Royalty Tax Stunts Mine DevelopmentWed, 10/19/2016 - 12:02
In today’s challenging mining market, Levon Resources has managed to remain debt-free and well-funded. Ron Tremblay, the company’s President and CEO, attributes this to foresight and a strong strategy. “During the upsurge of metal prices a couple of years ago, bankers suggested that we should go to London and introduce our project to the European investment community,” Tremblay explains. “When we presented the project, silver reached a peak height of over US$40/oz and there was a sense of excitement surrounding the silver market.” As a result, investors saw potential in the project and this gave the company a strong position to gain access to financing. At first, Levon Resources agreed to a US$25 million deal and then investors wanted to increase the financing to US$41 million with no warrants in a bought deal, which was a strong step for the company. Unfortunately, the metals market fell and this came with the government’s decision to implement the royalty tax. “This combination has scared the mining companies out of Mexico and it has certainly forced Levon Resources to reevaluate its business prospects,” Tremblay states. “Today, we have no need for financing as we are in great shape with US$25 million in the bank, and cash in marketable securities.” Currently, he is waiting for the market to turn and for metal prices to improve, and he expresses a desire to see the Mexican government reconsider the royalty since he believes this extra cost has encouraged mining players to look at other mining jurisdictions rather than take advantage of Mexico’s potential.
El Cordero is Levon Resources’ primary project located in the state of Chihuahua, and is described as one of the largest undeveloped silver deposits in the world. Spread across 37,000 hectares, Levon Resources has built Cordero into an attractive porphyry target for silver, gold, zinc, and lead. A Preliminary Economic Assessment has been successfully completed on 30 percent of the resource, with a new one on the entire resource when the metal prices improve. Other competitive advantages include the infrastructure close to the project since it is located close to power lines and plentiful water resources. “The location is convenient for the development of tailing dams so practically all variables are aligned to set up an operating mine,” Tremblay boasts. “The pit is relatively close to the main highway and there are already a few kilometers of dirt roads established, which gives us the opportunity to easily transport the materials.”
One negative of Tremblay’s experience in Mexico has been the royalty tax, and he shares that it has even prevented Levon Resources from moving forward with the El Cordero project. “The combination of the royalty and the depressed metal prices has muted our interest and that of other investors in the country,” he laments. “Due to this situation, we have decided to hold onto our property and focus on remaining debt-free. We also eliminated our cost overheads and now we are stagnant until the market changes with the hope the Mexican government reconsiders its position.” Tremblay acknowledges that mining is an important component of the Mexican economy and believes the government should be more proactive in encouraging its development. The result of the royalty tax was that a high percentage of the exploration companies left Mexico, looking for better opportunities in the US and Canada.
“Mexico must be on the cutting edge and encourage more mining investment through the implementation of alternative incentives like tax breaks due to the levels of risk now involved.” Foreign players like Levon must compete with major local corporations like Industrias Peñoles and Grupo México, and Tremblay contends that these conglomerates have monopolized a large portion of the rich and easy to develop projects, and it is up to the new companies to invest and find new deposits and bring wealth to the country. “Without a doubt Mexico has strong deposits, but so too does Argentina and Chile and these countries are putting incentives in place to encourage operations,” he comments. “The fiscal reforms completely transformed the horizon for us because the 7.5 percent royalty was not included in our projections, and it negatively affected our future value. If that tax had not been imposed, Levon Resources would now be moving toward the feasibility study.”