Mexico vs mining: Are disputes snowballing under AMLO?

Mining companies in Mexico are fighting a string of battles with the government, in disputes relating to taxes, reforms and union representation.

A combative stance taken by Mexican President Andrés Manuel López Obrador (AMLO) over taxes has contributed to new arbitration proceedings against the government this month.

Controversial legislation has also sparked a legal showdown with a top Mexican mining company, while a thinly veiled threat to revoke concessions has ratcheted up tensions over a 14-month mine suspension.

MEXICO’S MINING DISPUTES

1. First Majestic Silver arbitration

Issue: Taxes

A dispute over decade-old taxes has resulted in an arbitration case against Mexico.

Vancouver-based First Majestic submitted a request for arbitration to the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) on March 2, saying the Mexican government had refused to engage in talks to resolve the issue.

The dispute relates to taxes paid by subsidiary Primero Empresa Minera (PEM) in 2010-12.

The Mexican government is seeking payment of around US$260mn, which the company said comprises just US$75mn in additional taxes, with the remainder made up of penalties, interest and other items.

DETAILS

Under a streaming deal, PEM sold the bulk of silver produced at the San Dimas mine to Wheaton Precious Metals for around US$4/oz, well below spot prices.

An advance pricing agreement (APA), signed by Mexico’s tax authority SAT in 2012 and covering the 2010-14 years, allowed PEM to pay taxes on these lower realized silver prices.

A Mexican court annulled the APA last year, a ruling which First Majestic has appealed.

OUTLOOK

Mining-related arbitration cases against Mexico are rare, with the government usually able to come to an agreement with companies, Control Risks analyst Inés Echeagaray told BNamericas earlier this month.

This shows the government is taking a hard-line stance on taxes - but this may not pay off, according to Echeagaray.

“We expect the mining company to be successful, just because AMLO is trying to...obtain more taxes retroactively. Laws are not supposed to work that way,” she said.

2. Fresnillo legal showdown

Issue: Electricity industry reforms

Mexican miner Fresnillo is planning a legal showdown with the government over controversial reforms of the country’s electricity law (LIE).

Mexico has passed legislation giving priority to state-owned power utility CFE over private generators, including privately operated wind and solar facilities.

The move threatens to undermine Fresnillo’s aims of sourcing 75% of its electricity from renewable sources.

In addition to lowering carbon emissions, self-supply power – including renewables – is cheaper than buying electricity from the grid.

“We are of course going into the legal front on that regard,” CEO Octavio Alvídrez said earlier in March.

“There is not much more to say, but we will defend somehow our rights to source our operations [with] cleaner and less costly energy.”

OUTLOOK

Fresnillo is not alone in its decision to challenge the reforms in the courts.

A string of appeals have been lodged, and courts have ordered a definitive suspension of the new law, which will remain in place until the appeals are concluded.

While the suspension is not a clear victory for the appellants, with the law likely to be ultimately settled by the supreme court, it does at least give them time to mount an effective legal challenge.

3. Americas Gold and Silver suspension

Issue: Union representation, alleged extortion

AMLO has taken sides in a dispute at Americas Gold and Silver’s Cosalá operations, which have been suspended for 14 months.

He has repeatedly called on the company to restart operations despite concerns over alleged irregularities, threats and violence in a vote on union representation last year.

The company alleges a union official has made demands which cannot be lawfully met, and says current conditions do not allow it to invest in a restart.

AMLO recently went a big step further, warning companies that do not obey the law that they will have their concessions removed.

Americas responded to AMLO’s comments on scrapping concessions with its own veiled threat, stating it plans to work with Canadian and Mexican government officials in order to avoid arbitration proceedings.

It also stated that axing concessions has “no basis in the facts or law.”

OUTLOOK

Despite the strong language on both sides, Americas has signaled that the matter may be resolved.

A framework for a production restart has been agreed with the federal government.

“The company is now awaiting actions from the applicable authorities in support of this plan,” it said in a release on Monday.

MORE TROUBLE BREWING?

In addition to the three cases highlighted, a number of other government proposals threaten to develop into full-blown disputes.

These include plans to nationalize the emerging lithium mining industry, which could potentially impact Bacanora Lithium and JV partner Ganfeng Lithium.

Their US$420mn Sonora lithium project is expected to become Mexico’s first lithium producer in 2023.

Another potential bone of contention relates to a proposed nature reserve in a key mining area of Zacatecas state, which could affect Newmont’s Peñasquito mine, Minera Frisco’s Tayahua copper-zinc asset and Orla Mining’s US$134mn Camino Rojo project.

A string of environmental permit rejections could also result in legal battles and possibly arbitration proceedings.

Environment ministry Semarnat has blocked at least four mining projects since AMLO came to power, most recently Almaden Minerals’ Ixtaca gold project.

The company plans to submit a revised application.