Mexican drug cartels could mess up the country’s most important lithium project

Over a decade ago, the country celebrated when a firm spotted 800,000 tonnes of lithium in the ground of central Mexico, but it wasn’t prepared for the lucky strike that was yet to come. In 2014, minerals company Bacanora Minerals Ltd hit the jackpot by locating reserves 10 times this size.

Found underground in the northern desert state of Sonora, Mexico, an arid region measuring 1.4 times the size of England, was just “above eight million tonnes” of the white gold – 250 years’ worth of resource – Bacanora claims. Sonora’s reserves alone can compete with entire countries (see graphic); Chile, for instance, with its nine million tonnes, is one of the top lithium exporters. In 2022, when extraction is due to begin, Sonora Lithium’s (SLL) supply will be almost as important.

The risk of a shortfall in lithium supply is rising, experts say. Covid-19 has played some part. There are now more bottlenecks in the market than before the pandemic; more so because of the larger macro-economic trends that keep lithium prices low and detract investments from the industry. Lithium is essential for electric vehicles and batteries, for instance. As one of the few lithium mines in the Americas – as opposed to lithium brine extraction in the South and the US – SLL could support electrifying transport towards net-zero locally.

Bacanora’s CEO Peter Secker spoke to E&T; he doesn’t hide his pride in the firm’s progress: “We are doing reasonably well.” He says it usually takes at least a decade to reach extraction stage but SLL is on the way to starting it in eight years, with just two more years now needed to engineer and build the mine. 

Part of this unstoppable success is down to Bacanora’s joint venture partner, Ganfeng Lithium. Chinese Ganfeng is one of the world’s largest and most successful lithium producers that brings a lot of experience to the table says Andrew Miller, product director at intelligence firm Benchmark Mineral Intelligence. 

SLL considers itself fortunate that Ganfeng’s expertise covers almost all entry lithium extraction and the production supply chain. In China, lithium entities control nearly half of the global lithium production, but Ganfeng seems comfortable enough to act alone. However, elsewhere it prefers to partner up, Secker says.

Bacanora is a local partner – it used to be listed in Canada as well as the UK but is now 100 per cent British. “We fit into [Ganfeng’s] expansion plan,” Secker says. Ganfeng entered a 22.5 per cent joint venture with Bacanora and committed to engineering the open pit mine.

The Mexican government were convinced to give this private joint venture a chance, and Covid-19 only had a subdued effect – Secker estimates the pandemic only delays the project timeline by about five to six months. Before the pandemic hit, Ganfeng’s management planned to wait to engineer the mine until after the Chinese New Year.

Mexico is largely a newcomer to lithium mining. This puts it in a weaker position, some say. But Benchmark Mineral Intelligence’s Miller says two SLL partners bring so much of their own longstanding expertise – especially Ganfeng – and contacts to the table that problems in the mining itself are unlikely.

Yet E&T found that concerns over the mining are the least of Bacanora’s worries. Mexico’s powerful drug cartels and nascent violence are a reasonable cause for concern; they could jeopardise the entire endeavour. For drug cartels to pivot into lithium trading is not entirely unfeasible, though other scenarios are more likely as mines are increasingly under attack by violent groups and organised crime, E&T learned. Security experts say mine owners must prepare for theft of valuable equipment, and extortion and kidnapping of workers.

Bacanora’s remote location may make it a desirable target for cartels. Its open-pit mine will be in a secluded spot around 11km away from a small town called Bacadehuachi, which has fewer than 1,380 inhabitants. There is lots of violence and trafficking near the US border and the mine is only 170km south of the border into Arizona. Alejandro Hope, a Mexican-based security expert, adds that state authorities have little in the way of resources to provide protection. Analysts at intelligence outfit BNamericas, covering Latin America, agree and say that Sonora has an uncomfortable history in mining robberies. Hope says the chances of Bacanora being subjected to extortion are not theoretical: “I dare to say it is even likely that the Sonora mine will be targeted.”

Faced with this reality, Secker says he doubts the cartels are interested in his mining product; previous mining thefts mainly focused on gold or silver. Yet cartels don’t shy away from experimentation. In April, a carefully planned attack involving a Cessna 206 aircraft was carried out on a mine in Sonora’s west where thieves stole gold and silver alloy from the Los Mulatos mine in Sahuaripa. Reports said the operation took only minutes. Last year’s doré bar theft of items worth between $6m and $8m, at the Noche Buena mine in the west of Sonora, was one of the biggest heists to be carried out in years.

Drug cartels are not short in ambition and sophistication, as Tom Wainwright, editor at the Economist and ex-Mexico correspondent, knows. He wrote a book a few years ago about Mexican drug cartels and their increased trend towards diversification into non-drug-related business areas. If cartels can figure out how to find experts to advise on drilling into gasoline pipes that stretch across to America and trade it on the black market, it’s worth considering the possibility that they would be interested in the SLL mining project. 

Alongside this, there are other sectors that local cartels have broken into. Earlier in the year, news reports said Mexican drug cartels started trading avocados in Mexico’s south.

Security expert Hope explains that there are various ways for cartels to make trouble for SLL. Organised crime and irregular armed groups can charge protection money and threaten to hold up construction efforts by, for example, blocking roads. Many mining companies would openly liaise with organised crime groups; they wouldn’t even stop to target international mining companies, Hope says.

One of the most audacious examples of cartels moving away from drug trafficking is the trading of such commodities as iron ore. Around 2013 and 2014, such techniques reached a palpable peak when the military ceased control of Lazaro Cardenas, Mexico’s largest seaport. The government order was to strike after one legendary cartel earned more money from trades going through the port than from the drug business itself. La Familia and The Knights Templar cartels were diversifying into the mining business, Bosworth says. The military campaign at the port somewhat backfired, he argues. It cost a fortune and, despite making the port safer, it failed to ensure safety in the rest of the Michoacán state and created smaller, potentially more violent groups.

A similar thing may happen in Sonora. Since the takedown of Chapo Guzman, groups that were more tightly controlled by the active north Sinaloa cartel suddenly splintered away into smaller independent groups. They would now roam freely in the state and, as such, are more violent as they look for new business. These off-shoots usually don’t attack each other. Yet Sinaloa’s lack of top-down control became more dangerous as they looked for alternative ways to make money from extortion and violence, Bosworth says.

E&T’s analysis checked Bacanora’s feasibility study from 2018 – a 261-page document – for any hints that security was part of the assessment. It wasn’t. CEO Secker says it should already have been part of the due diligence process when his company raised equity in the UK: “It [security] never had any impact on what we do,” he says, adding that his company operated in the country for the past 10 years and never had trouble with extortion or anything like it. To date, it invested $50m-60m in Mexico.

Security experts caution against taking these new developments lightly. The whole company must be considered; upper management of a mining company in Mexico may not even know it leaks money to a drug cartel, Wainwright says. He once interviewed a person familiar with the matter and learnt that extortion at the local-regional-manager level failed to alert upper management of a Mexican company in an international case. The source said the firm paid money to the local cartel for years without realising and it only came out because the regional manager left and the affair was exposed.

Secker explains that the south of the country is more violent than the north. “If you were in southern Mexico, states like Guerrero, you would probably be more concerned, but not where we are operating.” But crime is growing. In recent regional homicide data, E&T found that the north grew increasingly lawless; with Sonora’s homicide rate jumping by 38 per cent between 2019 and 2020 to 42 per 100,000 people, it is now comparable with other violent southern states. The Mexican regional average, for instance, is around 25 per 100,000. Authorities are less able to control the violence, experts say.

The US Department of State Travel Advisory thinks Mexico is at level 2 (‘exercise increased caution due to crime and kidnapping’) on the travel advisory scale. For Sonora, which is at level 3, it recommends to ‘reconsider traveling due to crime’.

Monthly statistics on crime from the Secretariado Ejecutivo del Sistema Nacional de Seguridad Pública suggests for Sonora that rates for extortions, car robbery with violence and homicides were all rising. Last May, its kidnapping rate jumped to 21 instances, comparable to the most violent places in the whole of Mexico.

Some hope new officials may improve the state’s security situation and turn things around. Mexico’s first secretary of security and civilian protection, Alfonso Durazo, was born and raised in Sonora and may have some compassion for the cause. Durazo wants to become governor of Sonora but, after a tragic shooting last November, the odds are stacked against him. Three women and six children, who were dual US-Mexican Mormons, were executed in an ambush while travelling through a remote area of northern Mexico. The location of the shooting (see map) was less than 100km from the Sonora lithium mine.

E&T asked Secker what precautions the company takes, and how he would deter attacks and protect workers and equipment. “The mine site is fenced, and we always travel in convoys of two or three vehicles, but you would do that in any country, not just in Mexico. We take the normal security precautions for working in a remote site but nothing specific to cartels in Mexico,” Secker says.

The chance of an attack, however, may affect the mining business of a company. In 2018, Canadian mining company Pan American Silver Corp suffered a rise in crime and violence; along roads where it transported personnel and materials to its Dolores mine in the northern city of Madera, less than 100km away from the Sonora lithium mine, the company was attacked and robbed. It went on to announce plans to roll back operations in the country.

Other challenges

There is also the risk of corruption. Many companies can sing a song of Mexico’s endemic level of corruption. It includes graft among large international conglomerates, too. Emilio Lozoya, the former head of the state oil firm Pemex, said he accepted millions of dollars of bribes from Brazilian construction giant Odebrecht to help the 2012 election campaign of former President Enrique Peña Nieto. Mexico now faces one of the biggest criminal investigation probes in history. Bacanora’s executive team may be better positioned here as it has connections that reach into the Mexican government, E&T discovered. One of the firm’s non-executive directors, Dr Andres Antonius, previously held positions within the Government of Mexico as undersecretary for energy policy, and a staff member at the Agriculture Secretariat.

There are environmental concerns, too. Lithium mining has a lower footprint over brine extraction, which is positive (E&T produced an extensive investigation on firms in Chile). Yet, if performed incorrectly, it can have devastating effects on the local environment. Precedence dictates that this risk is feasible. For instance, according to 2018 reports, at a lithium mine in Tibet harmful toxins leaked into the environment and polluted a local river, killing animals and affecting locals.

Critics indicated that the River Bavispe runs through Sonora’s mining concession territory (see map). The feasibility study does mention the river basin, yet the mining site can still access groundwater. The report says that  up to 10.7Mm3 is available annually from the Bacadéhuachi Aquifer. One concern is what happens to local water resources if the region hits a major drought? E&T found that Bacanora’s mining concessions are closely located to local towns including Granados and Nácori Chico.

Secker is confident his company won’t mess up. It received all the necessary certificates, he says. The Sonora mine will be a zero-discharge operation and won’t leak a drop of water. It’s being recycled back into the ground.

Yet the stakes remain high and failure could mean more than just financial loss. Lithium experts say the world’s supply is on the verge of failure. Bacanora’s project could diffuse some pressure, but not for the US. For the next couple of years at least, the US will not receive a single ounce of the precious lithium from the Mexican mine. The deal has already been signed: Ganfeng in China will take half of the mined volume while the other half goes to Japan, where a leading trading company called Hanwa will process it. 

It raises concerns that foreign companies could exploit Mexico’s resources and leave it in a poorer state. It happened with international conglomerates in Africa, though not for lithium but other minerals. A 2017 report by Global Justice Now found that much more wealth is leaving the world’s most impoverished continent than entering it.

Another hurdle to overcome is distance. Having to ship lithium halfway around the world isn’t ideal, experts say, and lithium firms are increasingly coming under environmental pressure. Consumers and other parts of the supply chain demand lithium miners to optimise operations and reduce the carbon impact of their transport. Shipping lithium carbonate more than 12,000km from the port of Guaymas to China, or the 11,000km to Japan, could add substantially to carbon emissions. Annually, the Bacanora plans to ship 35,000 tonnes of lithium carbonate by 2026/2027, when it reaches stage two of its agreement. This may cause between 7,300 and 13,400 tonnes in CO2 emissions per annum, according to E&T calculations. Benchmark Mineral Intelligence’s Miller says “it doesn’t necessarily make economic or technical sense to be shipping refined lithium chemicals in from China into the US or EU markets when you could locate some of that production closer to the end market”.

For the US to miss out on the deal has other effects. The country is under pressure to get lithium for its nascent EV and battery sector from somewhere else; it is developing its own lithium sources, but will always be dependent on other countries and – historically – has only accounted for 5 per cent of global lithium production, mainly from brine.

Bacanora’s agreement to exclude Mexico’s neighbouring country may still make waves down the road. America leadership has time to contemplate a better trade relationship with Mexico, and has good reason to do so, with some saying that America’s lithium demand may double or even triple by 2030. Meanwhile, Bacanora prudently avoids being caught in the middle of the US-Mexican trade war that President Donald Trump waged fiercely. A Joe Biden presidency seems more open for cooperating with Mexico. In the long-term it could lead “from Mexico being a security threat, which is how the Trump administration views it, to Mexico being a partner”, Miller says.

Mexico’s future seems bright and state officials have high hopes. Francisco Quiroga, undersecretary for mining, named investors from at least five countries who have expressed interest in Mexico’s lithium industry. Quiroga admits there are still several operational, commercial and financial challenges, while others, including Mexico’s Secretary for Environment Victor Toledo, see a problem in private companies running the show. Toledo reckons the lithium mine should be controlled by the government, but the President ruled against it. With government control, the mines could have sparked a domestic EV industry. The government thinks it doesn’t have the required resources. 

Toledo received harsh criticism from Mexico’s largest union, which said nationalisation isn’t viable and will scare off foreign investors. One central question remains: if the government nationalised Sonora reserves and mined it itself, would it invest more to keep security high and workers safe? After all, it knows its violent groups better than foreign companies. Without guidance, Mexico’s private lithium extractors may have to learn from other countries – Bolivia, for example, with the largest lithium resources of 21 million tonnes, also struggles with safety and extortion.

Bacanora’s CEO Secker is convinced there won’t be any problems: “We had never anyone shot on our site and we don’t intend to.” But better safe than sorry. After the McEwen Mining refinery was robbed by a Mexican cartel in the Sinaloa state in 2015, Rob McEwen, CEO of the Canadian mining company, regretted how lightly he took the threat of the cartel business.