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TABLE OF CONTENTS Apr 7 - 13, 2014 Volume 100 Number 8 - 0 comments

Excellon CEO on Mexico, taxes and trust

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By: Anthony Vaccaro

Excellon Resources’ (TSX: EXN; US-OTC: EXLLF) La Platosa Mine in Durango is one of the world’s highest-grade silver mines. The mine also boasts lead and zinc by-products that make it one of the lowest cash-cost silver mines in Mexico.

The company’s CEO Brendan Cahill sat down with The Northern Miner at the recent Prospectors & Developers Association of Canada (PDAC) convention in Toronto to discuss recent changes to Mexico’s tax code and Excellon’s strategy for thriving in today’s silver market.

The Northern Miner: Your company, like other producers in Mexico such as Sierra Metals, took an expedited route towards production, eschewing the formalities of completing a bankable feasibility study. Is there something about Mexico that allows companies to fast-track production?

Brendan Cahill: With all the talk of tax reform, when you go through the checklist of things a company is looking for in a country it is going to invest in — i.e., the geology, security, community relations, education and government stability — Mexico is still better than almost anywhere else in the world for building a mine.

And you don’t need expats to do it. There is an incredible network of experience with former Fresnillo and Grupo Mexico people. They all have 35 to 40 years of experience, and there is a whole layer of other guys stepping in beneath them that will keep things going.

TNM: Let’s talk about the tax. The government recently implemented a 7.5% royalty on EBITDA, plus another 0.5% royalty on revenues from precious metals, and rather than cut the corporate tax rate to 26% as promised, it is holding it steady at 30%. How problematic is this for miners in the country?

BC: What is perhaps more problematic is the issue of forcing the capitalization of drilling expenditures. We now have to spread them over 10 years rather than expensing them in the first year. So now you go in and drill and maybe have no hope of finding anything, but you can’t fully expense it. Capitalizing on drilling just doesn’t make sense.

Mexico is complicated right now. There are labour, energy, mining, education and tax reforms. It is a complicated chess game the government is playing, and we as an industry aren’t entirely in the know in terms of what the political trade-offs are.

I think it will play out fine in the end. The government is supportive of mining, but it needs to be educated further on what effects it can have on industry.

TNM: Is the mining industry doing a good enough job of getting its concerns heard in the highest offices in Mexico?

BC: The industry is doing a job, but we need to make a bigger effort.

We have the Mexican Mining Task Force and it took a prominent role last year, but further steps are needed. We need to be in front of the right people at the right time, saying the right things.

Look at the Three Amigos summit [between Canadian Prime Minister Stephen Harper, U.S. President Barack Obama and Mexican President Enrique Pena Nieto on Feb. 19], there was nothing in The Globe and Mail or the National Post about the mining industry. That is a huge missed opportunity. [The summit] only happens every two years, and now was the time we needed it. 

TNM: How do you get your message out? Is there a danger the Mexican government, for political motives, becomes deaf to the mining industry’s concerns?

BC: I think if the Mexican government hears us, they’ll take care of us. But Mexico is a huge car producer, it has a large textile industry and agriculture is big as well. So while mining is important, they have their own concerns in terms of these other industries.

In our industry there’s a bit of: ‘Everyone knows my mining company, we are famous.’ Well no, you are not. You can never take it for granted that people will look out for you if you don’t speak up.

TNM: Could you describe how the tax reforms came down, and your reaction when they were finalized?

BC: The initial proposal was a 3% royalty on profits and then, all of a sudden in mid-summer, it came up to a 7.5% royalty, plus a 0.5% royalty for precious metals. The corporate tax stayed the same at 30%, and the new 10-year rule on depreciation comes in. It was a ‘wow’ when it all came down, which was just two to three months before the election.

The government is playing a bit of 3-D chess right now. There are a lot of pieces going in a lot of different directions. I hope that things are under control . . . the most damaging thing is that the tax policy rationale isn’t logical. Anyone could look at it and question the logic.

The mining time frame is five, 10 or even 15 years . . . the industry operates on long time frames, so the certainty of capital is really important. You need to know what taxes you will face by the time you get to production so that you can discount it the right way.

So when you actually look and see there are fundamental flaws in the logic of the tax policy, that’s when you question who’s driving the bus.

TNM: Beyond the tax issue, can you tell us what your experience in Mexico has been like?

BC: It is an awesome place. Take Mexico City. Forget New York or London or wherever — it is one of the most vibrant places in the world.

You meet guys in government there and they have high hopes for Mexico and they genuinely do want to help you.

Listen, the greatest currency in the world is trust. If you can sit in front of someone in a place that is barren of trust, and they can see in your eyes that they can genuinely trust you, it’s totally transformative.

There is a suggestion that in the Third World — not that Mexico is the Third World — but there’s an idea that you have to pay people off. That’s not true. You have to sit with them, drink some tea, build relationships and then they trust you. They begin to do things because they know you’re their friend, and you can help them down the road if they have an issue.

TNM: What are your broader thoughts on the state of the silver mining industry? 

BC: I was recently down at the [BMO Capital Markets Global Metals & Mining conference held in Florida in late February] and the message from speakers like [CEO of Glencore Xstrata (LSE: GLEN)] Ivan Glasenberg was that we need to look at it from the DeBeers kind of model. DeBeers cornered the diamond market by controlling supply and marketing the product so well. That’s almost what the mining industry has to do. We can’t control prices, but we can do a little bit to control supply. The half-wit projects need to be forgotten.

The message from the BMO conference was that there is no development money out there, so it’s all about cutting costs, finding synergies and consolidating . . . and hopefully that means we are at the bottom of the market now.

TNM: As one of the few companies in the sector that has increased cash flow quarter over quarter, what are your thought on how to best grow your company?

BC: From our point of view, if this is the bottom of the market, now is the time to pick up those quality assets, and then forget about them.

If we do some acquisitions, our time frame for developing them would be two to three years. We would take them along, do some drilling and spend $5 million a year, develop them a bit and wait for the market to turn. Right now things are cheap.

Some of these assets — as independent and orphaned junior resources — are worth nothing.

But you put them in Excellon and it becomes a reality. They now have the insurance of surviving through a tough market, and they gain the relationships we have in the industry and our marketing to push forward.

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Facilities at Excellon Resources' La Platosa silver mine in Mexico. Credit: Excellon Resources
Facilities at Excellon Resources' La Platosa silver min...

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