Laura Díaz
DBR Abogados
View from the Top

Mining: the Goose Laying the Golden Egg

Mon, 10/22/2018 - 16:02

Q: What did the Supreme Court rule in terms of the amparos that were filed against the constitutionality of the mining royalties?
A: On Nov. 15, 2017, the Supreme Court of Justice voted to discard all amparos related to the constitutionality of the so-called mining royalties, which are in fact new mining taxes. On that day, of all of cases that were filed for revision, three were chosen for reevaluation. The final vote ended up being rather unusual as the result was extremely close, with three in favor of the tax and two against. In these scenarios, votes are usually more unanimous. But this resolution is not definitive, as the case files that were not examined have to be sent back to their original court to be resolved individually based on the conclusion of the Supreme Court. The final resolution will likely not be in the interest of mining companies as the court has already declared that the royalties do not violate constitutionality or proportionality principles.
Q: What is your perception of the development and impact of mining royalties in the industry almost three years after the implementation of the fiscal reform?
A: The economic impact of the mining royalties is unquestionable as it has caused profits to decrease and production costs to rise. This makes Mexico a lot less attractive when companies are making projections of how much it costs to produce an ounce of ore in the country in comparison to other mining jurisdictions. Our main competitors at the moment are Peru and Canada, whose general conditions are more favorable.
As for how the funds from the mining royalties are being used, I do not personally know of any successful case. CAMIMEX information shows that there are several projects being developed with this capital but we do not have any real evidence of their advancements or impact on the industry or the local communities where the funds are supposed to be invested. There is not a clear enough correlation being shown between the use of the funds and what miners are paying. But we are still one of the top 10 mining countries thanks to our optimal ore reservoirs, this in spite of the business environment.
Q: How will the change of administration in 2018 affect the mining industry’s FDI?
A: I am optimistic about the change of administration and I believe that legal regulation and enforcement will improve in several aspects as this industry is one of the country’s main pillars even if it is often overlooked. FDI in the country has increased greatly and will continue to do so in the coming years. The industry used to be managed by a handful of actors including Peñoles, Grupo México, Grupo Acerero del Norte and Minera Frisco. Now, the industry is much more diverse and includes players with specialized knowledge in mining such as Canadians that are experts in managing capital risk. Regardless of the next administration’s outcome, I do not think the mining sector will be damaged because that would be like killing the goose laying the golden eggs.
Q: What is DBR’s overview of the industry in the past years and its short-term expectations?
A: I believe that 2017 was largely positive as prices did not drop and the market was stable in general terms. It was also characterized by a concentration of market share among a few companies, which was in part created by all the policies that discouraged foreign investment, such as the mining royalties. Players that have the expertise to operate in Mexico–mostly Canadians—were able to consolidate their presence in the mining sector.
As for DBR Abogados, we are a reflection of the industry. We may have experienced a flat year for our firm but we also did not suffer nor did our workload decelerate. Overall, the environment in the industry is favorable as companies continue to enter the country in search of new projects and opportunities. This implies that Mexico is still an appealing country to invest in. At the moment, our focus in the industry is mainly on the purchase and sale of projects.