Compared to the peak of gold mining in 2012, when investment reached over US$8 billion, last year’s investment totaled US$5.2 billion, a fall of almost US$3 billion. However, after a continuous fall in 2013 and 2014, with investment levels coming in at US$6.5 billion and US$4.9 billion respectively, miners may feel positively about the 2015 figures.
Miners all around the world have been reluctant to develop projects, and many have been put on hold indefinitely until operators see an increase in metal prices. Octavio Alvídrez, CEO of the world’s largest silver producer Fresnillo shared in a recent interview with Mexico Mining Review, “Since 2011, every year has been a challenge, with consistently lower metal prices. Mining in itself is a challenge, and the prices have only made the environment more hostile.”
However, the problem has been compounded by the fact that the Mexican government recently introduced a royalty tax on mining concessions. According to the tax, a standard 7.5% Derecho Especial on income has been applied to holders of any concession in Mexico. Other investments, accrued interest, and annual adjustment for inflation are not deductible. Moreover, a further Derecho Extraordinario, a rate of 0.5%, will be applied on top of this for precious metal concessions of gold, silver, and platinum.
The money is to be used to create the Fund for the Regional Sustainable Development of Mining States and Municipalities, which will be distributed among the communities affected by mining activities to promote economic development. However, many have expressed doubts about the allocation of these funds, and as a response, a partnership has been formed between the public and private sector to decide on the most appropriate investment. Alvídrez comments, “We are participating in a group to decide which projects are valuable for the communities and that may better serve the communities directly affected by mining activities.”
Another concern about the Fund is that many mining operators are already working with the surrounding communities, and have established agreements with communities to provide resources and infrastructure that could now be revoked should the operators begin to feel the pinch of the double payment. Moreover, Laura Díaz, Partner at DBR Abogados believes that, “The negative aspect is the fact that the money received directly correlates with production, which is continuously decreasing. Even if the royalty is not rescinded, the companies are not making a profit, which means that there will be no funds to channel into the municipalities.”
Some mining companies are even contesting the royalty, arguing that the Derecho Extraordinario is unconstitutional. As explained by Díaz, who represents an operator who has already filed an amparo against the tax, “In the case of the Derecho Extraordinario, we are arguing that this levy does not fall under fiscal responsibilities, but rather rights of way. Moreover, the extra 0.5% applies only to gold, silver, and platinum production, when Mexico is one of the top ten global producers of copper. The constitution contains a clause determining equality, meaning that the extra tax on only these three products is discriminatory and therefore unconstitutional.”
It remains to be seen whether the government will repeal the tax to maintain Mexico’s mining competitiveness, as the country’s sixth most profitable export. The Fraser Institute recently reported that Mexico had fallen to the 37th position globally in terms of competitiveness, from 33rd in 2014. This has been attributed to a variety of factors, the main ones being the drop in commodity prices and the regulatory changes.
However, Fernando Alanis, Director of Peñoles is much more optimistic about the direction the industry is taking, and believes that several factors mean it will remain an attractive mining destination on a global scale. He explains, “Firstly, Mexico is recognized within the sector as a mining country and the potential for exploration here is enormous. Secondly, the country enjoys a stable economy and regulations that foster the development of the industry. Thirdly, Mexico benefits from its proximity to one of the most important markets in the world, the US, which continues to consume the vast majority of metals produced in Mexico. All the ingredients are there to reposition the mining industry as a strategic sector in the country, and I am sure that this will happen soon.”