Miners report mixed impacts from Mexican outsourcing ban

Changes to subcontracting rules in Mexico have met with mixed responses in the mining sector, with some firms warning of wage inflation while others expect costs to fall.

The senate approved a ban on so-called outsourcing in April, defined as subcontracting core business services, a previously common practice to avoid profit-sharing obligations (PTUs). Workers are eligible for a 10% cut of profits under Mexican law.

But in a compromise with business leaders opposed to the changes, the legislation also capped PTUs at the greater of three-year trailing average payments or three months’ salary.

Companies were given until September 1 to comply with the new rules.

Subcontracting of certain specialized services outside of the main scope of the business is still permitted, as long as contractors are registered as service providers by labor and social welfare ministry STPS.

ADMINISTRATIVE ADJUSTMENTS

“[The outsourcing ban] has been a big question and topic that we and really all businesses have been following in Mexico,” Mitch Krebs, CEO of Coeur Mining, told BNamericas.

But aside from some administrative adjustments to comply with the new law, the changes don’t have any meaningful impact on the company, which has the Palmarejo silver-gold mine in the country.

The intention of the legislation was to tackle the companies who put employees into service companies and then didn’t pay them fairly, the CEO added.

“That’s well intended, to target that, but for us, we weren’t doing that, we wouldn’t do that, we have never done that, so it was more of an administrative process we needed to go through,” he added.

COST INFLATION

But other companies expect higher costs as a result of the ban.

These include Gatos Silver, with the Cerro de Gatos primary silver mine in Mexico, which has had to change its contracting and employment structure to comply with the new rules.

“That new law will require a certain amount of reorganization in our group to now place some employees who were in another entity that we had used as an internal outsourcing environment, and we will definitely have to participate in the profit-sharing up to 25% of their annual salaries as additional compensation, and we will see some higher costs from that,” CFO Roger Johnson said in the Q2 earnings call in August.

These additional costs are estimated at around US$3mn/y, which will begin to impact production costs from Q4, he added.

LOWER COSTS

But some companies expect profit-sharing costs to fall.

Torex Gold paid US$30mn in PTUs accrued during 2020 in Q2, but expects lower costs for the current year.

Torex reiterated total cash cost guidance for 2021 of US$680-720/oz gold sold from its El Limón-Guajes mine in Guerrero state, its sole producing asset.

“The stable total cash cost guidance reflects the strong start to the year as well as lower anticipated PTU in 2021 following recently passed legislation that now caps the PTU as the greater of three months of salary or trailing three-year average PTU payments per employee,” the company said in its Q2 earnings release last month.

These lower costs will be offset by higher processing costs, reflecting increased reagent consumption due to elevated levels of copper and iron in sulfides as mining moves deeper within the open pits.

But Fresnillo, Mexico’s top gold and silver producer, cited the subcontracting reform as a factor contributing to risk for the company, complicated relationships with contractors and the hiring of specialized technicians to advise on project development and new technologies.

Any impacts on the company’s bottom line are likely to be marginal, however.

“Based on the group’s analysis of possible arrangements, the new regulations are not expected to materially impact production or costs in 2H21,” Fresnillo said in its H1 earnings report in August.