative) over time. Most investors apply quarterly or yearly period benchmarking. For example, the Corporate Human Rights Benchmark (CHRB) provides a comparative snapshot year-on-year looking at how companies systematize their human rights approach and respond to serious allegations. Grupo México has been assessed by the CHRB since 2019, and currently ranks 28% above local industry standards.

Another key appraiser, Sustainalytics, an ESG research provider that leverages its parent company Morningstar’s experience delivering financial data, ranked Grupo México in 2021 with a 26% improvement over 2020. Sustainalytics takes into consideration companies’ business model as well as incident’s history, and applies company feedback mechanisms that provide improved valuations when time series are involved.

Measurement-driven decision making is on the rise

Although there will always be shortcomings to any methodology, it is undeniable that measuring, ranking, and scoring are increasingly common in an effort to promote transparency and accountability. Grupo México is a powerhouse in the world of mining and is subject to ubiquitous scrutiny. With so many (perhaps countless) variables being considered, AMI can provide valuable contextual analysis to help investors and other stakeholders place all-encompassing data points into their proper context. Contact us for more information.

And for the burgeoning industry of ESG data providers, AMI can act as a valuable partner delivering on the ground intelligence and unique local experience quantifying complex circumstances.

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