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News Article

Good Practices, Relationships Key to Increase Legal Certainty

By Antonio Gozain | Wed, 01/26/2022 - 13:32

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The Mexican mining industry has faced several challenges over the past few years. Restrictions on new concessions and delays in permits have fostered an environment plagued with legal uncertainty. Establishing good relationships with authorities and communities, along with a strong due diligence on documentation and land rights, is key for companies to counter this uncertainty and thrive in Mexico, agreed industry experts.

Mining is a capital-intensive activity and returns on investments can take years to materialize. Contradictory messages from the government have become one of the main concerns for industry leaders. This uncertainty is part of the reason why the country has not met its investment expectations, according to Rubén Cano, Founding Partner, CR Legal. In 2021, the sector attracted US$4.246 billion, which was higher than in 2020 but 15.6 percent below the US$5.03 billion expected for the year. "When the terms and conditions of an agreement are changed unexpectedly, investors are scared away," Jaime Gutiérrez Núñez, President, CAMIMEX, told MBN.

The lack of concessions and permits is impacting the arrival of new investments and even driving away certain companies with projects in Mexico, leading to a potential loss of US$25 billion, MBN previously reported. Still, even though concessions have not been granted since the beginning of President Andrés Manuel López Obrador’s term, there are certain mechanisms that can allow companies to approach the government in a more favorable light, as long as they comply with the requirements established by the government, said Mariano Calderón, Partner, Santamarina y Steta.

“The key to success is learning about these legal requirements, procedures and steps to negotiate based on legal certainty and rule of law. Mining activities are highly regulated and supervised by authorities, but obligations are reciprocal. The authority has a duty to act in accordance with the legal framework and companies have the right to receive a well-founded response in accordance with the applicable legal framework,” Calderón said.

“The first step is to find a good lawyer. It is important to work on an in-depth analysis regarding legal certainty, regulation compliance and how changes in regulation have impacted previous ventures. Any potential investor must be aware of all of this. A political analysis is also necessary to understand what is behind the government's decisions, so that there are no surprises or unsatisfactory deals,” said Andrés Pérez-Howlet, Managing Partner, Molina, Hanff & Pérez-Howlet.

Certainty, however, does not only come from external factors like government decisions. Companies must also be certain about the conditions under which they do business to avoid any unfavorable outcomes. Pablo Gutiérrez De la Peza, Managing Partner, O’Gorman & Hagerman, highlights the issue of land rights as something to keep in mind when starting a project in Mexico. Given the particularities of land regulation in the country, companies need to understand the land, its legal standing and geographic characteristics, while making sure that documentation is truly valid to exercise their right over it.

While there might not be many issues with public or private property, Mexico also grants land rights under the figure of social property, which includes ejidos and agrarian communities, which give entire communities rights over land. This type of property represents approximately 53 percent of the total territory, according to INEGI. "We recommend companies to always check the validity and accuracy of any documentation regarding the land they are about to enter. Are documents filed in the public registry or are they issued by the communities themselves? Do they correspond to the actual land that the company expects to use and are they subject to any legal disputes? Understanding this and being prepared can help companies to devise strategies to respond to any claims that may come," said Gutiérrez. 

Applying for a concession and drafting the related legal procedures may seem to be the first logical steps when deciding on a new investment project. However, local and indigenous communities play a key role in the success or failure of a project and must be taken into account, agreed experts. “Companies must investigate the communities where they are planning to invest to know if they are welcoming to these kinds of projects. Mining, if done right, can bring great benefits to communities. However, it can also face rejection as social and environmental conditions are altered,” said Enrique Rodríguez del Bosque, Partner, RB Abogados.

“Carrying out a thorough consultation with indigenous communities, diligently and in compliance with legal requirements, could be key to understand if a project would be viable or simply impossible to carry out,” said Calderón. Mining lawyers have had to expand their portfolios to include these types of social negotiations, said Pérez-Howlett. “The community must be convinced that the mine will bring benefits and that people will be a part of the mining project. (They should) consider the project a driver of human, economic and social development for the community.”

For Cano, it all comes down to compliance. “Mining companies must set an example when it comes to compliance. In the end, rule of law is not only defined by the government but by all industry participants,” he said.

The mining industry has been subject to bad press and constant misconceptions regarding its social and environmental impact. Compliance and a strong communication strategy that focuses on this can be key to counter these ideas, which is also true when approaching local communities. “If we do not properly communicate the benefits of the industry, it is easier for negative messages to permeate communities, which may lead to the rejection of the project.”

Expropriation Should Not Be a Risk Factor

Expropriation, commonly understood as a government taking over privately owned property to be used for the benefit of the population, exists in Mexico as well as in many other countries. While it became a “fashionable topic” due to contradictory messages from the government, this must not be cause for divestment, as Mexico is part of a large number of international treaties, including USMCA, said Rodríguez del Bosque. Besides this, there are also local mechanisms in place to protect companies. “Expropriation has always been an available tool for the government, but it is not absolute nor without its limits; it must meet certain requirements and it must be properly justified,” said Calderón.

Rodríguez highlights the fact that even under the current circumstances, Mexico remains a country with legal stability. “Should the government reach such an extreme, there are defense mechanisms to oppose it. It is not something people should worry about too much,” said Calderón. Still, Rodríguez del Bosque calls for stronger mechanisms that ensure rule of law prevails. “The legal framework has gaps, so we need more efficient mechanisms that allow companies and citizens to enforce this framework.”

The data used in this article was sourced from:  
MBE, MBN, INEGI
Photo by:   MBN
Antonio Gozain Antonio Gozain Journalist and Industry Analyst