Playing Mexico's Golden Potential

By Aaron Levitt | May 14, 2012 AAA


As investors have been clamoring for more security in the wake of the global financial crisis, gold demand has surged. Various central banks continue to purchase the safe haven metal in spades as a way to diversify out of fiat currencies and the dollar. At the same time, consumers across the developed and emerging world have flocked to gold as a way to prevent inflationary pressures and protect purchasing power.

Funds like the SPDR Gold Shares (ARCA:GLD) have surged in assets as this trend has taken place. However, all of this rising demand has come at the expense of dwindling supplies. To that end, various natural resource firms have gone to the ends of the earth to find new supplies. One often-ignored country in Latin America could be the key for new sources of gold supply.


Rising Production Growth
While it's currently known as the world's largest producer of silver, Mexico is on track to be a force in the gold mining sector. The majority of gold mined in the nation comes as a co-product of both silver and copper. That is quickly changing. Mexico's geology is crisscrossed with a valuable network of mineral deposits, and much of the land remains unexplored. However, exploration efforts in the nation have surged in the wake of higher gold prices and demand.


Right now, Mexico is the tenth-largest gold producing country in the world. The LATAM nation produced nearly 86.6 tons of the precious metal in 2011. That's a 307% increase from the 21.3 tons it produced in 2002. However, analysts at Thomson Reuters GFMS estimate that as various new mines and projects get underway, Mexico could see its gold production rise to about 100 tons over the next five years.

There's definitely reasons those production numbers will continue to climb into the future. The North American Free Trade Agreement (NAFTA) has helped mineral exploration industry in the nation. Low labor costs, skilled workers and certain government price controls help keep production costs low. Globally, it costs an average of $649 to mine an ounce of gold. In Mexico, production costs are a low $325 per ounce. That extra money goes directly into the gold miners pockets.

SEE: NAFTA's Winners And Losers.

Playing the Production
With Mexico's rich golden resources, investors may want to consider adding to their portfolio a swath of mining companies that are doing business in the region. Both the Market Vectors Gold Miners ETF (ARCA:GDX) and iShares MSCI Global Gold Miners (ARCA:RING) make ideal broad plays on the theme, but the best way to capture Mexico's golden potential is through individual firms. Here are some picks.

Operating in the Guerrero gold belt, super major Goldcorp (NYSE:GG) owns the largest gold mine in Mexico - its Los Filos complex. That mine features proven and probable gold resources of 7.75 million ounces. However, Goldcorp is not resting on its laurels. Its new Peñasquito mine should take over the title of largest in the nation. Additionally, the firm has several development projects that will begin production in 2015. Shares of the super-miner currently can be had for a forward P/E of 10, and yields 1.5%.

Also featuring assets located in Mexico, although not in the same scale as Goldcorp, are mid-tier miners Yamana (NYSE:AUY) and AuRico Gold (NYSE:AUQ). Yamana's 100% owned Mercedes project recently began commercial productio,n and features proven and probable reserves of 964,000 ounces as well as a vast amount of silver. AuRico features three commercial production mines across Mexico and has been expanding via exploration efforts throughout the LATAM nation.

Finally, perhaps the best way to play Mexico's golden future lies within the junior and exploration-mining firms. The major miners have ignored much of the country's potential, and smaller outfits have done the bulk of the new activity. The Global X Gold Explorers ETF (ARCA:GLDX) still remains one the best ways to play the smallest of the small when it comes to gold production.

SEE: Getting Into The Gold Market.

The Bottom Line
While it may be the world's largest producer of silver, Mexico is quickly gaining a reputation as the superstar gold producer. Production and mine activity in the Latin American country continues to grow at a rapid pace. For investors, adding a dose of firms that produce in the nation could lead to portfolio gold. The previous picks, along with Agnico-Eagle Mines (NYSE:AEM), make ideal selections.

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.


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