Mexico - Second Small and Medium Scale Mining Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 5454b-ME STAFF APPRAISAL REPORT MCO SECOND SMALL AND MEDIUM SCALE IaNING DEVELOPMENT PROJECT April 26, 1985 Projects Department Latin America and the Caribbean Regional Office - Thi document bus a restriced distribution and may be used by recipients only in the perfonnance of their offkicd duties. ts oQtents may not otherwise be disclosed without World Bank authoerizaion  CURRENCY EQUIVAIENTS Currency Unit = Peso (Mex$) 1/ US$1 = Mex$ 226.85 2/ GLOSSARY OF ABBREVIATIONS ACF - Index of Average Cost of Funds to the Banking System CFM - Comision de Fomento Hinero (Mining Development Commission) CRM - Consejo de Recursos Minerales (Mineral Resources Council) ERR - Economic Rate of Return FNM - Fideicomiso de Minerales no Metalicos Mexicanos (Trust Fund for Mexican Non-Metallic Minerals) FRR - Financial Rate of Return GIRA - General Interest Rate Agreement between Mexico and the Bank NAFINSA - Nacional Financiera S.A. (National Financial Corporation) PECAM - Special Complementary Program for SMM Development PIs - PECAM's Participating Institutions RBPs - Regional Beneficiation Plants SAP - Special Action Program SEMIP - Secretaria de Energia, Minas e Industria Paraestatal (Ministry of Energy, Mines and Parastatal Industry) SHCP - Secretaria de Hacienda y Credito Publico (Ministry of Finance) SNMs - Small and Medium Scale Mining Enterprises SOE - Statement of Expenditures FISCAL YEAR January 1 - December 31 1/ The Mexican peso is adjusted on a crawling peg basis. 21 Free market, as of March 31, 1985.  FOR OMCIc USE ONLY MmCo STAFF APPRAISAL REPORT SECOND SMALL AND MEDIUM SCALE MINTNG DEVELOPMENT PROJECT TABLE OF CONTENTS Page No. LOAN AND PROJECT SUMMARY * .......................* .................. (i) I. THE MINING-SECTOR AND SMALL AND MEDIUM SCALE MINIG ................ 1 A. The Mining Sector ............................................... 1 Wi) Background .............................................. I (ii) Mining Legislation and Pol ies......................... 2 (iii) Natuonal Mining Program 1984-1988....................... 2 B. Small and Medium Scale Mining (SM) ...... e.. ..eeeeee 3 (i) Financing and Technical Assistance for SMMs*e.............. 3 (ii) Environmental Impact and Safety ......................... 3 Ciii) Overall Potential, Viability, and Development Constraints of SMMs.................................... 4 II. THE ORGANIZATIONAL AND INSTITUTIONAL ASPECTS ..... ........SS...S...00 4 A. Special Complementary Program for SMH Development (PECAN) ....... 5 (i) Background .....................cc 5 (ii) PECAM's Organizational Structuree........................ 5 B. Comision de Fomento Minero (CFH) .. ...... SCeecCOS 00 5 (i) Background and Objectives...... ........e.e..c.ee...0..*e 5 (ii) Organization, Management and Staffing ................... 5 Ciii) Operations ..... 6 (iv) Financial Position and Results .......................... 8 C. Fideicomiso de Minerales No Metalicos Mexicanos (FNM) ........... 8 (i) Background and Objectives ............................... 8 (ii) Organization, Management and Staffing..................* 9 (iii) Operations .................................... 9 (iv) Financial Position and Resultse..e..uu.ee......e... . ..e. 9 D. Consejo de Recursos Minerales (CRM) . ............. eee........... 10 Ui) Background and Objectives ............................... 10 (,I) Orgarization, Management aud Staffing ................... 10 (iii) Financial Position and Resources........................ 11 This report Is based on the findings of two missions which visited Mexico in November 1984, and in January 1985. The missions comprised Messrs. M. Alouso, 0. Saadat, and A. Leon (from the Bank); and R. King and G. Castaneda (Consultants). The report has been edited by Miss Virginia Foster. Thisdocmenthasareswiceddistnibutionand maybe usedby recipitsonly intheperIoa o c their ofricia duti. Its contS may not otherwist be disbld witout Wodi B ank  TABLE OF CONTENTS (Continued) -ii- Page No. E. Other Institutional Aspects .. ....... ............ ...... 11 Ci) Operating Policies ................. ................ 11 (ii) Subproject Appraisal and Supervision ..................... 11 (iii) Technical Assistance................................ .... 12 (iv) Procurement and Disbursement..................... 12 tv) Accounting ..o..o ...... .................... .o... 13 (vi) Commercial Banks' Participation ..............6...... ....... 13 (vii) Action Program ..o.o.oo........................................... 13 III. THE PROJECT.o.....o.....ooooo...o... oo.......o................. 14 A. Experience Under the First SMM Project ........................ 14 B. The Proposed Project's Objectives and Description.....0......... 15 C. The Proposed Bank Loan.... .oo.o.o............................... 16 Ci) Chanueling of the Resources and Repayment Arraugements.. 17 (it) Terms and Limits of Fi..ci.go .... .................... 18 (iii) Eligibility Criteria and Operating Policies aud Regulations............................................ 18 (iv) Onlending Interest Rates and Leasing Charges .....o ..... 19 Cv) Technical Assistance...oo.... oo.o. . .o...o.....*.. 19 (v.') Procu..emento ... o............... ....o..o... o..... o ...... 19 (vJii) Disburseenet,,..,,,ooo ...,,,,,,,,,..o*oeo.,.,.,,.o.oo... 20 (viii) Retroactive Financing. .0o ... ................... ..... 20 Cix) Accounting, Auditing and Reporting-....................o 20 D. Project Benefits and Risks...o... ........ ............o ..... 21 IV . AGREEMENTS REACHED AND RECOMMENDATION..o ...... .....o.......o.. 22 LIST OF ANNEXES ANNEX 1 PECAN's Draft Operating Guidelines ........ .0........0.... 23 ANNEX 2 CFM's Draft Operating Guidelines ,, .............................. 30 ANNEX 3 FNM's Draft Operating Guidelines ....-........................ 34 ANNEX 4 Technical Assistance ..... ............. * ... 37 ANNEX 5 Key Indicators for Project Implementation ....... o......... 39 ANNEX 6 Supporting Tables and Charts C-1 PECAN's Organization Chart .... ........... 41 C-2 CFM's Organization Chart .................... 42 C-3 FNM's Organization Chart e.........0..........*. 43 C-4 CRM's Organization Chart ....................... 44 T-1 Mineral Production 1982-1983 o ............... O....... 45 T-2 Trade Summary of Major Minerals- .................... 46 Mineral Sector Exports and Imports .................. 46  TABLE OF CONTENTS (Continued) -iii- ANNEX 6 (continued) Page No. T-3 CFM - Regional Beneflciation Plants ............ 47 T-4 CFM - Balance Sheets 1981-1988 ................. 48 T-5 CEM - Arrears In Loan Portfolio (December 31)... 49 T-6 CFM - Income Statements 1981-1988 50 T-7 FNM - Second Tier Operatious....ion..s*..O*VO 51 T-8 FNM - Balance Sheets 1981-1988...........0... 52 T-9 FNM - Arrears In Loan Portfolio (December 31)... 53 T-10 FEM - Income Statements 1981-1988.9............. 54 T-11 CRM - Balance Sheets 1981-1988.................. 1: 55 T-12 CRM - Income Statements 198119881...........*.. 56 T-13 Characteristics of Subprojects Approved by the 57 Bank under Loan 1820-ME as of December 31, 1984 T-14 Estimated Schedule of Disbursements............. - 58 ANNEX 7 Selected Documents and Data Available in the Project File 59 MA  mYXTco SECOND SHALL- An NI-scALE xmN DEVELOwE PoJEC LOAN AND PROJECT SMZEARY Borrower: Nacional F inanciera, S.A. (NAFINSA) Guarastor: United Mexican States Project Programa Especial Complementario de Apoyo a la Pequena y ESecuting Mediana Nineria (PECAM) Agencles Comision de Fomento Minero (CEM) Fideicomiso de Minerales No Metalicos Mexicanos (FNM) Comision de Recursos Minerales (CRM) Amount: US$105.0 million equivalent. Ter-s: 15 years, including three years of grace, at the standard variable interest rate. RelLendlux NAFINSA would pass on US$102.0 million to CFM, FNM, and CRM, who Terms: would, in turn, relend US$76.0 million In pesos to SMH enterprises, through subloans with terms of up to 12 years, including a grace period of up to three years, and floating interest rates based on the average cost of funds to the banking system (ACF), in accordance with the terms of the General Interest Rate Agreement (GIRA) between the Government and the Bank. CFM and FNM would onlend a part of these funds through commercial banks, which would retain a spread of between 2.5 and 3.0 percentage points. CFM would also lease equipment to SMMs for up to eight years, including a grace period of one year, with financial charges as specified in GIRA. CFM, FNM and CRM would repay the amounts they borrowed under the loan to PECAM, and the Government-through NAFINSA--would repay the Bank loan, including interest, and bear the foreign exchange risk. Project The proposed project has been designed to support the DecrIption: Covernment's sector development strategy, building and expanding upon the accomplishments of the first Bank project in Mexico's SMM sector, by means of a comprehensive program of technical and financial assistance. It would finance evaluative exploration, sine development and exploitation; strengthen the capabilities of the major institutions supporting SMKs; and Improve coordination within the SMM sector. Commercial bank lending to SMMs would be encouraged under the project, which would help to build up the second-tier credit operations of two key sector agencies--CFM and FNM.  - (ii) - Prolect Risk: Although the proposed project faces no special risks, lower than expected commercial bank participation and low mineral prices might affect its implementation. However, iu view of FNM's satisfactory experience with commercial banks receutly and the adequate spreads allowed, the probability of the first risk is low, and, given the broad range of minerals mined by 9Ms aud the record low international metal prices, which are unlikely to further drop sharply, the second risk is acceptable. Estimated Cost: (In US$ Millions Equivalent) Local Foreign Total Investmats by Sns: 99.0 60.0 159.0 Xaventamt bY CFMv 7N 4d CRX. fort Equipment Leasing 8.0 5.0 13.0 Regional Beneficiation Plants 14.0 10.0 24.0 Laboratories 2.0 4.0 6.0 Exploration Equipment 1.0 3.0 4.0 SUBTOTAL 25.0 22.0 47.0 Technicals Assistance: 2.0 2.0 4.0 TOTIL 126.0 84.0 210.0 PiILanc