Contributed By A.D. Sosa & Soto, S.C.
Mining in Guatemala has a simple legal framework with constitutional support, since Article 125 of the Political Constitution of Guatemala declares the technical and rational exploitation of minerals to be of public utility and necessity, urging the facilitation by the State of the necessary conditions for its rational exploration and exploitation.
From a practical perspective, Guatemala’s mining industry can be divided into four main categories:
For reasons that are not entirely clear, a de facto distinction has been made between metallic and non-metallic mining. The main players of non-metallic mining projects are owned by local investors and sales are generally for the local market, whereas metallic mining projects are mostly owned by foreign companies who also export the mines’ output. As it will be further explained in 2.3 Communities and 2.7 Good and Bad Examples, NGOs opposing mining projects generally target metallic mining owned by foreign investors, and the degree of opposition is generally greater if the parent company of the holder of the mining right is a publicly traded company. Also, the general opinion of locals generally favours non-metallic mining, possibly because there is more visibility to direct costs' implications associated with construction materials. Since transportation costs constitute an important component in construction materials, it is usually not economical to import them from very long distances, ie, blocking mining projects of construction materials (non-metallic mining) has a direct impact on the overall population at large. However, Guatemala is a price-taker in metallic mining and whatever happens with metallic mining in Guatemala has little or no effect on the prices and on the local economy.
Guatemala has not been a country of great mining tradition; however, the signature of the Peace Accords, and improving conditions of some metals in the international stock markets, brought the winds of change to mining in Guatemala a decade and half ago, which for many years had been basically a construction and ornamental material industry.
The new mining investment era has caught the interest of the public, on a large scale, particularly in the western portion of the country, where the first gold mining licence was awarded approximately 15 years ago. Since then, several licences for metallic mining have been granted. Silver, nickel, gold, zinc and lead mines have caught international attention and Guatemala now develops world-class mining operations, including the Escobal silver mine and the Fenix nickel mine, each of which is considered one of the world’s biggest deposits of its kind.
Guatemala’s mining potential has increased significantly in the past decade as a new era for metallic mining vigorously emerged with foreign players quickly applying for mining rights all over the country. Guatemala needs to improve certain key areas to attract foreign investment in the mining sector. It needs to reduce legal uncertainly, eliminate discretion in how justice and environmental regulations are applied, and develop stronger political institutions to support the sector and inform the communities about the different projects and their benefits in order to promote community support for an industry that has the potential to bring progress to rural areas that otherwise are doomed to remain undeveloped.
In countries with a roman tradition, where romano-germanic law is used, laws are applied and interpreted by judges, usually known as civil law or continental law. Latin American countries are characterised by being civil law countries, and Guatemala is not an exception.
The main source of mining legislation is the Political Constitution of the Republic of Guatemala, which in its Article 125, declares that the technical and rational exploitation of hydrocarbons, minerals and other non-renewable natural resources is of utility and public necessity, for which the State must promote the necessary conditions for exploration and exploitation. In the exercise of the powers conferred by paragraph a) of Article 171 of the Political Constitution of the Republic of Guatemala, the Congress of the Republic of Guatemala decreed the Mining Law Decree No 48-97, in 1997. In 2001, the Congress of the Republic of Guatemala for the proper application of the Mining Law dictated the respective legal provisions by Decree No 176-2001.
The Mining Law regulates any activity of recognition, exploration, and exploitation in general mining operations. The Ministry of Energy and Mines is the body of the State responsible for formulating and co-ordinating government policies, plans and programmes of the mining sector, for processing and resolving all administrative matters, as well as for complying with the provisions of this Law and its regulations.
The rules of this law are applicable to all persons, individual or legal, who develop mining operations and especially activities of recognition, exploration and exploitation of mining products that constitute deposits or natural deposits of the subsoil.
Mineral deposits (hydrocarbons and minerals) in Guatemala are the property of the State, as established in Article 121 of the Constitution of the Republic, as follows:
“Property of the State: /…/ e) The subsoil, hydrocarbon deposits and minerals, as well as any other organic or inorganic subsoil substances /…/”
Owners of surface rights require a mining licence granted by the Ministry of Energy and Mines (exploitation licence) or the Mining Office (reconnaissance and exploration licences) to carry out mining activities on their properties. However, holders of mining rights require authorisation from the owners or possessors of surface rights to undertake mining activities. If no agreement is reached between holders of mining licences and owners of surface rights, the holder of the mining licence is entitled to request of a court the imposition against compensation of a mining easement.
Mineral resources are owned by the nation (not the municipality) but the statutory 1% royalty is paid 50% to the central government (the nation) and 50% to the municipality where the exploitation activity took place.
Generally, a mining company purchases the surface areas where the licence is located, as well as surrounding properties in order to own a buffer zone and mitigate discomforts among neighbours. In cases where the exploitation activity needs to take place in property owned by third parties, the owners of surface rights generally lease the properties or grant a usufruct in exchange for a rent plus a private royalty based on the output obtained from that surface land.
Surface lands in Guatemala can be any of the following:
Securing access to surface rights that are recorded in the Property Registry or that are possessory rights of individuals is relatively straightforward and requires negotiation and agreement of the terms with the owner/possessor of the surface rights. However, for surface rights in areas that are not recorded, things can be challenging because even with the mining licence in force, certain environmental permits require express consent from the owner, eg, tree-cutting permits.
The role of the State in Guatemala is grantor and regulator. There are no mandatory national or government joint ventures, contracting or participation; however, a royalty must be paid to the government.
In the past, in some specific cases the state participated with a minority shareholding in some mining projects; however, as far as is known, none of the projects authorised in the last 15 years include an equity portion for the state.
As a grantor and regulator, the two main government agencies involved are the Ministry of Energy and Mines and the Ministry of Environment and Natural Resources. Since mining projects requiring the construction of a process plant are inherently complex, many ancillary permits are often required in addition to the mining and environmental permits, such as construction permits from the local municipality, transportation permits for heavy equipment during the construction phase and for the transportation of supplies and output during operation, forestry, labour permits for 24/7 operations and foreign workers, forestry permits, electric permits for connecting heavy loads to the grid, etc.
As previously stated in 1.3 Ownership of Mineral Resources, hydrocarbons and minerals are owned by the State of Guatemala, as established by the Constitution of the Republic, and Article 125 of the Constitution of the Republic recognises the importance of mining and declares it of national interest.
Mining rights derive from law, since the Mining Law sets forth the different mining licences granted in Guatemala (reconnaissance, exploration and exploitation).
Mineral rights do not have the status of real estate property, although exploitation licences are recorded in the Property Registry and can be mortgaged for financing purposes. Moreover, there is case law from the Constitutional Court establishing that rights derived from government licences are assets of the licence-holder and as such are protected by law and the Constitution in the same way as real estate property.
Guatemalan law recognises three different types of mineral licences:
Under certain circumstances, the area of exploration and exploitation licences can be greater than these maximum limits.
Recognition and exploration licences are granted by the Mining Director, whereas exploitation licences are granted by the Minister of Energy and Mines. In all cases, mining rights are granted through a licence and no additional contract is executed with the granting authority.
Security of tenure is guaranteed by Guatemala’s political constitution and law, as mining rights may not be cancelled or limited discretionally by the Mining Office or Minister of Energy and Mines. Holders of mining rights are required to comply with all applicable mining and environmental regulations and only in the cases provided by law can a mining right be cancelled by the granting authorities.
The Mining Law sets forth four categories for cancelling or limiting mining rights:
Therefore, mining authorities are limited by law as to how and under what circumstances mining rights can be cancelled or limited. In addition, administrative resolutions that affect mining rights are subject to one administrative appeal and the resolution of that appeal is subject to judicial control.
Article 50 develops the non-subsistence of a mining right in the case that it was granted without the requirements stated in Mining Law regulations.
Article 51 describes the causes for which the Ministry of Energy and Mines can declare the suspension of a mining licence. This Article states that, based on a previous report from the Mining Office, the Ministry of Energy and Mines may order the suspension of mining activities if the owner of the rights fails in any obligation contained in that Article. The suspension must be declared by the Ministry.
One of the instances where the Ministry can declare the suspension of an exploitation licence is when there is a manifest disproportion of the mineral reserves and the volume of exploitation and that disproportion cannot be duly justified (paragraph h) of Article 51). This entitles the Ministry to declare the suspension of an exploitation licence when there is little or no extraction. If the declared suspension lasts for three years, it can then be a cause for initiating an expiry proceeding.
Article 52 regulates when the licence-holder may request the suspension of mining activities for a term of up to two years.
From the last two Articles referred to above (Articles 51 and 52 of the Mining Law), it is important to point out that the suspension of mining rights is either declared by the Ministry for a cause stated in Article 51 or requested by the owner (Article 52). There is no such thing as a “de facto” suspension.
Article 53 describes the causes for the Ministry of Energy and Mines to declare the expiry of mining rights. Paragraph f) refers to the suspension of exploitation activities for three years. It should be noted that Articles 51, 52 and 53 all refer to suspension of exploitation activities, not suspension of the mining licence.
Article 54 describes the causes of extinguishment of mining rights. This Article states that, if any of the causes mentioned in the Article are triggered, the mining right shall be extinguished.
Even though Article 53 of Mining Law does not establish a detailed procedure for the Ministry to declare the expiry of a mining license, the Legal Advisory Unit of the Ministry of Energy and Mines is of the opinion that the procedure established in Article 51 (suspension of mining activities) must also be used in Article 53 (expiry of mining rights), ie, a prior formal declaration of suspension by the Ministry of Energy and Mines is required in order to invoke paragraph f) of Article 53.
As previously explained, the declaration of suspension of a mining right can be initiated by the Ministry of Energy and Mines when
The holder of a mining right can also request the suspension of mining activities, invoking and proving a just cause for up to two years (Article 51 of the Mining Law).
The Ministry of Energy and Mines can declare the caducity or expiry of an exploitation licence, among other things, when the works towards the exploitation of the deposit have not initiated within 12 months of the granting of the licence, for manifest and proven resistance of the licence-holder in allowing the inspection and supervision of a mining operation by personnel of the Ministry of Energy and Mines, and for suspending exploitation activities for three years.
Finally, a mining right is declared extinct upon the expiry of its term (or any renewal thereof), exhaustion of the deposit, renunciation filed by the licence-holder, and death of the licence-holder, provided the heirs do not promote the continuation of the right within six months.
It should be noted that the decisions of the Mining Office or the Ministry of Energy and Mines declaring the suspension or expiry of a mining right are not final resolutions. In both cases (suspension and caducity) an internal process is followed before a resolution is issued by the mining authorities. An initial administrative resolution triggers the initiation of the expiry proceeding, granting the licence-holder a 15-day hearing to submit its arguments. With the response of the licence-holder, the Mining Office can end the proceeding or send the file to the Ministry of Energy and Mines. Only the Minister of Energy and Mines has the authority to declare the expiry of a mining exploitation licence, ie, the General Directorate of Mining has no authority to make any such resolution. Until such time as the Minister of Energy and Mines issues a resolution declaring the expiry of an exploitation licence, the licence is valid and in force. Moreover, the resolution issued by Minister of Energy and Mines is subject to an administrative appeal for the reconsideration of the resolution. Pursuant to case law of the Constitutional Court of Guatemala, the mere filing of the administrative appeal suspends the effect of the resolution being reviewed. The practical effect of this is that the resolution declaring the expiry of a mining licence would not be in force until the administrative appeal is resolved, ie, the mining licence continues in full force and effect during the administrative appeal. In addition, the ruling of the administrative appeal is subject to a judicial appeal before a Court of Appeals for Administrative Matters, and the ruling of this court can also be challenged before the Supreme Court by promoting a special appeal (cassation recourse), which in limited circumstances can also be challenged and revoked by the Constitutional Court through an amparo.
With regard to renewals, generally, when the holder of a mining right has complied with all applicable regulations, renewals are granted without discretion. Holders of an existing mining right have preference for a renewal or for progressing from an exploration licence to an exploitation licence.
Holders of mining rights are required to pay a granting fee and an annual fee based on the surface area covered by the licence. In addition, for exploitation licences, holders are required to pay a 1% royalty in January of each year, calculated on the production of the previous years. The 1% royalty is divided as follows: 0.5% for the central government and 0.5% to the municipality where the mining activity took place. Several projects have been submitted to Congress in recent years to increase the royalty rate. Some companies have entered into voluntary royalty arrangements with the government to increase the royalties and to include local communities as direct beneficiaries of those voluntary royalties.
Exploitation licences are also recorded in the Property Registry and can be mortgaged for purposes of obtaining financing.
Mining rights are assignable, but the granting authority (the Mining Office or the Minister of Energy and Mines, depending on the mining right) needs to approve the assignment. This process is usually lengthy and also requires, as a condition precedent, that the environmental permits associated to the project be assigned and that assignment be approved by the Ministry of Environment and Natural Resources (MARN) before the Mining Office of Minister of Energy and Mines accepts the assignment. For this reason, assignments of mining rights are not common. Instead, when a partial or total acquisition is made of a mining right, it is usually structured as an M&A transaction where the shares of the holder of the mining right (or the parent companies of the licence-holder) are acquired, thus leaving the mining right without changes at the Mining Office or Ministry of Energy and Mines.
Before Guatemala eliminated bearer shares in 2011, the Mining Law required, since 1997, that all corporation holding or applying for mining rights have nominal shares. However, at no point in the application process or, once granted, during the life of the mining right, are licence-holders required to disclose who the shareholders are. Also, there is no need to disclose the ultimate beneficial owner of the shares. For this reason, there are no “change of control” provisions in Guatemala’s mining legislation. This is likely to change in the future because the mining authorities have manifested their discomfort when it is publicly known that certain projects have been sold one or more times but there is no formal track of those changes in the file at the mining authorities.
In addition to the supervision exercised by the Mining Office, mining rights are also monitored by MARN to control whether the requirements of the Environmental Impact Assessment Study have been met. If the holder of the mining right is not complying with the applicable environmental requirements, the mining activity could potentially be suspended or limited by MARN. MARN’s decisions are also subject to one administrative appeal and thereafter are also subject to judicial review.
The Protection and Environmental Law (Decree 68-86) is the main law regulating environmental matters in general, providing that any activity that creates an environmental impact must have an approved environmental impact assessment (EIA) study by the Ministry of Environment and Natural Resources (MARN).
In addition to the above-referred law, the MARN has enacted several regulations specifying the different EIA studies for different projects and how monitoring is performed by the MARN.
There are several other environmentally related laws and regulations that mining projects need to observe, such as the Forestry Law (for obtaining tree-cutting permits), Protected Areas Law, Health Code, residual water discharge regulations, solid wastes regulations, archaeological regulations, etc.
Exploitation licences require a full-scale environmental impact assessment study. The holder of the mining permit must comply with all the mitigation measures contained in the study plus all the recommendations and covenants imposed by the Ministry of Environment and Natural Resources when authorising any given project.
In addition to the MARN, the Ministry of Energy and Mines (MEM) has an independent environmental unit and each monitors mining activities separately. In some cases there is an overlap between the MARN and the MEM and they sometimes have different criteria.
Exploration and exploitation licences both require a separate EIA. The standard of an EIA for an exploitation licence is stricter and the EIA must be more comprehensive, requiring a public consultation procedure that is different from the ILO 169 consultation. Preparing an EIA for an exploitation licences and getting it approved by the MARN is a lengthy process that can take over a year (or even longer). The MEM requires an approved EIA by the MARN before being able to grant an exploitation licence. This is not the case for an exploration licence, although an exploration project requires both permits (mining licence and environmental permit) before explorations operations are undertaken.
Although the MARN has offices in different provinces to review and approve EIAs for projects in the provinces, EIAs for exploitation projects are reviewed and approved in the MARN’s headquarters in Guatemala City, since exploitation projects fall into the strictest category.
Environmental authorities are generally strong and strict and, for mining projects, even stricter than for other type of projects. The MARN usually does two random inspections per year of each project to supervise compliance with all commitments contained in the EIA and the resolution that approved that EIA.
The MARN’s laboratories have limited capabilities and for this reason, when a specialised analysis is required, the MARN sends samples to third-party laboratories in Guatemala, or abroad if the local laboratories cannot provide the required service.
There are protected areas in Guatemala, where exploration and all mining activities are generally prohibited in the core zone of a protected area. Other zones of a protected area have less stringent restrictions, where some mining activities are allowed.
The history of the first protected areas of the country began in May 1955, when the then President of the Republic, Carlos Castillo Armas, declared the first protected areas of Guatemala.
From 1955 to 1988, 69 protected areas were declared, as follows: Tikal, Atitlán, Río Dulce, Sipacate-Naranjo National Parks, the Mario Dary Rivera, Cerro Cahuí Biotopos, the volcanoes and closed areas. Although the first national parks and definitive closed areas were established after 1955, other protected areas were created over a long period that are currently part of the Guatemalan System of Protected Areas - SIGAP. In February 1989, the creation of the institution responsible for the management of protected areas became a reality. Decree Number 4-89 of the Congress of the Republic promulgates the Law of Protected Areas, which supports the creation of the National Council of Protected Areas - CONAP. This institution is assigned the responsibility of establishing, co-ordinating and managing the Guatemalan System of Protected Areas - SIGAP - and the conservation of the country's Biological Diversity. The SIGAP is made up of all those protected areas and the entities that manage them, regardless of their management category or their management effectiveness. Presently, the SIGAP has 339 protected areas that were generally declared to protect areas of scenic beauty, cultural traits or to protect vegetation or wildlife.
The Protected Areas Law has undergone two reforms, established in Decree Nos 18-89 and 110-96 of the Congress of the Republic of Guatemala. In 1990, the President of the Republic of Guatemala approved Government Agreement No 759-90, establishing the Regulations of the Protected Areas Law.
This is a critical aspect for any mining project which gains more relevance on a daily basis. Although mining projects require two basic statutory permits, a mining licence and an environmental licence, there is a third basic permit not expressly regulated by law and commonly referred to as the “social licence”. To ensure the viability of a mining project, close and diligent attention to obtaining and maintaining this approval is required, and this can only be achieved by working closely with the local communities and local stakeholders.
Nowadays, one of the most critical departments of a mining project is the community relations department, which should engage with the communities as early in the project as possible. The success of a mining project will greatly depend on how effectively the relationship with the communities is managed.
Mining projects in Guatemala are faced with the challenge of defining the optimal scope of the geographic area of the communities being actively monitored and engaged by the project company. In most cases, the communities immediately surrounding the project are the most actively addressed by the project company and hence, usually show a strong support for the mine. However, this is not always the case with communities further away from the project, which are more prone to object to the mine on the grounds that they do not see any benefit for themselves. This jealousy is in many instances promoted by anti-mining NGOs that seek the weakest link in the project to advance their agendas.
Community relations should not be confused with corporate social responsibility (CSR) which nowadays is a “must-have” for any serious mining project aiming to achieve sustainability.
Where the local communities are comprised of indigenous people (which in the case of Guatemala covers most of the country), the communities have to be consulted according to the International Labour Organization, Convention No 169 (ILO 169). For this purpose, a consultation procedure must be carried out, where the participation of the community, the government and the investor is required.
Prior and informed consultation is mandatory and it shall be carried out by the state with the participation of the investor, the state, communities and other players, as provided in a recent ruling of the Constitutional Court.
Pursuant to a recent ruling by the Constitutional Court, Congress is urged to regulate the ILO 169 consultations, and in the meantime, the public consultation procedure shall follow the guidelines issued by the Constitutional Court.
Guidelines for ILO 169 public consultations set forth by the Constitutional Court are as follows:
(a) comply with all criteria and standards applicable to public consultations;
(b) achieve and create an atmosphere of mutual trust and respect between the parties;
(c) ensure that the process shall be absolutely transparent, without omitting any information that could affect the rights and decision of the indigenous groups.
(d) ensure that, before approving any project that affects the lands or natural resources in the territories of the indigenous groups, they shall decide and eventually consent to the projects in a free and informed manner, without pressure, fear of persecution, extortion, coercion, tergiversation of the information, deceit or any other trick that could annul their decision or consent;
(e) avoid any action that could disintegrate the social cohesion of the indigenous groups, such as secret or parallel discussions with certain leaders or individual persons of the community.
(a) the Ministry of Environment and Natural Resources shall send the environmental impact assessment study of the project to the Ministry of Environment to establish which communities could be affected by the project;
(b) the Ministry of Energy and Mines shall call a meeting through all communication means with coverage in the area of the project, in Spanish and in the local language;
(c) the Ministry of Energy and Mines shall also call, at least, the following entities, so they can appoint two representatives and two substitutes to do the preliminary work of pre-consultation:
(i) municipal council;
(ii) indigenous communities through the corresponding Provincial Council for Urban and Rural Development);
(iii) ministry of Culture and Sports;
(iv) ministry of Environment and Natural Resources;
(v) board of the local linguistic community;
(vi) COCODE (Communal Councils for Development);
(vii) developer of the proposed project;
(viii) representative of the Human Rights Office; and
(ix) representatives from the San Carlos University (state university) and the private universities that form the Provincial Council for Development.
(d) once the representatives of the above have been appointed, the pre-consultation phase shall take place, in order for all participants to give an initial presentation, providing objective, true and pertinent information about the implications of the authorisation of the project being sought by the developer;
(e) all appointed participants shall jointly design the specific procedure to carry out the public consultation process for that particular project. This is a flexible procedure, but shall contain, as a minimum:
(i) procedures that can be made in good faith and that aim to achieve consensus and agreements among the actors of the process (the Ministry of Energy and Mines, the indigenous communities of the area of influence of the projects and the developers of the projects);
(ii) effective means to transmit the information, regarding the authorisation to use natural resources (with respect to the developers), and regarding the local institutions, consuetudinary practices and values (with respect to the indigenous communities);
(iii) a dispute resolution mechanism for possible disagreements among the participants of the consultation process.
(iv) scheduling of the consultation procedures, designed pursuant to reasonable timings for undertaking them, taking into account concrete opportunities for the participants to pronounce themselves about the proposals being made, probable dates for the pre-agreements to materialize, and a form to systematise the agreements reached and follow up to achieve their fulfilment;
(f) once the pre-consultation has been realised, the consultation process in strictus sensus shall begin, where the different actors shall begin a dialogue, aiming to arrive to agreements through their representatives. Any party can request that the Human Rights Office representative act as facilitator, conciliator or mediator to assist in arriving at an agreement;
(g) once agreement has been reached, the government and municipal authorities shall define, or if applicable, authorise the forms and requisites to guarantee the compliance of the agreements;
(h) The entire process shall be completed within a term of no more than 12 months.
There are specially protected communities. Mining rights in areas occupied by indigenous groups require that a public consultation be carried out by the government before the licence is granted, as per International Labour Organization Convention 169 (ILO 169).
This has been a sensitive issue in recent years because although Guatemala is part of ILO 169, it has not yet issued internal legislation to regulate how ILO 169 consultations are to be performed. In some cases, the Ministry of Energy and Mines has undertaken such consultations using an ad hoc procedure and in other cases mining rights have been granted without a consultation being performed by the government. In the latter cases, the applicant has performed private consultations in lieu of the government’s consultation. The Constitutional Court has said that only the government consultation is valid; it has exhorted Congress to legislate the ILO 169 consultations and has set guidelines for performing these consultations until Congress regulates ILO 169.
Community development agreements are more common every day. They are not regulated and vary widely as to form and scope. In the context of ILO 169 consultations, the agreements between the community and the mining company are considered mandatory.
ILO 169 consultations are no longer static, ie, carried out before the mining licence is issued without further monitoring or updating. These consultation processes are dynamic and should be reviewed and updated periodically. The same happens with community development agreements to foster the continued support of local communities.
The Marlin mine, a gold mine located in western Guatemala near the Mexican border ended operations and is the first mine to implement a comprehensive closure programme that will be implemented over the course of several years. They have worked together with the mining and environmental authorities and have promoted the enactment by the authorities of environmental guidelines for mine closures.
Informal mines for jade and construction materials that carry out mining activities in an empirical way and in many cases without a licence.
Metallic mining in Guatemala is mostly undertaken by subsidiaries of foreign companies that are usually traded in foreign exchanges and in many instances most comply with World Bank standards in addition to local regulations. These projects usually have a strong environmental department and compliance policies that ensures good environmental practices.
The Fenix mine, a nickel mine located in eastern Guatemala was issued an exploitation licence in 2006. Although Guatemala has not implemented internal regulations for the implementation of ILO 169, the licence-holder requested that the Ministry of Energy and Mines perform an ILO 169 consultation before the exploitation licence was granted to prevent future allegations that the consultation was omitted. The Mining Office made an ad hoc procedure for carrying out this consultation between 2005 and 2006 before granting the licence. When the Constitutional Court set the guidelines for doing the ILO 169 consultations in lieu of Congress enactment of the required regulation, the licence-holder requested the Ministry of Energy and Mines to update the consultation in order to adopt the new standard, and that update was made in 2018 and 2019. This project enjoys good support from most of the local communities as they have benefited from the mine.
The La Puya mine, a small gold mine in central Guatemala has received strong resistance from local communities and the project is currently suspended by court order. This project was unable to engage with the necessary communities to promote a constructive dialogue and although they did have support from the communities located immediately within the licence area, the communities located farther away opposed the project.
Mining projects for construction materials generally do not have problems with local communities. The opposite occurs with projects for metallic mines which in most cases are owned by foreign companies. In these projects, the communities located close to the project usually support the mine, but the communities located farther away are easily manipulated by NGOs to oppose the projects.
The Guatemalan government through the Ministry of Environment and Natural Resources (MARN) created the Unit of Environmental Information and Climate Change to implement the National System of Information on Climate Change. It is not specific to the mining sector but it certainly includes it.
There is no climate change legislation specifically related to mining and as far as is known there are currently no discussions specific to the mining sector.
Guatemala is part of EITI (Extractive Industries Transparency Initiative - https://eiti.org/guatemala), which is the global standard to promote the open and accountable management of oil, gas and mineral resources. It is guided by the belief that a country’s natural resources belong to its citizens; the EITI standard requires the disclosure of information along the extractive industry value chain, from the point of extraction to how revenues make their way through the government, and how they benefit the public. By doing so, the EITI seeks to strengthen public and corporate governance, promote understanding of natural resource management, and provide the data to inform reforms for greater transparency and accountability in the extractives sector. In each of the 52 implementing countries, the EITI is supported by a coalition of government, companies, and civil society. This includes how licences and contracts are allocated and registered, who are the beneficial owners of those operations, what are the fiscal and legal arrangements, how much is produced, how much is paid, where those revenues are allocated, and what the contribution to the economy is, including employment.
The tax system of Guatemala is a unitary system, where income of all kinds, other than capital gains, is agglomerated and is subject to a single tax. The components of gross income subject to tax are usually business income, interest, dividends, rent, salaries, and services. Companies are subject to income tax only on their Guatemala-sourced income.
The mining activity is subject to income tax, value-added tax and import tax. Paid royalties are considered as an expense and are deductible from income tax.
Mining companies can choose from any of two basic income tax regimes: 7% on gross income, or 25% on net income.
There are no restrictions for repatriating capital; however, a 5% income tax is levied on dividends, irrespective of whether they are distributed to local shareholders or remitted to foreign investors.
Holders of exploitation mining rights are required to pay a 1% royalty in January of each year, calculated on the production of the previous years. The 1% royalty is divided as follows: 0.5% for the central government and 0.5% to the municipality where the mining activity took place. These royalties are revenue-based. Guatemala makes no distinction on how national and foreign investors are taxed, as they are treated equally.
Royalties are calculated and paid based on the value of the commercialised mining product, ie, royalties are triggered when the mining product is sold as opposed to when it is extracted. For the purposes of considering whether mining activities are being carried out, the extraction of mining material is sufficient and it is not necessary to commercialise the mining product.
The Guatemalan tax system does not recognise carrying losses forward, ie, the loss on one year cannot offset the profit of following years for income tax purposes. However, investments made during the years prior to the beginning of exploitation can be accrued and, once exploitation begins, they can be amortised in five equal and successive annual quotas, beginning on the year exploitation started.
The owner of a mining right may import, free of tariffs and duties, inputs, machinery, equipment, spare parts, accessories, materials and explosives, which are used in their mining operations.
In Guatemala, there are no specific tax incentives for mining projects and there are also no tax-stabilisation agreements available. There is currently a bill in Congress for tax-stabilisation agreements, but it is unclear when or if it will be approved any time soon.
If the holder of the mining right exports most of its output, it may apply to import, free of tariffs and duties, inputs, machinery, equipment, spare parts, accessories, materials and explosives, which are used in their mining operations. The beneficiary of this benefit would need to pay the exonerated fees and tariff rights if he or she uses or disposes of imported goods for purposes other than those of his or her mining operations, unless the acquirer was the State or another person who enjoys the benefits of the exemption. Five years after the settlement of the import policy, the beneficiary may freely dispose of the exempted assets.
The transfer of a mining licence via a contribution to the capital of another company is not subject to transfer tax, whereas the transfer of the licence via a direct assignment is subject to a 12% value-added tax on the amount of the transfer. In both cases the assignor or transferor is subject to capital gains tax of 10%. These tax levies do not necessarily apply when the transfer happens through corporate structures two layers above and outside Guatemala.
The main features of attracting investments are the existence of several metallic and non-metallic exploitable minerals. Also, generally, the development and operating costs for mining projects in Guatemala are lower than in other countries, considering the following factors:
Foreign investment for mining projects requires no approval and there are no foreign investment restrictions for mining projects. Foreigners are afforded the same status as local investors and are treated equally. In cases where the investment originates from a country that has a bilateral investment treaty for the mutual protection of investments, the foreign investor is in a better situation than the local investor because, in the event of an adverse situation by the host country, it can procure the available remedies under local law or promote an investment arbitration dispute in a foreign forum.
There are no multi-lateral or bilateral investment treaties (BITs) specifically for mining. However, there are bilateral treaties that protect foreign investments in general, including exploration and mining, with the following countries: Germany, Argentina, Austria, Belgium, Luxembourg, South Korea, Cuba, Spain, Russia, Finland, France, Israel, Italy, the Netherlands, the Czech Republic, Sweden, Switzerland, Trinidad and Tobago.
These BITs generally include equal treatment and no discrimination provisions with local investors and provide the investor the possibility to sue the host country under the ICSID Convention (Convention on the Settlement of Investment Disputes between States and Nationals of Other States) or similar procedures when the investment has been jeopardised through expropriation measures or measures tantamount to expropriation.
The main sources of financing are private funds raised in the international markets. Funding is usually provided by the parent company which is in turn raised through the stock market when the project is in its early stages. Once the project has achieved significant progress, funding for the construction of a process plant and bringing it to operating status is often obtained through syndicated loans or bond issuances in the international market. Working-capital lines of credit can normally be obtained in the local financial market.
Although Guatemala has a local securities exchange, it is very small and insignificant; equity is hardly traded at all and debt instruments are mostly issued and trade by local financial institutions.
In the early stages of a mining project being developed by a junior company, capital is raised in private placements, OTC transactions or venture exchanges. Once the projects have achieved a certain progress, the parent company of the project developer can opt to list its shares in a bigger exchange such as the TSX, NASDAQ or NYSE or they merge with a bigger company already listed in such exchanges.
For exploration activities, funding is usually provided by the parent company, as third-party financing or funding is unlikely due to the high risk inherent to such projects at that stage and their inability to offer positive cash-flow for the service of debt. For the exploitation phase, funding is available through syndicated loans and/or bond issuance in the international market.
Generally, when financing mining projects, security is done in two tiers, the on-shore level and the off-shore level. On the on-shore level, a security interest is created on all the main assets of the project, which include:
In many instances, lenders prefer security trusts to mortgages because the foreclosure procedure is more expeditious.
At the off-shore level, the shares of the holding companies (Guatemalan companies require at least two shareholders or partners) are also pledged or put in trust, as well as the bank accounts and account receivables.
The general objective is to provide lenders with an expeditious mechanism to take control of the project company in the case of default (after the agreed cure periods and mechanisms have been exhausted) knowing that in all likelihood the individual assets will not be foreclosed (because foreclosure will likely take place at the holding level structure) but at the same time allowing for the individual assets to be perfectly locked through the security interest put on each asset.
The past two years have posed significant challenges to the mining sector because, although the sector has received support from the central government, the higher courts have been very hostile to the sector by suspending mining rights on the grounds that no ILO 169 consultation took place (or in the cases where it did take place, that it did not comply with the standards recently set forth by the Constitutional Court).
In January 2020, a new President and Congress will take office for a four-year term, and the mining sector anticipates that the new authorities from the central government will continue to support them and that the new Congress should enact the ILO 169 consultations regulation soon. This should dissipate the current uncertainty around the effects and scope of ILO 169 consultations.
The mining sector is optimistic that in the next couple of years new projects will begin commercial operation, enhancing the importance of this sector in the Guatemalan economy, which currently represents about 2% of GDP, with a potential to increasing it to 4%+.