Mexico Must Unfetter Exploration to Affirm Silver DominanceBy Alejandro Ehrenberg | Fri, 07/24/2020 - 14:13
It is impossible to imagine trailblazing companies like Apple or Tesla neglecting R&D investment. In the mining industry, R&D is called exploration. Not investing in exploration eventually results in the project pipeline drying out completely. Yet, Mexico’s tax framework is blatantly inimical to exploration.
Before the 2014 fiscal reform, the mining industry was excluded from the general rule for pre-operating expenses. Instead of recovering these expenses over a period of 10 years, miners were allowed to deduct them in the same year in which they were carried out. Today, however, the mining industry is subject to the general 10-year rule.
This does not take into account the reality of the mining industry and has led to an investment contraction in Mexico. Exploration is a high-risk, capital-intensive activity. In the best of cases, only one out of 20 exploration projects ends up in an actual mine, but the number is often as low as one out of 100.
Industry leaders have consistently voiced their apprehension on the matter. For example, during a digital conference organized by the Ministry of Economy in collaboration with Mexico Business Publishing to celebrate Miner’s Day 2020, Vice President of Grupo México Xavier García de Quevedo noted that Mexico has consistently fallen in the Fraser Institute’s ranking of investment attractiveness. “Investments in exploration in Mexican mining fell 36 percent between 2018 and 2019 and 68 percent over the last seven years,” he said.
In his participation during the Miner’s Day conference, Fresnillo plc CEO Octavio Alvídrez highlighted the great risk that miners assume in the exploration stage, where the success rate is sometimes only 1 percent. For investments to continue reaching Mexico, Alvídrez stressed the importance of deductibility of exploration expenses, of the liberation of mining concessions and of long-term fiscal certainty.
Additionally, in an interview with Mexico Business News, Alvídrez said that it is crucial that Mexico create long-term mining policies to promote investment and guarantee legal and fiscal certainty. “Right now, miners in Mexico have a burden of around 52 percent, considering income tax, mining rights for exploration-exploitation concessions, royalties, PTU and other factors. Alternative jurisdictions have burdens as low as 25 percent,” he stated. Alvídrez said that exploration is decreasing in Mexico, due to lack of policy incentives. “A comprehensive fiscal plan to incentivize the industry is much needed. It would contribute to the objectives of the (López Obrador) administration: economic growth and job creation in areas of the country where often there is no investment because of their remote locations.”
For his part, Luis Eduardo Portugal, President of the Association of Miners in Sonora (AMSAC), pointed to the 2014 reform as a source of reticence among investors in a recent interview with Mexico Business News. “When the tax deductibility scheme for the exploration stage was changed, companies began to explore much less,” he said. Portugal noted that the change was due to lack of knowledge about the mining industry. “People think that if someone has a concession, they can start extracting gold the next day. In fact, the process requires a minimum of 10 years and many times, companies fail to reach the operational stage,” he added.
Canadian mining players have also expressed concerns about Mexico’s exploration activity running out of gas. When Mexico Business News asked Brendan Cahill, President and CEO of Excellon Resources, what Mexico needs to keep its global dominance over silver markets, he gave a simple answer. “Mexico needs to take the shackles off exploration,” he said. One of the industry’s main concerns globally is that there have been few world-class discoveries in the last 15 years, Cahill elaborated. “Ore is not right at the surface anymore so we need to start looking in more tricky places. Mexico has to think earnestly about its concession fees and tax deductions schemes,” he concluded.