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News Article

Impact of Mexico's Reforms on the Mining Industry

Wed, 02/04/2015 - 18:02

Moderator: Karina Rodríguez Matus, Partner of Pizarro-Suárez y Rodríguez Matus Abogados
Panelist: Eduardo Salgado, Partner and National Industry Leader, Mining at KPMG
Panelist: Ricardo López Pescador, Mining Leader of SEDATU
Panelist: José Martínez, President of Grupo Jomargo and CEO of Minera La Luz
Panelist: Iván Moguel, Partner at Chevez Ruiz Zamarripa

Karina Rodriguez began by telling that the amendment of the mining and fiscal reforms have impacted the industry. The legislative changes include penalties on mines that have been inactive in two years and royalties. The Energy Reform also had an impact on the mining industry, as preference for the use of land was given to hydrocarbons. Thus, mining will compete with the energy industry under unequal conditions. Gas associated with coal fields is now regulated by the energy regulation. “We do not know the exact impact, but these changes will certainly affect mining activities. We will examine how these amendments will affect Mexico's competitiveness in terms of competing with other countries in attracting investments,” she explained. Rodriguez asserted that a competitive company has low costs to compensate for the fluctuations in prices. Other factors that contribute to business competitiveness include the continuity of operations and the viability of new projects. The legal regime, tax matters, and security, she noted, all affect the country's competitiveness.

Ivan Moguel began claiming that there clearly has been an impact in competitiveness because of the change in the income tax, which alters deductions in the pre-production stage. In his view, the law does not consider inflation. Legislative changes and reforms in 2013 halted investment because of the way they impacted cash flows in the industry. Social benefits of workers cannot be deduced as they were before. He mentioned that Mexico has a competitive income tax rate of 30%. “Compared to other countries, the nominal rate is good.” However, when looking at elements that can no longer be deduced, the effective real rates reported by companies are much higher than 30%, making Mexico no longer competitive. Moguel claims the 7.5% royalty has raised questions on how to implement this tax, mainly because companies are confused about what they have to declare in terms of extraction or production.

Eduardo Salgado believes new taxes are definitely affecting companies. “We have observed that after the first fiscal year with the new taxes, companies did see the new fiscal regime affect their revenues,” he expressed and added that Mexico is now less attractive than countries with other fiscal regimes. The introduction of rights and new taxes in combination with the global state of the mining industry have a negative impact on companies. “These are also areas of opportunity that should be examined in Mexico,” he concluded.

Jose Martinez drew distinctions between the types of mining activities in Mexico and the way each has been affected. First, he said there are companies involved in several industries. These are not severely affected because of the diversification of their business. Then there are Canadian companies with operations in different countries, which still safeguard their position in the stock exchange. Third, foreign companies operating exclusively in Mexico are highly affected in the stock exchange and in their operational revenues. Finally, small and medium-sized companies are severely affected in their revenues. For Martinez, taxes and royalties should be proportional to the magnitude of mining activities.
“Just because Canadian companies have not left and some small and medium sized companies are still working does not mean the industry is doing well, and we have to educate the authorities about this.” International costs vary every day, and on top of that companies have to deal with country costs and operation costs.

Lopez Pescador stated that, “Given the situation of states and municipalities, does the Mining Fund help these entities ease their financial and credit situation or is it meant to improve the quality of life of mining workers, mainly through infrastructure?” For him, the application of the Fund should be about the second choice. He points out that SEDATU is the continuation of the Ministry of the Agrarian Reform, but with more duties and authorities such as the regulating housing. SEDATU was entrusted with the management and application of the Mining Fund. 65% of this fund goes to municipalities, ensuring that physical investments take place were the mining activities do take place. This will revert the myth of mining companies getting rich at the expense of impoverished communities. SEDATU has the challenge of making this happen by investing in infrastructure with a social impact. Rodriguez summarized the panel saying that the fiscal subject has been difficult to understand an implement.