Mario Hernández
Head of the Tax Mining Practice
KPMG in Mexico
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Insight

Main Challenges and Opportunities Facing the Mining Industry

Wed, 10/16/2019 - 16:51

The Mexican mining industry has been a generator of foreign exchange and employment in recent years, thanks to Mexico's significant mining potential. This makes it attractive for foreign investment, an important part of which has come from Canada. Therefore, it is important to review the main challenges and opportunities the industry faces and will face in the coming years.

The country remains in a stage of exploration and incipient exploitation; there are still several areas or regions that have potential and have not been exploited. This definitely represents an opportunity for companies that are in the exploration and exploitation stages. The mining industry will face certain challenges that it will have to manage in order to ensure that mining operations in Mexico are efficient. Sufficient security and legal and fiscal certainty are key.

In this context, uncertainty about the course of the world economy may represent an opportunity for precious metals, such as gold and silver, which usually see their best values in times of economic uncertainty. However, this also represents a challenge for other minerals or metals used in construction and infrastructure, as their values or the level of their consumption may decrease as the economies of the countries that use them begin to slow down.

Another important factor is the global trend to bring closer scrutiny to international financing structures, which, over the years, have been implemented to finance mining projects. With the worldwide trend to review structures that may be generating double nontaxation issues, mining companies may be affected in terms of corporate taxes that are paid to the various countries where the funding organizations reside. That may lead to higher interest rates.

Mining companies have also faced a scarcity of financing for exploration, not only in Mexico. With the level of metal prices in the market and failed projects of past years, access to financing for new developments has been affected. This causes companies to look for alternative sources of financing, which in many cases, increase the levels of return to be obtained by new projects.

In the national context, the challenges faced by mining companies will be seen particularly in the following areas:

  1. Legal certainty in the use of the concessions granted, without this being affected by environmental issues or issues of consultations on the rights of indigenous peoples or communities.
  2. Certainty regarding the tax regime in Mexico, which will apparently not have significant modifications during the current six-year period.

Regarding point number two, however, Mexico's fiscal framework will in some way inhibit foreign investment by establishing the mining rights regime, especially the special mining rights regime. Although it was established in 2014, it has not been reviewed to determine whether the applicable tax on it is consistent with what other mining countries have established, taking into consideration the world trends on the payment of this type of rights.

Another challenge facing mining companies is the Mexican government’s restriction on the payment of its value added tax (VAT) balance refunds. This generates financing problems, since the working capital of the mining companies, especially when they are in stages of exploration and infrastructure development, is scarce, and the withholding of VAT by the authority, or the delay in the payment of the corresponding returns, causes them to seek sources of financing, which, as mentioned above, are currently scarce or onerous.

An additional challenge that mining companies will face is closely linked to the development of technology, especially in terms of updating or digitalizing processes, which tends to reduce the use of personnel. Companies must carry out an adequate mix of process updating and personnel use, especially if they are committed to the communities in which they work. This should be done despite the risk of generating controversies with them or even with mining unions. The mining industry, like others in the country, is not immune to the challenges faced nationally and internationally, but, unlike others, it cannot go to another jurisdiction, since the deposits are located in the country. For this reason, it is convenient that, as far as possible, the Mexican government grants legal and fiscal certainty to the participants of the sector. Also, also as far as possible, it is crucial that the fiscal system becomes more efficient.