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Changes to Mining Law Decrease Mexico’s Competitiveness

Karina Rodríguez Matus - Pizarro-Suárez & Rodríguez Matus Abogados
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Wed, 10/21/2015 - 13:17

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Q: You once commented that, contrary to pre-conceived ideas, the Mexican industry is well-regulated by a number of laws. What makes you say this?

A: In my opinion, the Mining Law does not need to change. The law is in place to provide instructions on how to obtain a mining concession and how to open and operate a mine. All the important matters are either addressed in the Mining Law or in the laws that apply to all other industries. The entire mining sector is highly regulated by the Mexican legal system, including the Environmental Law, Labor Law, Social Security Law, Fiscal Law, Explosives Law, and Chemical Substances Law, among others. There is no reason why the law pertaining to mining activities should regulate labor or environmental matters, for example, since we already have specific legislations for those areas. Mexico’s challenge is to apply and improve its strong rule of law rather than trying to change it.

Q: Do you think that the legislators thoroughly assessed the state of the mining industry before implementing changes to the fiscal regime?

A: The legislators did not take into account that the Mexican mining sector has different players that can be categorized into three groups: large mining companies, the junior companies focused on exploration, and the small miners. The reality of each group is completely different but the fiscal changes will affect them all. The fall of metal prices already reduces the economic viability of mining projects, so by adding new royalties, the government may be forcing mining projects to shut down. It was the wrong moment to implement these royalties since the boom in metal prices had ended. Many projects will grind to a halt, investments will stop coming, and companies will simply wait for better times. If investments drop, we will see a reduction in employment rates in many parts of Mexico.

Q: What is the importance of attracting foreign investment for the development of mining projects in Mexico?

A: Mexico must fully exploit its potential, but to do so it needs to attract investment on a global scale as all countries do and partner with those that are willing to take the risk. To put the investment needs of the mining sector into perspective, only one out of 100 exploration projects turns into a mine. Furthermore, mining is an activity that requires extensive long-term planning. It can take up to 15 years for a project to develop into a mine and large investments are needed in order to keep the mine working. Mexico has very few investors who can meet these requirements with their own capital. This makes it all the more essential for Mexico’s mining legislation to attract capital from other countries, or from Mexican companies looking for the best place to invest. As a result of the royalties, Mexico is losing competitiveness with regard to bringing in investment for mining projects. Additionally, a company that invests in Mexico, particularly in the north, has the added expenditure of necessary security enforcement measures. When these factors are added to the existing fiscal burden that applies to any business, Mexico starts to become less and less attractive to investors.

Q: Apart from the loss of competitiveness, what are you most concerned about regarding the implementation of a mining royalty?

A: The major issue is whether or not the funds from the royalties will actually reach the municipalities as intended. It is not clear how the public funds will be distributed and what they will be used for. For example, Peru has a similar situation to Mexico, but individual cases were reviewed to assess how the municipalities were going to use the funds they obtained. This study highlighted the fact that some municipalities did not know how to efficiently apply the funds they received. It is therefore important to specify how the funds will reach the municipalities and how they will be used. Furthermore, if a mine is located in another municipality from that in which its workers live, an issue will arise as to the use of the funds collected through the royalty. The new law states that the resources will be invested in the municipality where the mine operates, but it does not state what will happen to the municipality where the workers live. In such a scenario, companies would most likely have to continue supporting that other municipality to continue their operations. Nevertheless, if the funds actually reach the municipalities, if the rules on how to use the funds are clarified, and if the municipalities can successfully apply these rules, then the development of the communities will certainly receive a boost.

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