Legal Certainty Needed to Retain Foreign Investment

Q: How are foreign mining companies challenged by the uncertainty in the Mexican mining sector?

A: When the law in 1992 permitted foreign companies to invest in the Mexican mining industry, it allowed the industry to develop. The most significant change was when all permits, such as exploration and exploitation, were reduced to only one permit. The permit itself also increased in duration. Since then, there have not been any significant changes to the Mining Law.

However, today there is a sense of legal uncertainty given that the federal administration is looking to place greater restrictions on foreign investments. Any change to the Mining Law in this moment presents a big risk for the industry because the current law has worked well to attract large investments from the United States, Canada and even Europe, whose investments were all on the rise until 2012. This made Mexico an important destination for mining investment. But the industry has experienced quite a big drop in investment due mainly to administration changes and legal uncertainty. Speculative reforms do no favors for the industry and just add more uncertainty, and all of it stems from an erroneous ideology, as well as misinformed officials who fail to understand the importance of mining and its benefits.

One example is the executive order putting a stop to future mining permits. This decision was based on erroneous arguments, including that Mexican soil was being granted to foreign mining companies, when in fact only 8 percent is under permit. Unfortunately for Mexico, mining companies do not just suddenly stop operating and wait for things to settle down. They take their investments elsewhere — and their return is unlikely due to the lack of trust in the country’s legal procedures. This forces the industry to fight for those permits, resorting to legal protection to keep those already granted. Without investment, exploration is not possible. Without exploration mining ceases to exist. 

Q: How does Molina, Hanff & Pérez-Howlet help mining companies adapt to these changes?

A: One thing that we communicate to our clients is that a crisis always provides new opportunities. For instance, while the administration has refused to grant any new permits, some existing permits have been canceled due to different factors. A mining company could acquire those halted operations at a lower price due to the permits being voided and push the projects forward. This opportunity did not exist before the current administration entered office, but it opens the possibility of conducting exploration in a different way, which also will be aided by the on-site operations that have already been performed.

What we want to communicate to companies is that there have been no changes to the Mining Law, and permits are still legally obtainable. We are continuing to provide foreign companies with the tranquility of knowing that if their operations have problems with the executive branch, the legal branch will provide the protection they require. While this situation will push some investors away, those looking for a high-risk, high-reward opportunity will feel at home in the current environment.

Q: What role do international organizations play in investment protection in the Mexican mining industry?

A: There two types of clients: those that want to invest in a mining operation in Mexico and put their trust in the country’s legal framework and those that already have projects ongoing here, whether in exploration, extraction or production. If their operations are threatened, we must defend them by all means possible. In extreme cases where the local courts are unable to defend our clients’ interests, we are pushed to seek protection from an international organization. Fortunately, we personally have not been forced to resort to such drastic actions. We have always been able to resolve the legal situations that our clients have faced. We have seen companies like First Majestic Silver seek protection from international organizations, but just imagine the impression that leaves for potential foreign investors.

Q: What is a success story for Molina, Hanff & Perez-Howlet in terms of resolving a client’s legal issue?

A: We had one case in the municipality of Madera in Chihuahua that began in 2009 with a client that is still working with us, which itself demonstrates the solid customer satisfaction we provide. The main issue was a community confrontation. There was a blockade of the mining operation and clashes between community members and the company itself. It got to the point where even the federal government had to get involved. When we intervened, we were able to create an understanding with the community by communicating the development that they would enjoy, which was far greater than what they already had. The company then went ahead and quickly began engaging with the community, giving community members the training needed for them to create their own companies. This is an important part of a mining operation. Companies should provide the neighboring communities with the tools they need to be able to improve their quality of life on their own. The greatest success story from that particular situation is that some companies founded by those same community members not only provided services to our client’s mine but expanded its services to other big mining companies in the country.

Q: What does Chihuahua offer to investors versus other mining jurisdictions in the country?

A: Chihuahua’s foundations are in mining. Towns such as Batopillas, Parral, Santa Barbara, San Francisco del Oro and more, have been 100 percent based on mining. The state has a mining vocation, and the development of the sector plays a prominent role here. There are miners in my own family, so I have been able to witness the passion that people have for the sector.

Back in the day, eight years after the Mining Law was implemented, a Canadian company acquired the Ocampo district and it ended up being one the first successful cases of a foreign investment making a profit. This opened the door to other foreign mining companies who saw the great exploration potential in Chihuahua. Junior mining companies explored for 10 years, and they discovered huge mineral deposits in the gold belt that crosses Chihuahua and Sonora, which became a gold and silver-rich zone. Today, compared to other states, Chihuahua ranks third for metallurgical production and second for gold and silver production, demonstrating the state’s very high mining potential.

Molina, Hanff & Pérez-Howlet, S.C. is a law firm that provides legal advice and representation in various areas of law such as mining, corporate, litigacion, land property, commercial, among others.