Mining Law Reform Puts Lithium Under State Control

Even though López Obrador's energy reform was rejected, the Mining Law reform was approved, which gave the State exclusive control over lithium. Even though no major impacts were immediately seen, since there are no lithium projects producing, experts said that the greatest consequences of the reform will be seen in the long term in falling investments, an increase in uncertainty and possible lawsuits, precautionary measures and international arbitrations.

“The immediate impact of the reform is practically imperceptible because it is a very specific change for those who are involved in the lithium industry. For now, it seems that it will only affect this newly developed branch, but no: it will affect the entire industry. In five or 10 years, the ambiguity of the law will increase political uncertainty and investment will fall,” Armando Alatorre, President, CIMMGM, told MBN.

On April 17, the Chamber of Deputies voted against López Obrador’s energy reform, which sought to favor CFE over private companies and leave the exploitation of lithium in the hands of the government. In total, there were 275 votes in favor, 223 against and 0 abstentions. Although there were more votes in favor, the reform was rejected because it did not reach a qualified majority, which requires the support of two-thirds of the Chamber for any constitutional changes. Nevertheless, López Obrador announced that on the same day he sent a new reform to change the Mining Law to ensure state control over lithium.

According to the document sent to Congress, the Mining Law reform seeks to “guarantee the self-determination of the nation, as well as the energy sovereignty of the people over lithium and other minerals that are strategic and necessary for the energy transition. In addition, it seeks to create a decentralized public body that oversees the exploration, production and use of the mineral.”

With 275 votes in favor, 24 against and 187 abstentions, the initiative to modify Art. 1, 5, 9 and 10 of the Mining Law was approved, granting the State exclusive control over the exploration and production of lithium. Unlike the energy reform that was rejected previously, the Mining Law’s reform did not need a qualified majority but a simple majority, since it does not entail a constitutional reform. The reform was approved with the support of MORENA, the Labor Party and the Green Party. Meanwhile, deputies of the Go for Mexico coalition, consisting of PRI, PAN and PRD, abandoned the discussion and announced that they would abstain from voting. The only representatives actively opposing the reform were the legislators of the Citizen Movement party. 

Ruben Cano, Founding Partner, CR Legal Partners Mexico, explained to MBN that the reform has been highly criticized for having been accepted abruptly, "becoming an express reform that is accused of having had a legislative process that violated the rules." In addition, Cano argued that lithium was already the property of the nation under Art. 27 of the Mexican Constitution, which means that the reform’s objective and structure failed.

Alberto Vazquez, Partner, VHG Servicios Legales, agrees that the reform makes no sense since the mineral already belongs to Mexico. “You cannot nationalize what is already nationalized in some way.” Moreover, Vázquez told MBN that creating a parastatal dedicated to lithium would lead to a similar outcome as with PEMEX or CFE, where the parastatals do not have the investment and technology to properly develop the industry.

Alatorre said another challenge that is not being discussed is that, according to the reform, the state will be in charge of the entire lithium value chain. However, once again the government did not clarify what the value chain will cover. “As the reform is a change to the mining law, one would think that it only affects its exploitation and production, but it does not. It may affect other industries such as health, energy and automotive, which use lithium. Therefore, if the government gets involved in this as well, it will harm more industries and leave those who already export and produce lithium products in these industries in limbo. Mining is not the only industry at risk with this reform."

Experts warned that problems between the government and mining companies will arise mainly because of inconsistencies with the Mining Law. Alatorre explained that, on the one hand, the reform establishes that the State can be the only one to exploit lithium. However, Art. 4 states lithium concessions can be requested. “This is very confusing for everyone, so can they do it or not? The Mining Law must be reformed, and, above all, attention must be paid to filling the gaps that currently exist. This will allow the industry to know the rules of the game and adapt to them,” says Alatorre.

Moreover, there has been much controversy as López Obrador announced that the legality of lithium permits granted to national and foreign private companies will be reviewed to see if concessions are maintained or suspended. According to experts, Mexico could be sued through USMCA’s conflict resolution mechanism, since any restrictive measure, not only in the constitutional framework but also regarding secondary law, clash with the commitments Mexico made in the treaty.

Kenneth Smith, Key Negotiator for USMCA, explained that the Mining Law reform violates USMCA since lithium was not previously stipulated in the treaty as an exclusive resource. Smith explained that USMCA specifies that only radioactive minerals are considered state-exclusive. Changing lithium’s condition would violate chapters 14 and 22 of USMCA, concerning investment and state-owned enterprises, respectively.

Uncertainty Remains

Industry experts are still unclear about what will happen to the concessions already granted, since the reform was not clear on the matter.  “The initiative says absolutely nothing about the concessions already granted and already explored. This reform did not present any transitory article or any guide in this regard ... There are going to be many problems, lawsuits and amparos,” said Alatorre.

Since the president has changed his position on the issue many times, the industry is not sure what will happen to the concessions already granted. The last statement that López Obrador gave is that the government will respect the concessions if they specifically request to exploit lithium.However, Alatorre explained to MBN that no concession is requested for a specific mineral. Consequently, although it appears that the government is being fairer, past concessions remain at risk. “The government set parameters and requirements that are not going to be met. This is not how mining concessions work and the lithium industry, like any other, takes years to develop. These parameters are impossible to meet and therefore unfair. ”

Cano said that the modifications to the Mining Law should not affect past concessions since all of them are protected by the principle of non-retroactivity of the Mexican Constitution. Art. 14 establishes that a law will not be issued retroactively if it harms the rights granted to a person or entity. As a result, the government cannot affect past concessions in this way. “From a very strict legal point of view, past concessions cannot be withdrawn. However, this does not mean that those in the lithium industry are not at risk, as there are many ways operations can be suspended. The current government has used other ways to complicate the operation of mining projects, such as making it difficult to process permits with SEMARNAT. I recommend those who have lithium concessions to take extreme precautions and strictly comply with the legal regulations to maintain their permits.”

Cano highlighted that another issue regarding the Mining Law reform is the modification to Art. 10 since it establishes that not only the government will be in charge of the future of lithium but also of other strategic minerals. “It is already legal for the Mexican government to declare that any other mineral besides lithium is strategic, reserving its exploration and exploitation to the state. This is a great risk because beyond lithium, Mexico is one of the main producers of copper, zinc, gold, silver, among others, which are considered key to the global transition toward clean energy. Therefore, these minerals produced by national and international companies are also at risk. This reform, far from improving the situation, generates fear and mistrust for those who operate and plan to invest in Mexico.”

Cano stressed that will remain for the rest of López Obrador’s government. “Today, more than ever, we must demonstrate that, as always, the mining industry is highly responsible. Currently the mining industry complies with standards and regulations almost like no other in the country. Therefore, we are not concerned about the possible changes that may be made in the legal framework, since miners will comply. However, it will be better for the industry if the legal framework provides certainty, is transparent, reliable and fair for the benefit of all.”

The future of the Mining Law will depend on the government that arrives after López Obrador, according to Cano. On the one hand, if MORENA stays in power, the new president is expected to be less radical and have a more open stance toward mining, especially since the idea of a state-owned company to exploit lithium will probably cost more than it would benefit Mexicans. On the other hand, if there is a political transition and someone from the opposition becomes president, the Mining Law is expected to be reformed for the sixth time. “It is a fact that the lithium industry will continue to develop and that its outlook will surely improve when there is a change in government. However, how much it improves depends on the new government. With MORENA, it is not sure if the Mining Law would be reformed, but with the opposition, definitely yes. Deficiencies in terms of certainty would be corrected and the participation of individuals would be allowed.”

Cano stressed that with the new government, better conditions can be achieved for the industry to grow and contribute to Mexico’s development.  “A government that is more open to mining would be better for the sector but also for the country, as there would be more employment, tax collection and community development. It would be a virtuous win-win cycle for everyone,” said Cano.