Tuesday, March 3, 2009

Mexico in Crisis

Mexico is facing a crisis that could potentially topple its government within the year.

Lets examine the facts, and consider how regional instability can easily bleed into to the more stable tourist and mining regions of this fragile state.

Some background of the source of Mexican Instability from Wikipedia:

The Gulf Cartel (Cártel del Golfo) is a Mexican drug trafficking organization. The Gulf Cartel traffics cocaine, marijuana, methamphetamine and heroin across the border to major cities in the United States. The group is known for its violent methods and intimidation, and works closely with corrupt law officials and business people in Mexico as well as in the United States. The sphere of influence for the cartel has been determined to be from the Gulf Coast state of Tamaulipas to Piedras Negras, Coahuila.

The Gulf cartel does not limit itself solely to narcotics trafficking, as they have been known to kidnap local businessmen to collect money.

Once a radical fringe group Los Zetas headed by Heriberto Lazcano provide the muscle for the Gulf Cartel. Los Zetas are at the forefront of the recent spate of violence occuring primarily on the border regions with the United States.

The Zetas is the first criminal organization in the Americas to have been formed by former military personnel and defectors from a regular army. Mexico's General Attorney classified and filed the Zetas as an armed division of the Gulf Cartel in December 1996.

The Zetas represent a major threat to Mexico's national security. Organised crime was designated a national security threat in 1987, and the Zetas are now one of the major criminal groups operating in the country. As army defectors, the Zetas possess considerable military expertise, training and experience in combat, guerrilla and urban warfare.

The Zetas' formation represented the first time that a drug cartel possessed such a sophisticated and well-trained armed division. Since then they have been responsible for the cartel's security, logistics, assassination of its rivals and its ambitious expansion strategy to other territories that are under the control of rival drug syndicates.

The Wall Street Jounal's Joel Kurtzman characterizes the current spate of violence as potentially disruptive to whats left of any democratic institutions in Mexico:

Mexico's Instability Is a Real Problem

Don't discount the possibility of a failed state next door.

Mexico is now in the midst of a vicious drug war. Police officers are being bribed and, especially near the United States border, gunned down. Kidnappings and extortion are common place. And, most alarming of all, a new Pentagon study concludes that Mexico is at risk of becoming a failed state. Defense planners liken the situation to that of Pakistan, where wholesale collapse of civil government is possible.

One center of the violence is Tijuana, where last year more than 600 people were killed in drug violence. Many were shot with assault rifles in the streets and left there to die. Some were killed in dance clubs in front of witnesses too scared to talk.

It may only be a matter of time before the drug war spills across the border and into the U.S. To meet that threat, Michael Chertoff, the outgoing secretary for Homeland Security, recently announced that the U.S. has a plan to "surge" civilian and possibly military law-enforcement personnel to the border should that be necessary.

The problem is that in Mexico's latest eruption of violence, it's difficult to tell the good guys from the bad. Mexico's antidrug czar, Noe Ramirez Mandujano was recently charged with accepting $450,000 from drug lords he was supposed to be hunting down. This was the second time in recent years that one of Mexico's antidrug chiefs was arrested for taking possible payoffs from drug kingpins. Suspicions that police chiefs, mayors and members of the military are also on the take are rampant.

In the past, the way Mexico dealt with corruption was with eyes wide shut. Everyone knew a large number of government officials were taking bribes, but no one did anything about it. Transparency commissioners were set up, but given no teeth.

And Mexico's drug traffickers used the lax law enforcement their bribes bought them to grow into highly organized gangs. Once organized, they have been able to fill a vacuum in underworld power created by Colombian President Álvaro Uribe's successful crackdown on his country's drug cartels.

The result is that drug traffickers are getting rich, while Mexico pays a heavy price in lost human lives and in economic activity that might otherwise bring a modicum of prosperity to the country.

To his credit, Mexico's President Felipe Calderón has deployed 45,000 members of his military and 5,000 federal police to fight drug traffickers. This suggests that he is taking the violence and the threat to civil government seriously.

(Deploying 45,000 troops, the equivalent of 3 army divisions, or an entire corps of a possible 230,000 army soldiers suggests Mexico's President is scared out of his mind that things might escalate and topple his tenuous hold on power. J )

But the path forward will be a difficult one. Not only must Mexico fight its drug lords, it must do so while putting its institutional house in order. That means firing government employees who are either corrupt or not willing to do the job required to root out corruption. It will also likely require putting hundreds, or even thousands, of police officers in jail.

For more than a century, Mexico and the U.S. have enjoyed friendly relations and some degree of economic integration. But if Mexico's epidemic of violence continues, that relationship could end if the U.S. is forced to surge personnel to the border.

As traders an investors in precious metals exploration, we need to look well beyond the PR work of mining firms who never tire of painting a rosy picture of geopolitical tensions. Consider what has happened to mining projects in other Latin American states where democratically elected regimes have taken charge such as Bolivia's Evo Morales. Dont expect any of the booths at Toronto's PDAC to give you a straight answer on the growing instability of Mexico.

Here is a not so brief list from Mineweb of mining companies from Canada with current projects in Mexico:

Alamos Gold (Toronto): Sonora
Aquiline Resources (Vancouver): Sonora
Aurcana Corporation (Vancouver): Queretaro
Avino Silver and Gold Mines Ltd. (Vancouver): Durango
Baja Mining Corp. (Vancouver): Baja Peninsula
Bralorne Gold Mines Ltd. (Vancouver): Durango
Canasil (Vancouver): Durango, Sinaloa, Zacatecas
Canplats Resources Corporation (Vancouver): Durango, Chihuahua
Capstone Gold Corp. (Vancouver): Zacatecas
Cardero Resource Group (Vancouver): Baja California,
CDG Investments Inc. (Calgary): Sinaloa
Chesapeake (Vancouver): Oaxaca, Sonora, Durango, Sinaloa, Chihuahua
Columbia Metals Corporation Ltd. (Toronto): Sonora
Comaplex Minerals Corp. (Calgary): Mexico State
Coniagas Resources (Toronto): Zacatecas
Continuum Resources Ltd. (Vancouver): Oaxaca
Copper Ridge Explorations Inc. (Vancouver): Sonora
Corex Gold Corporation (Vancouver): Zacatecas
Cream Minerals Ltd. (Vancouver): Nayarit
Diadem Resources (Toronto): Zacatecas
ECU Silver Mining (Rouyn-Noranda): Durango
Endeavour Silver (Vancouver): Durango
Energold Drilling Corp [Impact Silver Corp.] (Vancouver): Mexico State
Evolving Gold Corp. (Vancouver): currently exploring acquisitions in Mexico
Esperanza Silver Corp. (Vancouver): Morelos
Excellon Resources (Toronto): Durango
Exmin Resources Inc. (Vancouver): Chihuahua
Dundarave Resources Inc. (Vancouver): Chihuahua
Farallon Resources Ltd. [Hunter Dickinson] (Vancouver): Guerrero
Firesteel Resources (Vancouver): Durango
First Majestic Silver Corp. (Vancouver): Jalisco, Coahuila, Durango, Zacatecas
Fording Canadian Coal Trust [NYCO] (Calgary): Sonora
Formation Capital Corporation (Vancouver): Tamaulipas
Fronteer Development Group (Vancouver): Jalisco, Chiapas
Frontera Copper Corporation (Toronto): Sonora
Gammon Lake Resources (Halifax): Chihuahua, Guanajuato
Genco Resources (Vancouver): Mexico State
Goldcorp Inc. (Vancouver): Sinaloa, Durango, Chihuahua, Guerrero, Zacatecas
Gold-Ore Resources Ltd. (Vancouver): Sinaloa
Golden Goliath Resources (Vancouver): Chihuahua
Grandcru Resources (Vancouver): Sinaloa
Grayd Resource Corporation (Vancouver): Sonora
Great Panther Resources Ltd. (Vancouver): Durango, Guanajuato, Chihuahua
Grid Capital Corporation (Vancouver): Chihuahua
Hawkeye Gold and Diamonds (Vancouver): Nayarit
Horseshoe Gold Mining (Vancouver): Oaxaca
Iamgold Corporation (Toronto): (royalties) Chihuahua
Iciena Ventures (Vancouver): Sonora
Impact Silver Corp. (Vancouver): Zacatecas
International Croesus Ltd. (Vancouver): Jalisco
Intrepid Mines (Toronto): Sonora
Kimber Resources (Vancouver): Chihuahua
Linear Gold Corp (Halifax): Chiapas, Oaxaca
Macmillan Gold (Toronto): Durango, Sinaloa, Zacatecas, Jalisco, Nayarit
MAG Silver Corp (Vancouver): Chihuahua, Zacatecas, Durango
Minefinders (Vancouver): Chihuahua, Sonora
Morgain Minerals Inc. (Vancouver): Durango, Sonora
Metallica Resources Inc. (Toronto): San Luis Potosi
Mexoro Minerals Ltd. (Vancouver): Chihuahua
Northair Group (Vancouver): Durango, Sinaloa
Northwestern Mineral Ventures (Toronto): Durango
Oromex Resources (Vancouver): Durango
Orko Silver Corp. (Vancouver): Durango
Pacific Comox Resources (Toronto): Sonora
Palmarejo Silver and Gold (Longueuil): Chihuahua
Pan American Silver (Vancouver): Sonora
Pinnacle Mines Ltd. (Vancouver): Mexico State, Oaxaca
Quaterra (Vancouver): Durango, Zacatecas
Rome Resources Ltd. (Vancouver): Sonora
Ross River Minerals (Vancouver): Sinaloa
Roxwell Gold Mines (Vancouver): Sinaloa
Santoy Resources Ltd. (Vancouver): Sinaloa
Scorpio Mining Corporation (Vancouver): Sinaloa
Silver Crest Mines (Vancouver): Sonora
Silver Standard Resources (Vancouver): Durango, Mexico
Soho Resources Group (Vancouver): Durango
Sonora Gold Corp (Vancouver): Sonora
Sparton Resources (Toronto): Sinaloa, Sonora
Starcore International Ventures (Vancouver): Puebla
Stingray Resources (Toronto): Chihuahua
Southern Silver Exploration (Vancouver): Jalisco, Chihuahua
Stroud Resources (Toronto): Chihuahua
Teck Cominco Ltd. (Vancouver): Guerrero
Terra Novo Gold Corp. (Vancouver): Michoacan
Tumi Resources (Vancouver): Chihuahua, Sonora
Tyler Resources (Calgary): Chihuahua
UC Resources (Vancouver): Durango, Nayarit
Valdez Gold (Toronto): Chihuahua
War Eagle Mining Company (Vancouver): Chihuahua
West Timmins Mining Corp. (Vancouver): Sinaloa, Chihuahua
Zaruma Resources Inc. (Toronto): Sonora

Gold bugs are a strange lot. Forever suspicious of the words of governments, of analysts and mainstream media. Always on guard for the end of fiat money, the end of finance and the end of the world. But too easily swept off their feet by a mining man and a good story.

Dont believe the hype, the Jr. Mining Sector is under duress, the values of far too many Jr. mining outfits represent not great bargains but indications that mining on a small scale has become increasingly expensive and difficult due to global instability in all but a few of the richest mining regions of the world. Not only have Jr. stocks collapsed in price, further erosion has been prevented only by a much higher gold price. Bank stocks would be much higher today if office supplies suddenly exploded in value- it says nothing about the intrinsic ability of these equities to generate any sort of sustainable cash flow.

Good luck, and be careful on your next vacation.

aka dr. cosa

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