Mexico miners could face spiraling concession fees in shake-up

Mining companies in Mexico could face a sharp rise in concessions fees under a proposed shake-up of the country’s mineral rights system.

A proposal by lower house congressman Irán Santiago Manuel of the ruling Morena party calls for a new regime of mineral rights fees based on production to replace the current payments, calculated per hectare of concessions held.

The initiative, presented to the lower house on Wednesday, aims to end what Santiago describes as an overly lax fees set-up which – coupled with recent rises in metals prices – has allowed mining companies to make unjustifiably large profits.

“Mining companies in the country have done great business. In the last 15 years they have paid a derisory amount to the federal government, compared with the huge profits that the extraction of subsoil riches has given them,” Santiago said in the presentation of the proposal, published in the parliamentary gazette.

NEW REGIME

Santiago’s initiative would see mining companies pay 5% of revenues from mineral sales annually for their concessions, rising to 8% for gold, copper and silver assets – Mexico’s top mineral products.

The payments would replace current half-yearly levies which range from 7.56 pesos (US$0.38) per hectare in the first two years the concessions are held to 165.32 pesos from the eleventh year.

RATIONALE

The proposal aims to end what the congressman claims is an excessively generous mining tax regime.

In the six years to 2013 – the year before Mexico introduced mining royalties – mineral rights fees collected by the government amounted to 7.101bn pesos (currently US$359mn), or 0.6% of mining production value, which Santiago describes as symbolic.

While Mexico introduced royalties in 2014, the overall tax burden remains far smaller than that of rival Latin American mining countries including Chile, Ecuador, Peru and Guatemala, according to the congressman.

Since 2014, miners in Mexico have paid a 7.5% royalty based on net revenue less certain deductions, with gold and silver producers levied with an additional 0.5% special mining tax on gross revenues.

ECONOMIC BENEFIT

According to Santiago, charging mineral rights per hectare rather than by sales value has handed a significant economic benefit to Mexican mining companies.

“Hence, the Mexican fiscal regime contributes to elevate the profits of mining companies only because in most cases, the rights paid for the exploitation of mining concessions are lower than those established in tax regimes in the [Latin American] region,” he added.

ANALYSIS

While Mexico’s main mining bodies, Camimex and AIMMGM, have yet to comment, Santiago’s proposal is certain to elicit strong industry opposition.

Replacing per-hectare fees with payments of 5-8% of mineral revenues effectively creates a second mining royalty which risks rendering Mexico’s mining industry uneconomic.

The arguments used to justify the proposal also show some obvious flaws.

Like Mexico, other mining jurisdictions such as Chile charge per-hectare concession fees on top of royalties and taxes.

The introduction of royalties in 2014 brought Mexico’s fiscal regime broadly in line with rival jurisdictions, including higher-tax countries such as Canada.

On top of the 7.5% royalty and 0.5% special tax, mining companies pay 30% corporation tax, along with concession fees, and workers receive 10% of net earnings under profit-sharing rules.

Despite its flaws, Santiago’s proposal – or something similar – could make it through parliament in the near term.

President Andrés Manuel López Obrador (AMLO) has said he will consider changes to mining regulations – including taxes – around the middle of his six-year term, which would fall around December 2021.

The huge strain placed on public finances by the COVID-19 pandemic adds extra pressure on the government to seek extra revenues.