Home > Mining > View from the Top

Mexico is Competitive Mining Destination, Baker & McKenzie

Jorge Ruíz - Baker McKenzie
Partner and Head of National Corporate Mergers & Acquisitions Group

STORY INLINE POST

Wed, 10/21/2015 - 15:08

share it

Q: How have the reforms and the drop in mineral prices affected the environment in which you and your clients operate?

A: The main trend we have noticed is a struggle to keep costs down. Right now, the price of gold is still above most companies’ breakeven point. A few companies have seen costs exceed this point already and are now in a bit of trouble, but a lot of the companies that operate in Mexico are producing at well below US$1,000 an ounce. That is really low as a single mine would cost more than that. We have seen M&A activity slow down drastically, as shown by CAMIMEX indicating saw less than US$50 million in M&A during 2014. The district courts have ruled in favor of two of our cases related to the mining royalty, but the tax authorities will certainly contest this. I do not know if they will win or prevail, but it is a step in the right direction.

Q: What was the main argument that helped your clients to win these cases?

A: The main argument is tax disproportionality. Why are these companies being taxed differently to other companies operating in Mexico? Why do they have to pay an extra tax for gold and silver production if the same is not applied to iron, or zinc, or other metals? These taxes are not paid by the fisheries or by other natural resource segments. Based on that argument, we are pretty confident that if constitutional principles are followed, we will prevail. Even so, if the status quo remains with no extra mining royalties being paid, the defining factor is always going to be the metal prices. Right now, even though a lot of fuss surrounds the political crisis that the federal government is going through, Mexico’s general environment is good. Mining companies are working out their problems and they are making money. Gold and silver producers may not be making as much as they would like to, but they are definitely making money. Even so, the cost of metal slows them down because they are very close to their breakeven points.

Q: Last year, Baker & McKenzie felt that Mexico should seek to attain greater competitiveness on all fronts, while continuing to be mindful of its legal framework and the rule of law. How is the rule of law in Mexico today?

A: The rule of law represents the fact that you can prevail in a federal court because a constitutional principle is being violated, namely proportionality and tax equality. In certain states, where communities or eijdos have not agreed to accept the help offered by mining companies, those communities will sometimes act to disrupt operations. When this happens, we nearly always press criminal charges. Sometimes, those investigations are not really followed through on as we have learned that mayors of municipalities are sometimes behind the illegal acts. They want the best for their communities so they break the law. Another example of rule of law is safety, which is not only about procuring justice, but also administering justice. The processes of procuring justice and investigating these situations are not always very sound and differ from place to place around Mexico. Most of those investigations or criminal charges do not even end up in an indictment, let alone a conviction. Another aspect of the rule of law is that if a case goes to the courts, sometimes the judges do not act as they should, which worsens corruption. We have seen cases where a judge is bribed to prolong a charge, among many other examples. However, the rule of law is much better in the federal courts than in the municipal courts. With the awareness of corruption that has been created in recent events, the federal government has to apply the rule of law in a far stronger manner. Ultimately, when authorities begin looking into these matters in depth, only good things can come out of it.

Q: Some investors believe that Mexico lost its competitiveness when the mining royalty was introduced. How would you weigh up the country’s competitiveness with that of other countries?

A: When considering the countries that Mexico competes against, the situation is pretty good here. Chile, Columbia, and Brazil are all facing similar situations. When I talk to clients in Canada, I ask them why they get so alarmed about ejidos and communities as Canada has the same issues with its native peoples. As long as you acknowledge these communities early on and try to understand their needs, concerns, and issues, you can prevent them from taking advantage of you and vice versa.

We would like the government to sit down with us because we understand that royalties must be paid, especially for the benefit of communities. It would be good for mining companies to pay their fair share on royalties, but before that happens, we should look at the entire framework to make sure that Mexico is as competitive as other countries. Chile, for example, has come a long way toward implementing a fair framework for the payment of royalties, and also making sure that those royalties end up with the communities. If mining companies file more amparos, it may finally persuade the federal government to negotiate.

Q: Would authorities have any option besides negotiate, given that the legal system risks becoming overloaded with amparos?

A: There is a second instance in which you can file an amparo, which is the first act of application of the law. When this arrives in 2015, companies would be missing out by not filing amparos, especially those with high production. If the majority of mining companies file an amparo, the government will most likely try to enact another piece of legislation, which will hopefully be more balanced. Input from all facets of the industry should help to establish a fairer framework. Even when looking at examples like Argentina, Chile, and Peru, which are all better off than we are, it is clear that Mexico has room for improvement. In some countries, taxes are a little higher but there is far more transparency in the way that they are collected and spent. The mining industry must deal with federal concessions, the right to access land surface, and all the regulatory issues that require a license or authorization such as water usage. Federal concessions are pretty straightforward, and Mexico’s mining registry is very well kept as well as being among the best in the world for transparency. More complications arise with the contracts that grant land access. These contracts involve dealing with communities, ejidos, and private parties which can be are extremely distrustful of big companies, making the process quite complicated. Some companies even team up with several attorneys to keep track of it all, since this deals not only with access to the surface, but also easements, rights of way, access to power, and many additional factors.

Q: This problem is often mentioned because there is no single procedure for carrying out the negotiations. In your opinion, how could this be fixed?

A: It would be very difficult to change this aspect of the law since it arose as a result of the Mexican revolution. Whenever mining companies enter into these contracts, they should hire an attorney who can advise them on how to write them up, or have somebody in-house who can take on the procedures clearly and transparently. I have met with some people whose job it is to deal with ejidos but who do not even have any copies of the necessary paperwork. These documents are freely available but they had no idea how to obtain them. There is also the problem of corrupt, negligent, incompetent attorneys, but I doubt anybody knows how to change that. Transparency, honesty, and streamlined bureaucracy are the only ways to deal with these problems. Mining companies must live up to what they offer. We are kept busy at Baker & McKenzie, but the intensity of legal intervention is so high that it is sometimes better for mining companies to hire an in house counsel.

Q: What do you hope will be the highlight of 2015 for the Mexican mining industry?

A: I see the status quo simply preserving itself, but that will depend a lot on the global markets. There are mixed signals coming from different economies around the world, as well as prospects of war that normally bump up the prices of precious metals. There has been a tremendous slowdown in the Chinese economy that is generally hungry for metals. Both the state and federal authorities will pay much more attention to mining companies, so perhaps the highlight of 2015 will be a marked improvement in the rule of law. Furthermore, as long as mineral prices are kept at the same levels, then companies can continue to grow. The government is now becoming more aware of all the transgressions of local authorities, but this problem concerns all Mexicans. If we can organize ourselves and help maintain the rule of law, then the country will surely prosper.

You May Like

Most popular

Newsletter