The Mining Trust Fund: A Long Road to Change

Three years ago, the creation of the Mining Trust Fund sent shockwaves throughout the industry. The majority of mining companies are still to be convinced of its merits but its supporters believe a long-term perspective is needed.

In 2014, the newly elected center-right Institutional Revolutionary Party (PRI) government implemented sweeping reforms in a bid to raise taxes and boost public finances. Among the changes was a 7.5 percent royalty on metal and mineral production, plus an added 0.5 percent duty on gold, silver and platinum extraction. The Mining Trust Fund was set up to make use of the added cash inflow, with a specific goal to fund social infrastructure projects in mining regions.

Mexico’s metal producers felt persecuted. Already creaking under the pressure of plummeting commodity prices, the new taxes cut profit margins further and pushed many operators to the breaking point. Three years on, the Mining Trust Fund continues to divide opinion. Detractors argue the tax is unconstitutional and that a large chunk of the proceeds are lost in the public-sector ether. But some corners of the community believe that in the long-term, the ground-breaking program has the potential to bring real change to isolated communities with precious few sources of income.

The Mining Trust Fund has no precedent in Mexico. Under the guidance of the Ministry of Agrarian, Territorial and Urban Development (SEDATU), it is designed to finance social projects in targeted regions where mineral extraction is present. Municipalities and states receive a portion of the resources, depending on their respective contribution to Mexico’s mineral output. It is then up to a specially created committee, composed of a mix of public, private and social sector representatives, to allocate the funds to specific projects.

“Each committee is made up of five members and chaired by a SEDATU representative,” says Ricardo Lopez, Director General of the Mining Trust Fund at SEDATU. “Mining is a finite industry, so our job is to ensure that communities do not become dependent on support from the extraction activities going on around them.”

A total of MX$1.74 billion (US$98 million) was collected and redistributed in 2016. By February 2017, 812 projects had been started, of which more than 250 were completed. As the country’s most productive mining state, Sonora receives the highest proportion of the funds – over MX$579 million in 2016 - followed by Zacatecas, Chihuahua and Durango.

Local municipal governments are in charge of distributing 50 percent of the funds, with the state and federal government presiding over 30 percent and 20 percent, respectively. The added income can make a dramatic impact to public-sector spending power on a local level, especially in municipalities with large metal outputs.

“The creation of the Mining Trust Fund opens a space for a fair distribution of capital among the communities that surround mineral extraction sites,” says Jorge Vidal, Minister of Economy for Sonora. “Without the fund, municipalities like Cananea would only have a budget of MX$8 million per year but now they will have an extra MX$122 million annually.”

CORPORATE RESISTANCE

Mining companies have been open about their opposition to the reform, with many pointing to the questionable timing of the changes. In October 2014, the gold price stood at US$1,143/oz, 50 percent lower than the same point two years previously. Arturo Bonillas, President and Director of Timmins Gold, says the government could have waited for the wounds to heal before striking another blow. “The tax was imposed at the worst possible time,” he says.

Although prices have subsequently recovered, the doubters remain. Many organizations have been operating mines for several decades and during this time have built up a strong, mutually beneficial relationship with the local community. They feel the changes threaten this relationship and place responsibility on public authorities lacking in local knowledge.

“I have always stood against the reforms and continue to do so,” says Robert Eadie, President and CEO of Starcore International, which has been operating the San Martin mine in Durango since 2008. “We feared the government would not do an efficient job in distributing the resources collected into the Mining Trust Fund and this is exactly what has happened.”

For the mining companies, the results of the program have been slow and underwhelming. They are happy to support economic development in local communities through their own corporate programs, and feel that the Mining Trust Fund creates an unnecessary middleman between themselves and the people. Eadie claims the reform is “unconstitutional” and that it has not changed the way his company interacts with the community. “We do not wait around for the government to show up,” he says.

GOVERNMENT RESPONSE

Those at the Mining Trust Fund understand the concerns. Lopez acknowledges that the fund should do nothing to negate the “well-established” relationship between company and community, but stresses that the fund finances projects that fall outside of the private sphere.

“Our job is to make sure that the funds received from the new taxes are reinvested into infrastructure projects,” he says. “Mining companies are not responsible for improving public services.”

During the first two years, the focus was on small-scale infrastructure works on a local level. The majority were road maintenance, paving and construction projects in extremely remote areas of the country. A local road repair project may not have the dramatic effect of a suspension bridge or new hospital, says Lopez, but the real weight is often greater.

“Rather than speaking about specific projects, I prefer to focus on the overall social impact of our work,” he says. “For isolated communities, an improvement to the local road network significantly boosts quality of life.”

LONG-TERM BENEFITS

Given the fact that the Mining Trust Fund is an entirely untested public initiative, it should come as no surprise that the cracks are still being ironed out. According to Lopez, in the next two years the focus will switch to funding regional, rather than local, development that impacts larger and more urbanized communities. This could produce the kind of results the companies are waiting for. While Lopez admits that his team is still trying to find the “most effective” way of investing the funds, he insists that this will process will not be rushed to appease the doubters.

“Many companies expect to see change happen overnight but that cannot be the case,” he says. “It would be easy to hand out the money to districts without taking care to ensure that local authorities are using it correctly but we believe that the quality of the construction outweighs the importance of speed.”

For Mexico’s miners, the recovery in metal prices during 2016 and the first part of 2017 eased the pressure applied by the added taxes and the focus switched away from complaint to strategy for increasing production. Nevertheless, it is clear that the issue is still a touchy subject for companies with years of experience in Mexico. Regardless of how well the sector is performing, they want to see results sooner rather than later.

“I support the royalty taxes and I do not doubt the good intention,” says Bonillas, before adding, “as long as the funds go back into the communities.”