In 2018, Mexico’s mining sector represented 8.3% of the industrial GDP and 2.5% of the national GDP, providing over 379,000 direct jobs and two million indirect jobs. Due to its mining potential, Mexico is the fourth-largest recipient of foreign direct investment (FDI) for mining worldwide and the second largest in Latin America: mining-related investments representing USD1.4 billion, out of the total USD32.7 billion of FDI to Mexico.
Mexico ranks among the top ten world producers of silver (the largest producer, with 22.59% of worldwide production), celestite, fluorite, bismuth, wollastonite, molybdenum, lead, diatomite, cadmium, graphite, baryte, salt, gypsum, manganese, zinc, gold (eighth-largest producer with 3.83% of worldwide production) and copper (ninth-largest producer with 3.62% of worldwide production). In 2018, Mexico’s mining production amounted to USD12.57 billion, with precious metals (silver and gold) representing USD5.66 billion (45% of total production) and non-ferrous minerals (lead, copper, zinc, bismuth, cadmium, molybdenum and selenium) USD4.97 billion (39%).
From a geographical perspective, eight states (Guanajuato, Sonora, Durango, Chihuahua, Jalisco, Zacatecas, Campeche and Coahuila) concentrate 65.7% of mining production. It is worth noting that, in recent years, various projects (including gold-oriented exploration and extraction activities) have been developed in the south of the country, mainly in the states of Guerrero and Oaxaca, with significant potential.
The Mexican legal system is civil law-based. The main sources of mining legislation are the Mexican Constitution (Constitución Politica de los Estados Unidos Mexicanos), the Mexican Mining Law (Ley Minera), its Regulation (Reglamento de la Ley Minera) and the Federal Duties Law (Ley Federal de Derechos) (the Mexican Mining Legislation). Generally, the Mexican Mining Legislation provides the legal framework applicable to the performance of exploration and extraction activities in Mexico.
The Mexican Constitution provides the principles governing the ownership of land and natural resources, including minerals, obtained from that land. In addition, the Mining Law and its Regulation provide, among others:
The Federal Rights Law stipulates the amount of the duties that shall be paid as a result of the exploration and extraction activities of mining lots.
While the Mexican Mining Legislation provides the main legal framework governing mining activities, other laws and regulations apply to mining activities and related activities, such as, among others:
It is worth mentioning that the Mexican Mining Legislation does not regulate the exploration and extraction of hydrocarbons and radioactive minerals, for which another set of regulations is applicable.
Based on the provisions of Article 27 of the Mexican Constitution, ownership of the mineral resources extracted from Mexican territory belongs to the Mexican nation. The exploration, exploitation and benefit by private Mexican individuals or entities organised under the laws of Mexico and registered in the Public Mining Registry (the Authorised Persons) shall only be performed through mining concessions. Once the concession has been granted, the concessionaire is the owner of any mineral located within the territory over which the concession is located, without limiting the type of minerals that may be extracted or the depth to which that extraction may occur.
The Federal Executive branch, through the Ministry of Economy (Secretaría de Economía), the General Bureau of Mines (Dirección General de Minas), Mexican Geological Services (Servicio Geologico Mexicano), the Mexican Mining Public Registry (Registro Publico de Minería) and multiple subordinate agencies (the Mexican Mining Authorities) is responsible for the application of the Mexican Mining Legislation.
Considering the foregoing, and pursuant to the Mexican Mining Legislation, the role of the Mexican state in mining activities in Mexico is a grantor-regulator role. Once the concession is granted, the Mexican Mining Authorities are not directly involved in the performance of mining activities. That being said, the Mexican Mining Authorities would still be in charge of verifying that the concessionaire complies with the applicable regulations, and would therefore be entitled to revoke or suspend the concession and/or sanction the concessionaire. As an exception, the Mexican government, through the Mexican Geological Service, may participate in shared risk investments for exploration activities.
Mineral rights, deriving from the constitution and the law, grant the concession-holder the right to explore and extract minerals over the surface where the concession is located. It is relevant to mention that mining rights do not include, per se, any ownership right over the land where the concession is located. In other words, in order for a concession-holder to be able to explore and extract any mineral within the territory of its concession, that holder shall secure independently the surface rights to do so with the actual owner of the land through the acquisition of ownership, lease, easement or temporary occupation agreements. In the event that the concession-holder is unable to reach an agreement with the relevant landowner, the Mexican Mining Legislation offers the possibility to request to the Mexican Bureau of Mines, through an administrative proceeding, either the expropriation of the land or the forced execution of a temporary occupation agreement. If granted, the concessionaire shall ensure that a minimum level of operation is performed in order not to have its surface rights revoked by the Mexican Bureau of Mines.
In order to hold a mining concession, the Authorised Person shall either (i) request such a concession to the competent administrative delegation of the General Bureau of Mines, depending on where the concession is located, or (ii) acquire from a third party an existing mining concession. Mining concessions are granted by the General Bureau of Mines on a first-come, first-served basis, as long as the soliciting Authorised Person complies with all the filing obligations for this purpose and pays the relevant fees, and the mining concession is located in an area where exploration and extraction operations would not conflict with other activities considered more critical, such as the exploration and extraction of hydrocarbons or the production and provision of electricity. As an exception to that which has been previously mentioned, for mining lots where the Mexican Geological Services has already performed exploration activities, and therefore has been able to confirm the existence of mineral resources, the acquisition of mining concession over such lots would take the form of an auction process whereby the Authorised Persons will make an offer to the General Bureau of Mines, including the payment of a percentage royalty fee over the minerals extracted for a certain period of time, and the General Bureau of Mines shall choose to grant the mining concession to the offer that is the most advantageous for the country. It is important to note that, when considering whether to grant a mining concession, the General Bureau of Mines will take into account whether a local indigenous community would be willing to take part in any such mining activities and will favour any request coming from those local communities over private initiatives.
Under Mexican Mining Law, mining concessions are granted for a 50-year period, with a renewal option for an additional 50-year period if (i) the concessionaire is not in breach of any of its obligations and (ii) the renewal request is made within the five-year period preceding the initial expiry date. During that term, the concessionaire may perform exploration and extraction activities without needing to request any authorisation from the Mexican Mining Authorities in order to switch from one activity to the other. It is worth mentioning that mining activities (exploration and/or extraction) are to be effectively performed within a 90-day period from the date of registration of the granting of the concession with the Mining Public Registry, and the concessionaire must demonstrate to the General Bureau of Mines, through the filing of an annual work assessment report, that mining activities are actually performed. In addition, the concessionaire must comply with payment obligations of mining duties (see 4.1 Duties, Royalties and Taxes) and various filing obligation of statistical, technical and accounting reports to the Mining Public Registry, which mainly include the reporting to the Mexican Mining Authorities of the type and amount of mineral resources extracted from the concession. In the event of a breach by the concessionaire of any of its obligations, the General Bureau of Mines is entitled to cancel the concession if the concessionaire does not cure that breach within a 40-day period from the date of reception of the relevant breach notice.
As long as the concession is valid and enforceable, the concessionaire is entitled to transfer its rights over that concession to any Authorised Persons without needing the prior authorisation from the Mexican Mining Authorities. The assignment of the mining concession will be fully enforceable between the transferor and the transferee upon execution of an assignment agreement, but the transfer will be enforceable vis-a-vis third parties and the Mexican Mining Authorities upon registration of the assignment agreement with the Mining Public Registry. Although the assignment agreement may take the form of a private agreement to be enforceable between the parties, registration of the transfer with the Mining Public Registry requires that any such transfer be formalised in a public deed before a notary public.
If the concessionaire intends not to perform any mining activities and is not able to transfer it to a third party, that concessionaire is entitled to request the cancellation of the concession to the General Bureau of Mines, in order not to pay any fine resulting from the absence of mining activity in the concession.
Mining in Mexico is regulated for the most part by federal environmental laws and regulations. The General Law for Ecological Equilibrium and Environmental Protection (LGEEPA by its acronym in Spanish), sets forth the general environmental legal framework. Several regulations to LGEEPA regulate specific environmental aspects including environmental impact evaluation, prevention and control of air pollution, natural protected areas, among others.
Other relevant general federal laws that regulate environmental aspects of mining projects are the General Law for the Prevention and Integral Management of Waste (LGPGIR by its acronym in Spanish), which sets forth provisions which are specific to handling of tailings and other hazardous wastes specific to the mining industry, and the General Law for Sustainable Forestry Development, which regulates the modification of the forestry land use and removal of forestry vegetation.
The National Waters Law is also relevant for mining projects as it regulates the granting of concessions for the use of national ground or surface waters, as well as wastewater discharges.
The Federal Ministry of Environment has also issued several Mexican official standards that set forth environmental protection specifications for the development of specific aspects of mining projects, including exploration in specific areas and environments, construction, operation and abandonment of tailings dams, characterisation and elimination of tailings, among others.
The development of mining projects requires several environmental permits whether it be for exploration, exploitation or processing of minerals, as well as the construction and operation of tailing dams. The most important environmental permit is the Environmental Impact Authorisation that must be issued by the Ministry of Environment and Natural Resources or SEMARNAT. This authorisation must be obtained in advance of any works related to exploration or exploitation or processing of minerals and handling of tailings.
Mining exploitation will also normally require a Forestry Land Use Change Authorisation for the removal of forestry vegetation, which in theory is only granted by exception, concessions for the use of national waters and wastewater discharge permits. Plans for the processing of minerals will also require an Air Emissions Operating Licence from SEMARNAT.
The mining industry in Mexico had historically been a strategic activity for the Mexican Government and therefore, the implementation of environmental criteria to mining projects had been lax. The obligation to comply with environmental legislation was only included as an obligation for mining concession title-holders in the Mining Law in 2005. This meant that, before 2005, the holder of a concession title could be sanctioned by the mining authority or lose their concession title based on the breach of environmental protection regulations.
As social conflicts have arisen and environmental awareness has grown in the country, environmental authorities have become more active in enforcing environmental regulations in mining projects, although lack of personal and difficult access to certain mining areas makes enforcement more complicated.
There are 182 federal Natural Protected Areas or ANPs in Mexico, covering a total surface area of 90,839,521.55 hectares. ANPs are charged to the National Commission of Natural Protected Areas, or CONANP, which is an autonomous entity ascribed to SEMARNAT. There are seven categories of federal ANPs and each category establishes different types of restrictions, but in all cases the activities in the more permissive zones only allow human settlements, sustainable exploitation of natural resources, mostly by local communities, and public use areas.
ANPs are regarded as a modality imposed on private property by the federal government because the Decrees that create ANPs, their management programme, and the zoning for the area covered by it, dictate the type of activities that can be developed within each zone of the ANP and, more importantly, can prohibit or restrict the development of specific activities, including, of course, mining.
The creation of a new ANP over an area where mining projects already exist should not affect pre-existing operations; however, it can affect expansion projects or the ability of the concession title-holder to start exploitation of new areas which have not already been authorised from the environmental standpoint. It is arguable that pre-existing mining rights should not be affected by new ANPs, including areas which have not yet been exploited but are already included in the mining concession; however, this has been a controversial topic and courts have decided both ways in different cases.
Social issues related to mining projects have always been relevant, however; management of community relations is barely regulated in the Mining or Environmental laws and is mostly up to the developer of the project. The mining authority may sometimes act as a mediator upon the appearance of a social conflict and also promotes the participation of the community in the specific project, not only through the offer of jobs for local individuals but also the participation of the community in the economic benefits of the specific project. Notwithstanding, there are no specific regulations for handling community relations for mining projects.
Mexico is a signatory to and has ratified the ILO 169 Indigenous and Tribal Peoples Convention which, among others, sets forth the obligation for the State to conduct informed consultations with indigenous peoples for the development of administrative actions of projects affecting the rights of such communities. However, national legislation to implement the obligations resulting from this international agreement has only been enacted with respect to projects within the energy and oil and gas industries.
Notwithstanding, the federal governmental has developed protocols to implement informed consultation for all exploration and exploitation projects. These consultations for mining projects will be managed by the Ministry of Economy, with the participation of SEMARNAT, local and state governments and representatives of the indigenous communities.
However, the environmental impact evaluation proceeding includes a public consultation stage. This public consultation is not directed at indigenous communities but rather to all members of the community that may be affected by the specific project. The consultation needs to be requested by members of the community to SEMARNAT and is mostly developed in writing, although SEMARNAT may decide that the sponsor must carry out a public meeting of information at the affected community.
The public consultation under the environmental impact evaluation proceeding is more limited than an informed consultation and does address issues such as social impacts and the use of indigenous language, among others.
Mexico has a large and diverse indigenous population. The existence of these communities is acknowledged in the Federal Constitution, which also recognises the right of these communities to self-determination, to their land and to be governed under their own uses and traditions, in so far as these are not contrary to applicable law. Indigenous peoples are entitled and legitimised to challenge, through the federal courts, any acts from authorities which hinder their rights, which could include permits for the development of project which the feel affect their rights or livelihoods. Early and adequate community engagement become essential for a successful long-term mining project.
Another group which is governed by special regulations are the owners of social property or ejidos. The ejidos are areas of land for agricultural purposes which were granted in property by the federal government to a group of people or a community. Ejidos have their specific regulatory framework, especially with respect to the agreement granting the property, possession or the legal rights to property within the ejido to third parties. The Agrarian General Attorney is charged with protecting ejidatarios' rights and has powers to protect their rights and to make sure that third parties outside the ejidos do not abuse these communities.
Community agreements are not mandatory under Mexican legislation with respect to the development of mining projects.
It is possible that the mining industry may adopt the social impact evaluation and management tools that have been enacted for the energy and hydrocarbons sectors, which do require social development and management programmes which address the social impacts that the project will have; however, to date, while mining developers do tend to engage with the community, these types of agreements are not customary.
In recent years, social concerns have been incorporated as part of a project’s development, particularly in nascent mining ventures, in order to solve social issues and problems before they actually occur.
A perfect example of this good social practice was in an ongoing gold exploitation project in the state of Guerrero, where a thorough community outreach with neighbours was implemented, programmes and agreements thereto executed and even paid relocation when no agreement could be reached was made, all this before a single stone was moved. This project was streamlined into development and has not seen a challenge against it since the extraction phase started.
On the other side, a perfect example of bad social relations and engagement with the community was in the context of a gold-mining project in the Baja California peninsula, which was intended to be developed in the vicinity of a natural protected area that provides significant environmental and recreation services to the community at large.
In this case, no community consultation was undertaken and, to make matters worse, the environmental planning and mitigation programme for the project was tokenistic, formulated to comply with the law-provided standard (ie, the minimum requirements). Needless to say, this project has faced endless litigation and has yet to see the light of day.
What is also being seen in the sector is that older projects which have had ongoing operations for years, have had to invest a larger proportion of their income to prevent and solve environmental and social demands, as opposed to newer projects, which are created with these issues included as part of their business development model.
Mexico is a signatory to the Paris Agreement and has committed to reduce its greenhouse emissions by 22% by 2030; however, the bulk of emissions come from the energy and transportation industries. Most of the initiatives related to the adaptation and mitigation of climate change are directed towards the energy and industrial sector. With respect to the mining industries, the General Climate Change Law only establishes a general principle related to the promotion of projects for the use of gas associated to coal mines, but not much regulation has been developed to that effect.
The General Climate Change Law, its Regulations on matters of the Registry of Emissions the General Climate Change Strategy and other instruments that have been enacted by the Federal Government in connection with climate change are not specific to the mining industry; however, there some provisions which may affect all resource projects.
In particular, there is an obligation for all those industries which generate 25,000 tons of CO2 to report and verify their green-house emissions. Additionally, this year, SEMARNAT has launched the trial period of the Mexican Emissions Trading Scheme which will basically work like a cap-and-trade system. The trial period will last three years, in which there will be no economic consequences; however, participation of industrial and energy sectors which generate 100,000 or more tons a year of CO2 is mandatory.
Once the trial period is over, SEMARNAT will allocated emissions' allowances within industrial sectors to set the cap-and-trade scheme. The development of allowances auctions is also considered.
This new Mexican Emissions Trading Scheme could be a good opportunity for the mining sector to adopt more sustainable practices and technology and to benefit from the market that will be created.
Environmental issues and sustainable development are not at the highest level of priorities of the current government administration. However, efforts are being focused on regulating single-use plastics, climate change, and water issues.
Notwithstanding, with a focus on creation of jobs and community participation, the Federal Government, through the Ministry of Economy and the participation of the private sectors and state and municipal governments, has developed the Guides and Protocols for Sustainable Mining.
The Guides and Protocols cover topics such as safety, good practices for public consultation, best practices for community relationships, management of tailings, tax issues, water issues and industrial safety.
Performance of mining activities requires the payment of various duties to the Mexican Mining Authorities:
As mentioned previously, a failure to pay such duties could lead to the cancellation by the General Bureau of Mines of the concession.
Furthermore, mining concessions granted pursuant to the public auction process previously mentioned would usually pay an additional royalty fee (prima por descubrimiento) to the Mexican Geological Service, during the life of the concession. The percentage of this fee will depend on the offer made by the concessionaire when participating in the auction process and finally accepted by the General Bureau of Mines. The royalty fee is calculated as a percentage of the invoice value of the mineral resources extracted from the relevant concession and sold.
Finally, it is worth mentioning that, when acquiring a concession from a third party, the parties may agree on an additional royalty fee over the invoice value of the mineral resources extracted from the relevant concession, to be paid by the new concessionaire to the assignor.
Mexican law does not provide any incentive for the mining investors and projects, nor any tax stabilisation agreements.
Mining companies in Mexico are not treated differently from companies of other sectors; the corporate income tax is levied at a rate of 30% and a value-added tax (VAT) rate of 16% applies throughout the country. No specific would be applicable in the event of transfer of a mining concession, other than the taxation of the capital gains deriving from the transfer of the concession. For the sale of capital stock in a Mexican entity by a foreign tax resident, the transfer will be subject to taxation at a 25% rate on the gross proceeds. This tax is levied through a withholding, provided that the acquiring party is a Mexican resident or a foreign resident’s permanent establishment in Mexico. Otherwise, the foreign-resident seller is required to remit taxes due via the filing of an income tax return. Notwithstanding the foregoing, foreign residents may opt to pay income tax due on the transaction at a 35% rate on the capital gain (ie, net basis) provided that they comply with certain formal and procedural requirements under the applicable law. It should be noted that double tax treaties may provide relief in the form of reduced taxes rates or even an exemption thereto, insofar as the foreign-resident seller complies with the applicable requirements to claim treaty benefits under the relevant treaty. Lastly, it is worth noting that income derived by a foreign resident from an indirect sale of a Mexican entity could be subject to taxation in Mexico to the extent that 50% or more of the book value of the target entity’s capital stock consists of immovable property located in Mexico.
Mexico has not implemented specific features that would attract investment for mining activities. However, the country has an extensive network of free-trade agreements, which allows Mexico to have a preferential access to the markets of North America, the European Union, Latin America and Japan.
Pursuant to the Mexican Mining Legislation, concessions may only be granted to Mexican nationals, either individuals or legal entities. Although foreign entities or individuals cannot directly own mining concessions, they can indirectly own mining concessions through the incorporation of a Mexican company, provided that the share capital of that entity may be owned up to 100% by foreign investors.
Mexican entities with foreign investment shall be registered in the Foreign Investments National Registry, provided that the capital structure of the Mexican entity and information of its shareholders/partners may be required to be disclosed (and updated in the case of subsequent change) if the share capital of the entity is over a certain threshold. This registration is mainly for information purposes and, in principal, no authorisation is necessary in order to complete a foreign investment in a Mexican entity. However, prior approval of the National Commission of Foreign Investment (Comisión Nacional de Inversión Extranjera) is required for direct or indirect participation of foreign investors in the capital stock of Mexican companies if (i) such participation is greater than 49% of its capital stock, and (ii) the total assets of that entity exceed the monetary threshold fixed by National Commission of Foreign Investment (approximately USD1,000,000,000).
Mexico is not part of bilateral or multilateral treaties that specifically regulate mining activities; however, there are many free-trade agreements to which Mexico is a party and pursuant to which exportations and importations of goods, including minerals, benefit from an advantageous tax regime. As an example of the foregoing, Mexico has entered into a free-trade agreement with the United States of America and Canada under which most of the tax duties relating to exportation and importation of goods have been waived by those countries.
The main sources of financing for exploration, development and mining in Mexico come from financial institutions, whether national or international. Often, such financings are granted by a consortium of several lenders. In recent years, the mining industry in Mexico has also used the execution of streaming agreements as a form of financing. Streaming agreements are basically metal purchase and sale agreements, pursuant to which the purchaser of the metals (the streaming entity) pays in advance the consideration for those metals to the mining company, upfront or through the payment of instalments, in exchange for the right to acquire a specified amount of a specific refined metal, on a long-term basis. Streaming agreements in Mexico must be carefully drafted as the tax administration is controlling closely how the payments are qualified in agreements in order to apply to the relevant tax regime.
Finally, for small- and medium-sized companies, Mexican public entities may offer financing solutions. Bancomext provides a financial scheme dedicated to supporting the development of the mining sector’s export chain on a long-term sustainable basis, by offering loans and guarantees. Also, the Mining Promotion Trust (Fideicomiso de Fomento Minero) offers loans in order to finance the working-capital needs of the mining companies, the acquisition of machinery, the hiring of specific service-providers, the leasing of equipment or the repayment of existing credit facilities.
Although financing of exploration and extractions' activities in Mexico comes principally from bank loans, national and international securities markets participate to some extent to the development of mining activities. Various Mexican mining companies, including the leaders in the Mexican market, are admitted to the Mexican stock exchange. Some of these listed companies also raise debt in other markets, especially in the US debt market. With respect to foreign entities investing in Mexico, it is not uncommon that such entities raise capital in their home securities market in order to finance the development of mining activities in Mexico. In recent years, this has been the case for Canadian companies who are able to raise capital on the Toronto Stock Market in order to finance acquisitions of mining companies in Mexico.
Due to the long-term high-risk nature of any investment in the mining sector, financings granted to mining companies to develop their activities are typically guaranteed by a comprehensive security package. In addition to the usual guarantees, such as pledges over the shares of the operating entities or a mortgage over the land where the concession is located (when the concessionaire owns such land), it is very common that the debtor will also grant a pledge without dispossession over all of its assets. Such security would include the mining concessions that are held by the debtor. It is important to underline that, since under Mexican law concessions do not give any right over the surface of the mining plot, theoretically no mortgage may be granted over a mining concession. In order for the security over a mining concession to be fully enforceable, it is mandatory to have that guarantee registered with the Mining Public Registry, provided that in order to do so the pledge agreement will be notarised. It is worth mentioning that the Mining Legislation provides a specific exception in the event the pledgor is not an Authorised Person and therefore is not normally entitled to hold a concession. In this case, the pledgor who is not an Authorised Person would still be able to enforce the pledge and become the new concessionaire, provided that the pledgor shall transfer the concession to an Authorised Person within a one-year period from the adjudication of those rights.
From an economic perspective, the mining sector appears to be characterised by uncertainty for the future. Although the price of certain minerals (especially gold and silver) increased during 2019, the risk of economic slowdown worldwide may substantially affect the demand for precious minerals, such as copper, gold and silver, which are the metals principally extracted in Mexico. In addition, despite the announcement by certain mining companies that they were revising upward their estimated output of minerals (especially silver) for the 2019-2020 period and the increase of investment for exploration purposes by the leading mining actors on the Mexican market, the amount of minerals extracted slightly decreased from 2017 to 2018. Finally, the rise of insecurity, especially in the states where the mining projects are located, is not favourable to the attraction of new foreign investment.
From a legal perspective, the new government of President Andres Manuel Lopez Obrador has been sending conflicting messages to the mining industry. Indeed, Mr Obrador ran for president proposing an increase of the mining duties, a project that was abandoned once he was elected. However, in October 2019, a senator from the same political party suggested again that the rate of mining duties should be raised from 7.5% to 20-30% (a level equivalent to mining duties in Peru, Bolivia and Chile). It may be expected that this senator will propose in the near future a law initiative in this respect, as this idea has been generally positively received by the rest of the legislative chamber. Similarly, another law initiative was proposed at the end of 2018, which is now on hold, that would have required the completion of a thorough consultation process of surrounding indigenous communities for the construction and operation of mining projects. Given this tendency of the current government, it is not possible to discount the possibility that other initiatives could be studied in the future that would impact the mining sector negatively.