Capital Market

Why Mexico's mining sector faces a gloomy future

Why Mexico's mining sector faces a gloomy future
Mining News Pro - In this interview, Flores talks about bureaucratic hurdles, the tax burden, and potential of the lithium market.

According to Mining News Pro - When Mexico’s President Andrés Manuel López Obrador assumed office in 2018, he ordered a stop to granting mining concessions, the consequences of which are increasingly hitting the sector.

Mining contributes 6.7% to GDP and even though metals prices have risen, Karen Flores, the head of mining chamber Camimex, forecasts a drop in investments this year and possibly the next.

In this interview, Flores talks about bureaucratic hurdles, the tax burden, and potential of the lithium market.

BNamericas: How many mining projects are currently halted due to missing or delayed concession approvals or permits?

Flores: The mining sector is essential for the country, not only for the national economy as it is one of the five industries that contribute most to GDP, but also as it is the fifth foreign exchange generator.

But in addition to that, mining in most cases takes place in remote areas where there is no possibility for developing other economic activities, generating not only employment but also life, infrastructure and energy opportunities for more than 690 communities. In this sense, we are facing various challenges: one has to do with permits and lack of incentives for exploration. Regarding the number of projects, we carried out a count with data from the National Mining Commission, finding that to date, 822 projects are halted.

These projects are in the early exploration stages, some since 2014, and one reason [for stoppages] is that with the tax reform that year, the possibility of deducting preoperative exploration expenses in the first year was eliminated, resulting in a drop of almost 60% of exploration investments.

Obviously, this drop, coupled with other projects that are in a more advanced stage but lack permits – there is a long delay in permits, especially in environmental matters and some others due to registration – has caused these projects to stop. These are actually the two causes we see.

BNamericas: And what is the current situation of mining concessions?

Flores: In terms of concessions, the policy of this administration has been not to grant any more, which is mortgaging the future of the industry because mining involves finite resources and it is necessary to constantly explore to find new deposits that extend mine life. This can have a serious impact in the long run, not only in the mining industry but in all industrial sectors, since mining is the first link for the development of any industry.

Not granting new concessions will result in the stagnation of the mining sector and we are beginning to live with the absence of new mining projects. The [projects] that are operating in the country are mostly mine expansions rather than new mines, and this is having serious consequences.

There is great misinformation on the subject of concessions. It has been said that Mexico has concessions for over 60% of the national territory, which is false since, according to data from the mining department, the total concession area is 8.59%, and, if we really go to the concessions that register production and operation – because many of these concessions are in exploration stages that can last 10, 15 and even 20 years – we are talking about 2.06% of the national territory.

Even more so, if we go into detail, of that 2%, about 0.1% is occupied by mining facilities, plants, pits; we are talking about 201,996ha. In reality, there is a great deal of misinformation that we have tried to clarify and we think that this has generated confusion among authorities so as not to grant new mining concessions.

BNamericas: What amount of stalled investments do those 822 delayed projects represent?

Flores: We have made an estimate with data from Camimex that companies announced at the time … and this information amounts to US$960mn that has not been invested since 2018, since the beginning of this administration.

BNamericas: Have you talked to the authorities about delays? Have you been told if this will improve and how?

Flores: We have had various conversations. Recently, changes occurred at the economy ministry, which is our go-to contact, and in September we talked with [then-economy minister] Tatiana Clouthier to propose a plan to promote a public policy that encourages a responsible mining sector. This policy is aimed at promoting various mining states, which have expressed great interest and governors said they could see first-hand the many benefits mining brings. We are talking about states like Chihuahua, Sonora, Durango, Zacatecas, Guerrero, and even Coahuila, which are states that are seeking to promote this responsible mining sector and continue to develop value chains and added value.

We are still waiting for them to give us a date for an appointment with [current economy minister] Raquel Buenrostro and to be able to continue putting this plan on the table to work together to encourage exploration, improve security, a stronger rule of law in mining regions and, of course, that mining continues to develop best practices in terms of social and environmental responsibility and human rights.

BNamericas: Did you also meet with representatives of environment ministry Semarnat?

Flores: We have had some approaches, especially speaking with the environmental impact department, but more than that with the environmental regulation department, and derived from these approaches we have put on the table a joint work plan that we had already started also with the former undersecretary. We know his undersecretary also intends for us to continue, we can be allowed to exchange information and promote that permits, in compliance with the corresponding regulations, can be issued more quickly.

At the moment, 23 procedures involving environmental impact statements and change of land use, specifically for companies we represent at Camimex, which represent 90% of national production. We don't have a count of approvals.

BNamericas: What are the main factors – positive and negative – impacting mining in Mexico? What are the factors that inhibit investment?

Flores: We obviously believe that one factor that has had a significant impact is the lack of concessions, but also the lack of incentives for the mining sector to develop. An international study ... published by the Fraser Institute precisely measures the competitiveness of mining countries. In this sense, Mexico, unfortunately, has regressed, from 11th position in 2011 to 34th today, and of the items that mark the most impact, one has been the level of insecurity, where we rank 73 of 84 jurisdictions evaluated.

In fiscal matters, we are ranked number 63, and in the area of political stability 69. This is obviously of great importance. We, as the mining sector in Mexico, are among the industries that pays most taxes in the country. In addition to the income tax any company pays, the mining sector pays three additional ones: for the right on the concession area, another one of 7.5% on profits, and those that produce gold and silver pay an additional 0.5%.

This generates a very high tax burden for the sector, and note that there is a study by PwC measuring the tax burden and it is very impressive, because … Mexico ranks last, with the highest [burden of] 52.7%. If you compare it with regions like Peru, Chile, Arizona, Ontario, which are our competitors in America, almost all of them have tax burdens well below that. This puts us at a great disadvantage and has caused great flight of investment to other countries, both national and foreign investment.

BNamericas: What is your investment outlook for this year and 2023?

Flores: By the end of 2022 we estimate [investments to be] 15% less than the US$4.8bn invested in 2021, and for 2023 we still do not have an estimate but our conservative scenario is to try to stay within this US$4bn range. Projects that currently register these investments are not new ones. However, that will depend a lot on the climate for investors we see at the beginning of next year.

BNamericas: How has the rise in metals prices impacted the industry?

Flores: We had significant inflation this year in the US, not only in Mexico, and the metals price positively impacts the mining market. But in another way it also has its balance in the national economy and we are trying to be conservative, because Mexico unfortunately does not register the expected growth for this year. However, we are optimistic as the mining sector has been on its feet and was one of the few sectors that registered growth in the face of reactivation, of 7.1% in 2021. To take advantage of this dynamism, if there were a public policy to boost the sector, growth could be higher.

Inflation has affected operating costs, inputs, general costs, electricity, because they are all included in operating costs of one mining unit.

BNamericas: What are your prospects for lithium? How are investment opportunities, even though exploitation is limited to the State?

Flores: At Camimex, and I must say it with these words, there is no interest in the lithium market. Unfortunately, no deposits have been found in Mexico that are economically attractive or viable. The lithium that has been found, when we talk about the Sonora project, is in clays, not in rocks, and that makes it very expensive to extract, and it is not great potential to invest in a project of this magnitude.

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