Mention Mexico and your thoughts probably turn to sunny beach resorts and then maybe to the ongoing illegal immigration saga that has had politicians in Washington talking of building a massive wall along the border. Thanks to the media, these tend to be the prevailing images that come to our minds when we hear mention of Mexico.

But, there is another side to Mexico – one that we need be aware of and one that could result in investors taking serious losses on their investments in publicly listed firms engaged in mineral exploration and mining in Mexico.

To properly understand this other side of Mexico that I speak of, one needs to hearken back to 2006. In 2006, then President Vicente Fox decided not to seek re-election. Fox initially had another candidate in mind to run on behalf of the National Action Party (PAN). But, a 44 year old Harvard educated lawyer, Felipe Calderon eventually secured the nomination when he promised to continue with the pro-business policies of the outgoing Fox.

The election was a hard fought, viscious battle and as the votes were tallied it became clear that this election was a close nail-biter. After weeks of political and legal wrangling, Calderon’s victory was confirmed by the Federal Electoral Tribunal. 

But tight fought elections with narrow margins of victory can leave a man at odds with his opponent, in this case the left-wing Andres Manuel Lopez Obrador, who for much of the election race was well ahead in the public opinion polls.

As Mr. Calderon took office in December 2006, he pledged an iron-fist aproach to crime, plans to combat poverty, plans to improve health care, plans to improve education and promised to push for a migration agreement with the US to legalize residency for Mexicans who had lived in America  for more than three years.

But, facing him was an even bigger agenda  – staving off the mass protests by supporters of his defeated opponent and winning over those Mexicans who did not vote for him and who now believed he stole the election.

Matters have now intensified in Mexico for Mr. Calderon and aside from some concerns voiced by John McCain during the 2008 election campaign, the mainstream media has given a wide berth to the smouldering fires in Mexico.

An article in the July 4th, 2009 Economist and an article in the August 2009 issue of Mother Jones both caught my attention and opened my eyes.

Mr. Calderone, decided to act on his campaign pledge to deal with crime by unleashing 45,000 Mexican Army troops on the drug trade. But, something has backfired in spectacular fashion. Instead of a war on drugs, the situation has turned into a war for drugs with law enforcement and Army officials now engaged in violence to get their hands on their share of the lucrative cash flow from the drug trade. The resulting instability has now pitted cartel against cartel and Army against cartel. Something like 6 cartels have Mexico carved up into territories and the reach of these cartels now extends deep into America. The entire northern part of Mexico has become one big killing field with people "disappearing" on a regular basis. For a more graphic illustration, I seriously encourage you to read the August 2009 edition of Mother Jones. Statistics now suggest that since Calderon commenced his war on drugs, 11,000 odd people have perished.

America has respnded with a lame-duck policy initiative called the Merida Initiative carrying a price tag of $1.4 billion. Most of this money (still unspent) is earmarked for surveillance equipment to be placed at US border posts, so the impact on the attrocities in Mexico will be scarcely felt. Some of this cash, however,  will be spent to train Mexican Army troops – perversely enough the same troops that are now part and parcel of the violence. All Hillary Clinton advanced on the issue during a recent whistle stop in Mexico was a lame, watered down statement to the effect that the drug issue was being fueled by an insatiable American demand for drugs.

Now, political watchers are turning their gaze away from the drug wars and starting to look at the developing changes to the political landscape in Mexico. For some 70 years, Mexican politics was dominated by the Industrial Revolutionary Party (PRI). The PRI was finally ousted from office in 2000. Since this fall from grace, the entire social fabric of Mexico has started to unravel. The cartels and their respective territories are the most glaring evidence of this social breakdown.

Mexico held general elections on July 5, 2009. On the ballot were 500 federal legislators, six governors and mayors and local legislators in 11 states. Calderon still has three years left in his six-year term and was not on the ballot. The results clearly point to continued troubles in Mexico. Calderon’s PAN party went from holding 206 Congress seats to holding just 147 while the PRI went from 106 seats to 241 to now hold a 49% grip on Congressional power. What is worse are the numerous stories now emerging that are claiming the Army and the cartels were instrumental in determining which candidates ran on the PRI ticket. Clearly, the Army and the cartels are now aiming to use political leverage to jostle for a bigger piece of the drug pie. This election outcome leaves Calderon a lame duck. He will now have to pander to the PRI in order to get any legislative initiatives passed. If the connection between the Army, cartels and the PRI are true, Mexico has now been launched on a spiral path into the abyss. The outlook is now bleaker than ever.

What the impact will be on the mining and exploration industry remains uncertain at this point. But, it does not take a big stretch of the imagination to fancy exploration companies having to pay substantive sums of protection or bribe money to Army/cartel powerbrokers in order to survive. During a 2007 visit to Zacatecas State to visit a silver exploration project, I noted that the junior company in question had retained the services for $5000/month of a local kingpin. At that time, I thought this rather odd for a country so closely aligned with its neighbors to the north, but now upon reflection I can see what was happening.

So, if you are an investor who has been dabbling with publicly traded junior companies engaged in Mexican projects, all I can say at this juncture is – be careful. Where Mexico will end up from here is anyone’s guess. Keep a close eye on the situation qand a close eye on your investments in these juniors.

Malcolm Bucholtz B.Sc, MBA
Investing Success