MINING IN MEXICO REGULATORY FRAMEWORK CHALLENGES AND OPPORTUNITIES

MINING IN MEXICO© REGULATORY FRAMEWORK CHALLENGES AND OPPORTUNITIES Abdon Hernandez-Esparza Legal Consultant

CONTENTS Ø INTERNATIONAL SCENARIO Ø THE IMPORTANCE OF MINING IN MEXICO Ø KEY 2009 STATISTICS Ø LEGISLATIVE FRAMEWORK Ø CHALLENGES AND OPPORTUNITIES Ø CONCLUSIONS

INTERNATIONAL SCENARIO • • Worldwide 2009 was not a good year for the mining industry The world´s economy collapsed in the second half of 2008 and adversely affected 2009. The worldwide recession impacted all industrial sectors. The industrial strength of China supports the world´s demand for minerals. China has become the number one producer of automobiles.

INTERNATIONAL SCENARIO • Latin America leads in investment in mining exploration (26%). • Peru is the third mining country in the world. (Metals Economic Group) • Mexico faced strikes and work stoppages, increased cost of energy and suffered delays in exploration projects.

WORLDWIDE INVESTMENT IN MINING EXPLORATION: U. S. $7. 320 BILLION (- 42%)

THE IMPORTANCE OF MINING IN MEXICO Mexico’s tradition as a mining country goes back many centuries and since the pre-Columbian days

THE IMPORTANCE OF MINING IN MEXICO The search for gold was a driving force behind the Spanish conquest. The miners spread throughout New Spain side by side with the Spanish conquistadors, the priests and missionaries. Zacatecas Guanajuato Taxco

THE IMPORTANCE OF MINING IN MEXICO Wealth from mining was the most important source of financing for the construction of architectural jewels. Santa Prisca. Taxco

THE IMPORTANCE OF MINING IN MEXICO Mexico has a rich territory and a definite and well known mining vocation. 70% of the territory is favorable for the finding of world class mineral deposits Cu Metallogenic Map Mo A-89 D-12 D-13 C-29 C-39 Cu, Mo, Au Pb B-53 A-69 B-61 B-62 B-63 B-64 B-65 B-66 A-79 B-71 B-72 B-73 B-74 B-75 B-73 Au Ag, Pb, Zn D-22 D-23 D-32 HERMOSILL D-45 O Au Sb Pb, Zn D-64 C-82 Na. Cl Existing World Class Deposits Fresnillo Tayoltita Cananea Real del Monte y Pachuca Charcas Santa Eulalia La Herradura Las Cuevas Molango Peñasquito D-75 CHIHUAHUA Fe, Cu C-85 C Ag Fe A-11 A-41 B-59 A-51 A-52 B-69 P F A-46 -47 A A-56 A-58 A-57 A-66 -67 A B-79 A-73 B-88 A-83 A-85 A-84 C-11 C-21 C-35 C-45 C-37 C-48 C-49 C-55 C-56 D-42 2 D-44 D-52 C-59 DURAN GO A-17 SALTILL O C-51 D-58 -59 D C-51 C-61 D-67 D-69 D-76 D-78 C-71 D-79 A-38 B-34 B-35 A-48 B-44 B-45 A-59 Au A-69 Mn B-39 A-32 A-34 A-31 A-33 A-43 B-49 A-42 ZACATECA B-58 A-51 B-59 S B-68 B-69 A-53 A-55 A-54 En estudio A-63 A-65 B-78 B-79 A-71 A-73 A-72 A-74 A-89 D-14 Ag Fl B-88 B-89 A-84 AGUASCALIENTES C-15 C-16 TEPIC D-24 D-32 D-51 D-34 C-25 C-26 C-31 GUANAJUATO C-42 C-43 C-44 C-46 C-45 C-47 C-54 C-53 D-53 D D-63 D-61 -62 D-71 Fe P A-13 A-22 A-24 B-25 B-33 S Bi Sr D-62 D-63 B-23 C D-12 D-13 D-22 C-79 D-71 LA PAZ B-14 B-13 Sr A-72 B-82 C-17 C-19 C-18 C-27 C-28 C-64 GUADALAJARA QUERETARO C-84 A-16 B-22 B-23 B-34 B-27 B-36 B-43 COLIMA B-46 Au B-65 Zn MORELIA A-26 TOLUCA A-45 A-46 A-44 A-51 A-53 A-55 A-54 A-63 A-64 A-65 B-78 A-74 A-75 A-73 A-85 A-84 C-12 Cu Mn S Ti VILLA HERMOSA OAXACA D-59 D-58 D-69 D-68 C-77 Source: Consejo de Recursos Minerales C-88

The importance of mining in Mexico Mining activities in 24 of the 32 states in Mexico and impact directly or indirectly 83 millon Mexicans. 2009 Key Statistics Ø Annual value of production: US $9, 319 million ØShare of GNP: 1. 6% Ø Direct Employment: 269, 000 Ø Indirect Employment: 1, 500, 000 Ø Investment in mining: US $2, 858 million (- 22%) Ø Projected Investment 2010 -2012: US $3. 083 billion ØNew mining operations: 15 ØMinerals in top 12 places: 18

TOTAL INVESTMENT IN MINING-MEXICO Million Dollars

SHARE BY METAL Value of Mining-Metallurgical Production: US $9, 319 Million 2008 2009

FOREIGN INVESTMENT IN MINING IN MEXICO Foreign Investment in Exploration: US$366 Million Value of Mining Production: US$9, 319 Million

FOREIGN INVESTMENT IN MINING IN MEXICO BY COUNTRY

RESULTS IN 2009 Notwithstanding the adverse world environment and internal problems faced by the sector, such as: Ø Strikes and work stoppages Ø Conflicts in access to land Ø High energy costs Ø Unjustified attacks on Mining Ø Legislative initiatives which would adversely affect the competitiveness of the sector 15 important mining operations were opened or reactivated in Mexico

NEW MINING OPERATIONS- 2009 q BAJA CALIFORNIA q q – El Triunfo (US $23 M) – San Juan of Rofomex, recommenced operations (US$75 M) SONORA – San Juan of Timmins Gold (US$40 M) – San Felipe of Minera Hochschild (US$40 M) CHIHUAHUA – Dolores of Minefinders (US$450 M) – Pinos Altos of Agnico Eagle (US$240 M) – Palmarejo of Coeur D’Alene (US$30 M) COAHUILA – La Encantada of First Majestic, expanded operations (US$30 M) DURANGO – Cerro Las Minitas of Silver Dragon (US$40 M) – Velardeña of ECU Silver (US$10 M)

NEW MINING OPERATIONS- 2009 q ZACATECAS – Peñasquito of Goldcorp (US$1, 700 M) – El Coronel of Frisco (US$71 M) q SAN LUIS POTOSI – Asientos of Frisco (US$44 M) q JALISCO – Cascaronal of Jaguar Mining (US$30 M) q MICHOACAN – Aquila of Terniun (US$30 M) INVESTMENT: US$3, 098 M

EXPLORATION PROJECTS 738 PROJECTS 11 232 Mining Companies 58 51 13 11 6 32 16 4 6 13 5 15 34 35 8 14 19 11 5 16 16 7 26 15

EXPLORATION PROJECTS Investment Forecast 2010 -2012: US$13. 083 Billion

EXPLORATION PROJECTS Mexican Companies Grupo México Peñoles Frisco Autlán Grupo Alfil Fresnillo PLC Minas de Bacis Las Encinas Materias Primas GAN

MINING LEGISLATION Regulation of mining activity dates back to the 16 th century colonial period of New Spain. The Cedula Real issued on December 9, 1526 The Ordenanzas del Nuevo Cuaderno on August 22 nd, 1584 The Ordenanzas de Aranjuez on May 22 nd, 1783 Independent Mexico Codigo de Minas de los Estados Unidos Mexicanos of 1884. Ley Minera de los Estados Unidos Mexicanos of June 4, 1892. Ley Minera of 1909.

MINING LEGISLATION The Political Constitution of the United Mexican States adopted in 1917. Article 27 of the Mexican Constitution specifies that: “The nation has eminent domain over all natural resources in the continental shelf and islands; of all minerals and substances in veins, mantos, masses or beds which constitute deposits whose nature is distinct from the components of the lands, such as ores from which metals and metalloids used in industry are extracted, beds of precious stones, of rock salt and salt beds formed directly by marine waters…” Ley Minera of 1930 Law Regulating Constitutional Article 27 on the Exploitation and Treatment of Mineral Resources of February 6, 1961 Law Regulating Constitutional Article 27 on Mining Matters, December 1975 Regulations enacted on November 30, 1976. New Regulations enacted on December 10, 1990.

MINING LEGISLATION Ley Minera of 1992. Regulations enacted on March 29, 1993. The Mining Law amendments enacted on December 24, 1996. The Regulations of 1993 were replaced by the new Regulations published on February 15 th, 1999.

2005 AMENDMENTS TO THE MINING LAW On April 28, 2005 substantial amendments were made to the mining law. The principal features of the 2005 amendments are: ØReclassification of certain minerals, elements and substances, and updating of the terms used to identify some of them. ØChanging the name of the Mineral Resources Council to Mexican Geological Service and strengthening and expanding its role. ØGrants indigenous peoples and communities the (i) right to apply for and obtain mining concessions, provided they comply in all respects with the law and its regulations, (ii) the “preferential right” would apply in the case of “simultaneous” applications for concessions; and (iii) the “preferential right” would also apply in the case of bidding process upon disincorporation of an area as a National Mining Reserve. .

2005 AMENDMENTS TO THE MINING LAW ØReplacing the “exploration concession” and the “exploitation concession” with a single “mining concession” with a 50 year term, renewable for another 50 year term, provided the corresponding petition is filed within 5 years prior to the expiration of the initial term. ØRegulates “gaps” or “voids” (huecos) and establishes rules for the preferential right to acquire a concession thereon ØEstablishes that, upon termination of a concession (through cancellation, expiration of term, or abandonment, a concession holder must provide to the Mexican Geological Service a complete geological and mining report including all exploration and exploitation work done, for incorporation in the “public geological survey and information system”. ØIncorporates in the law, instead of the Regulations, the obligation of having a safety engineer in coal mines with more than 9 workers and in all other mines with more than 49 workers.

2005 AMENDMENTS TO THE MINING LAW ØEmphasizes the obligation of concession holders to comply with all applicable Official Mexican Norms and Mexican Norms regarding safety and environmental protection. ØSimplifies and deregulates bureaucratic procedures, which complicated compliance by mining companies and created unnecessary workload for the Bureau of Mines. ØIncreases penalties to concession holders who relapse in breaches of the law.

2006 AMENDMENTS TO THE MINING LAW On June 26, 2006 amendments were made to the mining law. The principal feature of the 2006 amendments are: ØAllows the capture, storage and delivery of methane gas from coal mines, subject to certain requirements and consents from the Ministry of Energy and provided the gas is delivered to PEMEX.

OTHER LAWS AND REGULATIONS APPLICABLE TO EXPLORATION AND MINING ACTIVITIES Ø Importation, purchase, storage and use of explosives: q FEDERAL FIREARMS AND EXPLOSIVES LAW Ø Extraction, use and disposal of water: q NATIONAL WATERS LAW Ø Environmental matters: q GENERAL ECOLOGICAL BALANCE LAW FOR THE PROTECTION OF THE ENVIRONMENT q GENERAL LAW FOR THE PREVENTION AND MANAGEMENT OF WASTE q NOM-120 -SEMARNAT-1997 FOR EXPLORATION (Defines environmental specifications for direct exploration activities)

OTHER LAWS AND REGULATIONS APPLICABLE TO EXPLORATION AND MINING ACTIVITIES Ø Environmental matters: q. NOM-141 -SEMARNAT-2003 FOR TAILINGS PONDS (Procedures, specifications and criteria for the characterization of tailings and site preparation, construction, operation and postoperation of tailings ponds) q. NOM-147 -SEMARNAT-SSA 1 -2004 FOR SOIL AND LAND REMEDIATION (Establishes criteria for determination of land contaminated with Arsenic, Barium, Berylium, Cadmium, Chrome (VI), Mercury, Nickel, Silver, Lead, Selenium, Talium, and/or Vanadium)

MAIN CHALLENGES AND OPPORTUNITIES FOR MINING IN MEXICO Public Policy q Mining must be reassessed as a strategic industry. q Government Mining Office must be promoted to the level of Undersecretary of Mines. q Regulations of the Mining Law related to 2005 -2006 Amendments must be enacted. Land q Resolution of conflicts between mining operations and local rural communities. q Ensure the Rule of Law when all permits and authorizations have been granted.

MAIN CHALLENGES AND OPPORTUNITIES FOR MINING IN MEXICO Labor Reform q Flexibility of labor market and recognition of productivity. q Mine workers labor union must adopt internal democratic procedures and accountability. Environment q Timely compliance with existing regulations. q Publicize the sustainable development measures adopted by the mining sector and their high social economic and environmental benefits. Human Resources q The severe shortage of geologists and mining engineers is cause for concern.

MAIN CHALLENGES AND OPPORTUNITIES FOR MINING IN MEXICO Energy q Current domestic prices of energy pose a clear disadvantage vis-a-vis our competitors. q Mining is the third largest energy consumer in Mexico. q Need competitive energy. q Optimize use of energy in each mining unit. Water q This resource is increasingly more scarce and with higher demand. q Need public policies which promote the saving and efficient use of water.

CONCLUSIONS Ø 2009 was a difficult year for Mexican mining. ØIt faced the collapse of metal prices, shrinking markets, strikes and work stoppages, delays in exploration projects and legislative initiatives adverse to the development of the mining industry. Ø 22 thousand jobs were lost in the sector, total investment fell 22% and 52% percent in exploration. The value of production decreased 11%.

CONCLUSIONS ØAccording to the Metals Economic Group, Mexico fell from the 4 th to the 6 th place as a preferred location to invest in mining exploration. ØNotwithstanding the adverse scenario, 15 important mining operations were opened or reactivated in 2009. ØThe mining sector is honoring its commitment to Mexico with forecasted unprecedented investment of US$13. 083 billion in 2010 -2012.