Mexican legal reforms would hinder medium-term mining projects - Moody’s

Two bills submitted by Mexican President Andrés Manuel López Obrador to congress would hinder the medium-term growth of mining projects, according to Moody’s Investors Service.

In late March, López Obrador submitted to the lower house a bill to reform the mining and water law that would reduce the length of mining concessions from 50 years to a maximum of 30, with a first term of 15 years and a single renewal. In addition, the proposal would make concessions conditional on water availability, among other things. Current concessions last 50-70 years, Moody’s said.

The second bill would allow the government to revoke permits or concessions unilaterally in any sector, at the government's discretion, according to Moody's. "This is particularly negative to future investment seeking to take advantage of nearshoring trends," the agency said in a comment. 

Moody's warned that the changes would hurt mining projects' profitability and future investments.

However, if approved, the new bills would not immediately impact the credit quality of Fresnillo (‘Baa2’, stable) or Southern Copper Corporation (‘Baa1’, stable), as existing concessions for both companies expire around 2050-60, according to the document. 

"We also do not expect any immediate credit impact for the fluorspan [sic] operations of Orbia Advance Corporation (‘Baa3’ stable), whose current mining concessions are distributed in several concession agreements with maturities between 2029 and 2061, which give the company some diversification and potentially limit its risk from changes to rules about concessions," Moody's added. 

If approved as proposed, the agency said the changes to the mining and water law "will be credit negative for the mining sector, increasing producers' regulatory burden and heightening the risk of early termination of their current concessions. 

"The proposals make granting new mining concessions in Mexico more uncertain and would increase operational risk for companies that chose to expand outside of Mexico. The propose[d] conditions may discourage mining companies to further invest in Mexico and look elsewhere," the agency added. 

The firm highlighted that the mining bill adds certain reasons to cancel concessions, such as the lack of reports on possible damage, risks to the ecological balance, or not having closure or waste management programs. 

The proposals follow changes to the mining law in 2022 that established that the government will have exclusive exploration and mining rights over lithium through the state-owned company LitioMx, eliminating the option of lithium mining concessions for private companies.

The second bill on the administrative system would likely make the approval process for new projects "more lengthy and difficult," according to Moody's Investors Service. "That measure would allow the government to revoke permits or concessions unilaterally and would require producers to obtain water concessions and conduct consultations with communities before obtaining new mining concessions.

"Additionally, if the administrative acts bill is also approved, the uncertainty of concession revocation will heighten the risks of these concessions," the document states.

Moody's expects mining companies to engage the government to discuss the proposals. "In the past, dialogue between the private and public sector has resulted in agreements and amended proposals, but we cannot rule out that the proposal will pass as proposed."

The new bills would involve changes to existing laws, not to Mexico's constitution, and their passage into law would require simple majorities in the lower house and the senate. 

Since the lower house’s ordinary sessions end on April 30, resuming on September 1, Moody's expects the debate to extend for some months. 

"We would expect the government to discuss the terms of the bills with the industry, given mining's importance to Mexico's economy. Mining represented 2.5% of Mexico's GDP in 2021, and Mexico is the world's largest silver producer, second largest fluorspan [sic] producer, and a top-10 producer of zinc, gold and copper, among other metals," the Moody's document says.  

"Mining generated around US$3.1bn in fiscal revenue in 2021, including taxes and royalties. Mining groups spent some US$5bn in 2022 – a level in line with capital spending in recent years," the agency added.