Mexico’s fiscal reform bill, approved by both houses of congress at the end of October and now awaiting the signature of President Enrique Peña Nieto, has not gone down well with the country’s mining industry. The general aim of the bill was to boost non-oil tax revenues to strengthen the government’s fiscal position. Most economists agreed that with some of the lowest general taxation rates in the Organisation for Economic Cooperation and Development (OECD), Mexico definitely needs to strengthen government finances. But Mexico’s mining industry, the biggest in Latin America, says it has been unfairly singled out and is being asked to make a disproportionate contribution.
The main new provision in the bill, which is expected to come into force at the beginning of 2014, is for a mining royalty of 7.5%, charged as a percentage of profits. Gold and silver miners will have to pay an additional 0.5%, taking their total royalty up to 8.0%. Companies will also face other unfavourable changes, such as the loss of the tax-deductible status of exploration expenses, together with a new green fuel tax and a tax on dividends applied across the Mexican corporate sector.
The Mexican mining industry has until now been one of the few that has been free of royalties and some argue that this, along with very attractive copper, gold, silver, zinc and iron deposits, is precisely what has attracted investors. Mining accounts for around 4% of Mexican GDP. Investment in 2005-2012 was around US$28bn, putting the country at the top of the Latin American ranking for mining investment inflows. Mexico is the world’s largest silver producer.
The mining sector responded to the new taxes with a loud ‘ouch!’, but there were interesting nuances in what different companies had to say. Camimex, the Mexican Chamber of Mining, issued a statement saying that the changes would make Mexico one of the most expensive countries in the world for mining operations. It said its members had been planning to invest US$30bn in 2013-18, a figure which as a result of the new bill would be reduced by 60% to US$12bn; it also claimed that up to 60,000 new jobs would not now materialise in the sector.
Grupo México, the world’s third largest copper producer, said it would maintain its current US$5bn Mexico investment programme for 2013 and 2014, but would reconsider after that. “We will be obliged to redirect our future investment programme of US$3.5bn for the coming years, which is primarily allocated to Mexico, and analyse opportunities in countries where investment conditions are more favourable, such as the US, Canada, Peru or Chile,” the company said in a statement.
The US-based Hecla Mining said it would re-evaluate its San Sebastián silver-gold mine in Durango state following news of the tax changes. It had been thinking of building a series of small pits to start revenue flows before incurring big capital expenditure on a ramping system. Although this might be the best way to improve net asset value, the company’s chief executive officer (CEO) Phil Baker stressed that “we are going to have to weight that against the new taxes.”
Brad Cooke, chief executive of Canada’s Endeavour Silver, said that as a result of the new royalty taxes, investors might question whether Mexico is “still an attractive jurisdiction for new operations”. He described the change as taking Mexico “from one of the most attractive jurisdictions worldwide to one of the worst”. He calculated that his company would need to find over US$6m a year in additional tax payments. Yet he also seemed quite resigned to the hit. “The government wants the money, it has got the right to it, and we are going to pay it. I guess the way to adjust for that is to tighten up our costs” he said, adding that “if we saw a US$1.00 per ounce [upwards] movement in the silver price, it would be enough to offset the additional taxes.”
Jason Reid, CEO of the US mining company Gold Resource Corp., said the royalty would “hurt’ his company’s Mexico operations but he also noted that a provision that 50% of the revenue generated from the royalty be paid to local municipalities or states might have positive effects. People living close to potential new mines might “want a piece” of the associated revenues and therefore become supportive of local development. Reid says this redistributive aspect might allow Gold Resources to make “greater headway” at its El Rey project in Oaxaca, which to date has encountered determined local opposition.
Some analysts suggest that mining companies might reasonably demand a quid-pro-quo in return for paying the new tax. Jean-Baptiste Bruny of BBVA Bancomer noted: “In all countries you have to pay a royalty. The issue in Mexico is if you pay a royalty of 7.5%, you will want the same services as in other countries.” He noted that despite paying the royalty, some companies in Mexico might still need to finance the building of access roads or spend on security.
The security issue is a serious and expensive one, as there is evidence that some of Mexico’s drug-smuggling syndicates are moving in on mining. In October a government official (the land and urban development minister Jorge Carlos Ramírez Marín) said that criminal groups had started displacing landowners in Guerrero, parts of Michoacán and Jalisco, with the objective of establishing illegal mining centres.
A new emerald war in Colombia?
A grenade attack killing four people in the town of Pauna, in the western Boyacá department, has sparked concerns about a revival of the so-called ‘green war’ between rival emerald tycoons in the department in the 1980s.
Colonel Carlos Antonio Gutiérrez, the departmental police chief for Boyacá, (where the country’s largest emerald mines are located), told reporters on 10 November that the grenade lobbed the previous day into a crowd in the town centre was an assassination attempt on Pedro ‘Orejas’ Nel Rincón. A leading player in the local emerald mining business, Nel Rincón had been attending a local festival and, along with one of his sons, was injured in the attack.
Colombia is the world’s largest emerald producer and Boyacá and surrounding areas were at the centre of the ‘green war’ in the 1980s, as competition for control of the increasingly profitable emerald mines grew. The violent attacks took place between the Nel Rincón clan and that of Víctor Carranza (known as Colombia’s emerald tzar), both of which developed ties to the powerful local drug trafficking organisations of the time. This violence only appeared to subside after a truce agreed between the emerald tycoons in 1990 and the death of the drug lord Pablo Escobar two years later.
Concerns about a revival of the ‘green war’ have been building in recent months, following Carranza’s death from cancer in April 2013. Nel Rincón may have seen in this an opportunity to expand his control of local mines. According to the Colombian weekly Semana, 25 people were killed in the first ten months of the year in this new ‘war’. These included some of Carranza’s close collaborators. His right hand man, Pedro Ortegón, was shot dead in July and one of his lawyers, Óscar Casas, was killed the previous month. The government has since deployed 250 soldiers and police deployed to the municipalities Pauna, Quípama, Muzo and Maripí, as well as Boyacá.
But the prospect of renewed violence has provoked concerns from various sectors, including the Catholic Church. Monseñor Luis Felipe Sánchez, bishop of Chiquinquirá, described the situation in Boyacá as “worrying” and called on the Bogotá government to closely monitor the situation. He also called on the emerald tycoons to sit down at a “dialogue table” and talk “sincerely” about their commitment to peace, as agreed 23 years ago.
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