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Analysis

Concession Void Casts Doubt on the Future of Mining

By Paloma Duran | Tue, 08/17/2021 - 12:53

The government’s decision to stop granting new mining concessions is considered one of the main challenges for the sector. Without concessions, investments will decline and the survival of an essential industry could be endangered, some experts believe. “If new concessions are not awarded, there is no exploration, and if there is no exploration, the future of mining is simply in doubt,” says Fernando Alanis, President of CAMIMEX.

According to Article 27 of the Mexican Constitution, all-natural resources found on or below the surface of the land belong to the state. As a result, a federal permit is required to use and exploit mining resources. Mining concessions are generally granted for 50 years, with extension options, reported MBN.

When López Obrador entered office, he proposed new reforms to the Mexican Mining Law, which he says does not benefit the country or the communities near mining operations. “We can no longer grant any more concessions. We are going to see what benefits this brings to the nation, since our natural resources have to benefit the people of Mexico, not private companies," he said on March 11, 2020.

Among the president’s initiatives were the separation of exploitation and exploration concessions that were merged after the 2005 Mining Reform. The goal is to set a term for concessions of 24 years for exploitation and 12 for exploration. Likewise, an in-depth examination has been proposed to verify that human rights are not violated and that indigenous communities agree with the concessions granted. Stricter environmental regulations and MIA requirements are also considered in this initiative.

“Although these consultations already exist in other countries, they imply a cost in time, which also increases uncertainty regarding the possible approval of the concession if a satisfactory agreement is not reached between mining companies and communities,” reported Moody’s.

Concessions Suspended

López Obrador has repeatedly stated that his government will not grant new concessions, arguing that previous governments readily gave many concessions. The president has highlighted that the mining concessions granted over the past 30 years totaled 80 million ha of the country’s 200 million. "We are no longer going to continue granting new concessions for mining exploitation, because they gave too much and for a long time."

CAMIMEX, whose affiliated companies represent 90 percent of the mining value in Mexico, said that the area covering current concessions is smaller than what authorities’ figures show. According to Alanís, Mexico has 24,066 concessions, which represent 16.83 million ha, equivalent to 8.59 percent of the national territory. Alanís stresses that the area occupied by producing mines is less than 0.10 percent of the national territory.

 “There is a deep ignorance regarding the mining industry. Granting a concession is not giving a mine to companies but the possibility of exploring the land. Companies need more permits to have a mine,” adds Alanis.

Representatives of the mining industry have sought to work with the federal government to reactivate the granting of mining concessions that stopped in 2019. They argue that the government’s action has discouraged investment. However, the government has held its ground, as it believes that proving that a project is environmentally and socially responsible could pave the way for better development.

Jose Castro, Director of CLUMISIN, told MBN that the suspension of concessions is among the main concerns for its members, along with other government policies that have hampered the sector. “As a cluster, we are working to provide certainty. We are advocating for the rights of the sector and to change its negative image.”

The Annual Survey of Mining Companies 2020 organized by the Fraser Institute showed that Mexico fell from 38th to 42nd place as a mining investment destination. “Mexico fell further down the rankings of the most attractive jurisdictions for mining investment, which are clear indicators that in the most recent years we as a country are not making sufficient efforts to promote and encourage mining investments. Statements such as the one we have seen in the news that the current federal administration is not willing to grant new mining concessions is not a good sign for anyone and specially for mining investors,” Juan E. Pizarro, Managing Partner of Pizarro-Suárez & Bandala, told MBN.

According to CAMIMEX, in 2020 the Mexican mining sector captured just US$2.5 billion in investment, the lowest figure in the last 13 years. However, several investors and financial institutions consider Mexico one of the top investment destinations in Latin America and among emerging economies. "It has a great macroeconomic stability and is increasingly integrated into the North American bloc," says Emilio Romano, Director of Bank of America.

In 1Q21, the Mexican mining sector reported foreign direct investment (FDI) of US$1.05 billion. That was the second-best first quarter the sector has had since 2014, when it attracted US$1.158 billion. According to the Ministry of Economy, mining FDI in 1Q21 was 176 percent higher than in 1Q20, when it received US$381 million.

Francisco Quiroga, former Undersecretary of Mining, believes proper preparation could help companies overcome the current concession obstruction and move forward with their projects. “If a foreign company has a project that meets the standards from an economic, social and environmental point of view, I am sure there will be a good reception and the government will admit new concessions,” he says.

Citlali Pérez, Partner of Jáuregui y Del Valle, S.C., said that an important factor to consider in this uncertain environment is that concessions must comply with all the mining obligations established in the Mining Law to minimize the legal risks that may appear. "The basic ones are the payment of surface or mining taxes, the drafting and filling out of works receipts, environmental authorizations, complying with the obligations derived from the agreements signed with other parties to have access to the mine and keeping updated the information about the operation of the mining concession.”

Quiroga adds that given the refusal to grant new concessions, mining companies can acquire properties in the secondary market. Another option is to acquire concessions through the assignments granted by the Mexican Geological Service (SGM). However, the Ministry of Economy must first confirm that it is possible to work on these properties, Quiroga says.

Some authorities have sought to improve the country's mining situation and strengthen relationships with private companies. Minister of Economy Tatiana Clouthier told MBN that the agency is working to provide a modern regulatory system that will reduce bureaucracy. “We need a better relationship with the private mining sector, where both sides trust each other,” she says.

The Future of Concessions

Some industry experts say the June legislative election results will contribute to a more beneficial environment for mining companies, while others say uncertainty will continue. Christian Wagner, Senior Analyst for the Americas at Control Risks, says that a more diverse distribution in the lower house will force MORENA to further negotiate its legislative agenda with other parties, prompting more space for dialogue. However, Senator Miguel Ángel Lucero Olivas, President of the Mining and Regional Development Commission of the Senate of the Republic, told MBN that the election results will not affect the party or its plans, since there were no serious composition changes in the Chamber of Deputies, which is relevant for the federal budget.

Mexico has a mature mining industry with great potential to further develop the country but government support is essential to improve its results, experts say. “It is time to acknowledge that Mexico is a mining country with a mineral wealth that must be recognized and utilized to achieve the required development. Public policies on mining should be aimed toward strengthening the activity within the existing legal framework. Trying to ban mining would be like denying the very essence of the country, ignoring its history, limiting the present and postponing future development,” says Karina Rodríguez Matus, Partner of Rodríguez, Matus & Feregrino

The data used in this article was sourced from:  
Reuters, BNamericas, MBN, Moody’s, El Financiero, Economista, Ministro de Economia, La Jornada, Gobierno de México, Reporte Indigo
Photo by:   Gobierno de México
Paloma Duran Paloma Duran Junior Journalist and Industry Analyst