Legal Certainty Crucial for Mexico's Mining SectorBy Alejandro Ehrenberg | Wed, 10/16/2019 - 16:51
The López Obrador government came to office in December 2018 following a landslide election. Boosting growth, combating corruption and lifting millions of Mexicans out of poverty were the crucial campaign pledges. A thriving mining sector is fundamental for the president’s objectives, but throughout its first year the new regime has sent mixed signals to the industry. As Armando Ortega, president of the Canadian Chamber of Commerce, points out, “voices in Congress and the president himself often make negative public statements about the future of Mexico’s industry, only to privately reassure key players afterward.”
Given that mining is an extremely capital-intensive activity and that returns on investments can take years to materialize, contradictory communications from the government have put legal certainty as one of the top concerns among industry leaders. As companies, government, labor unions and civil society negotiate a revisited legal framework, the main issues on the agenda include reforming Mexico’s concession scheme, consulting indigenous populations to start projects, revising the Mining Fund, crafting a more competitive fiscal structure and homologating national regulations to international standards.
“Mexico, as a nation, is the direct owner of all mineral deposits within the national territory as provided in the Constitution. The exploration and exploitation of such mineral resources are concessional to private parties pursuant to concessions granted by the federal government,” says Enrique Rodríguez del Bosque, partner at RB Abogados, in an article for Lexology. “Mining concessions,” continues Rodríguez del Bosque, “grant their holders the right to explore and exploit all minerals and substances specified in the Mining Law, except for those reserved to be exploited by the Mexican government.” In the last 25 years, the main amendment to the legal framework was merging exploration and production concessions into one single element. Before, concessioners needed to request an upgrade of their concession, from exploration into production, within six years of the initial grant. As this frequently caused companies to lose projects and therefore investments, “the reform was a landmark in Mexican mining law, definitely making life easier for miners,” says Iberto Vázquez, partner at VHG Servicios Legales. Such sources of legal certainty are what investors look for when evaluating whether to undertake a new project in Mexico, a country whose extraordinary mineral wealth is beyond doubt. That is not to say that sensible reforms would be unwelcome. Mexico’s system, once a model that other mining jurisdictions sought to emulate, is in need of modifications. Two reforms are particularly pressing. First, the inclusion of indigenous consultations in the Mining Law, but not through paralegal instruments, as the current administration has declared it is inclined to do. “The major problems with a law arise when issues are not properly regulated by a document that establishes clear procedures in accordance with the Constitution,” says Rodríguez del Bosque. Second, there is confusion around how to keep a concession without having to comply with investment obligations. Currently, if a company cannot fulfill these obligations, they can be omitted, but other dispositions must be obeyed instead. Elucidating processes such as this would be an asset for companies seeking to do business in Mexico. But the crucial element for assuring certainty during an eventual reform process is to make it clear that any changes in concession rules will not be applied retroactively. “The government must work from the point at which it began its administration and onward, not backward,” says Carlos Pavón, General Secretary of the National Union of Miners and Metallurgists.
Consulting indigenous communities as a prerequisite for obtaining a concession is a proposed amendment to the Mining Law that has stirred much debate. But in fact, Mexico is a signatory of the ILO Convention 169. The ILO describes this convention as “a consensus on the rights of indigenous and tribal peoples within the nation-states where they live and the responsibilities of governments to protect these rights, based on respect for the cultures and ways of life of indigenous peoples – it recognizes their right to land and natural resources and to define their own priorities for development.” Consultation and participation are at the core of Convention 169. Therefore, including provisions in the Mining Law to implement and enforce these two practices is an overdue issue for Mexico’s legislators. The task is to carry out this reform in a way that results in greater competitivity for Mexico, not less. Clearly defining what qualifies as an indigenous population is a key preliminary step, and establishing protocols to this end based on UN criteria would be beneficial. Moreover, other countries are more advanced than Mexico in this regard, so putting in place a committee for evaluating the relevance for Mexico of international best practices is also pertinent.
A critical point with respect to consultations is the sequence of the process. The proposed format asks for environmental impact consultations to be done prior to the start of exploration activities, which is unsound because interested parties need to know how a project will be developed in order to assess its social and environmental impact. “Authorities need to understand how the industry works,” notes Joel González, partner at ALN Abogados. “In other countries,” he continues, “legislators, stakeholders, companies and chambers work together to define clear regulations that provide certainty for project development. Consultations on projects that lack development knowledge and information discourage investment.” It is important that any legal development is in harmony with older regulatory achievements so as to progressively minimize sources of confusion, which generate uncertainty. As Adolfo Calatayud, Partner at PwC, explains, “there is a direct correlation between legal certainty and investment attraction.” Appropriately, in 2018 Australia, Canada and the US received 34 percent of total investment in exploration, according to PwC.
Mexico’s fiscal regime is an additional area where reform can lead to greater competitiveness. In 2014, extraordinary mining royalties went into effect. “This was one of the hardest moments for the industry,” Vásquez says. “It still echoes in companies’ prospective investments.” While companies have adapted to some extent, the bottom line is that Mexico has to do more as a mining jurisdiction than merely being able to provide world-class mineral offerings. For it to detonate its immense potential and compete as a global powerhouse, the country must whet investors’ appetite for harnessing these offerings. Calatayud says that Mexico is falling behind: “By now, it is evident that Mexico has become more expensive than other mining jurisdictions.” A case in point of the effects of this is the emerging trend of national champions, like Peñoles or Grupo México, investing in countries like Chile or Peru. Moreover, the extended period of time companies must wait before deducting preoperational expenses in Mexico is not conducive to new projects. In contrast, the US fiscal reform included a 100 percent deductibility of investment with no fixed assets. “Mexico is at a fiscal disadvantage for exploration compared to other jurisdictions,” observes Calatayud. Modifying fiscal obligations has to be done with a clear understanding of the industry’s rhythms and cycles. Even if the current Income Tax Law is flexible enough to allow companies to adjust how much they pay taking into account the economic cycle and market conditions, legislators should take the opportunity to go further: “There is space for doing things differently to promote investment, having companies pay what is fair while understanding the industry’s circumstances,” Catalayud concludes. Decisive initiatives are needed, like those Argentina or Peru have taken: the first country provides tax pacts that guarantee no change in fiscal obligations for mining companies for 30 years, while the latter has a similar system for up to 15 years.
Conducting reform efforts in a collaborative and inclusive manner is vital for success. Frequently, legislating bodies do not seek feedback from those who will be regulated. The process should not only pertain to lawyers and legislators, but include geologists, mine managers, community leaders and traders, because they are the ones who suffer from mystifying and outmoded laws. “We should take the experience related to every issue the industry faces and generate an understanding of what is creating hurdles to make the necessary modifications,” Rodríguez del Bosque says. Formalizing this cooperation in a mechanism specifically designed to promote dialogue would be profitable, says Juan Manuel González, partner at DBR Abogados. “I propose to create an intersecretarial commission as a body that can coordinate government agencies, private companies and other relevant parties with the aim of updating Mexican regulations in the most informed and inclusive way possible.”