Mexico’s New Mining Laws: Additional Complexity, Government Control, and Increased Country Risk Requires Investment Protection Planning

Private investors in the Mexican mining sector will now be required to navigate a whole set of new and complex rules during the entire life of a mine, all of which will provide the government with unprecedented control over the country’s mining and water resources.

This client alert addresses the current Mexican government’s mining policies that are based on “resource nationalism”, the impact of the new mining legislation which has increased legal uncertainty and created an environment posing a higher risk for private investors making long-term investments in mining, and as well the critical importance of ensuring that investment protection planning is undertaken at the outset and revisited throughout the life of the investment in order to access neutral international dispute resolution mechanisms.

Resource Nationalism and Increased Risk

The current government has been critical of mining companies and the overall sector. This negative view of the industry was reflected immediately upon AMLO assuming power in December 2018. Starting in 2019, the granting of new mining concessions was suspended on the basis of the president’s opinion that the previous governments had issued too many mining concessions. This was followed by a ban on the issuance of mining concessions to private investors for lithium exploration, reserving this activity exclusively to the state.

The most recent legislative reforms reflect the president’s goal of curtailing the number of concessions granted and allowing for many more circumstances in which the government can terminate concessions. To the extent that Mexico already suffers from negative foreign private investor experiences in relation to legal and political uncertainty, lack of support from the government in resolving mining conflicts and disputes, aggressive tax enforcement, weakening the tax ombudsman’s office, hollowing out of the previously experienced mining bureaucracy on the grounds of austerity, exacerbating the lack of coordination between government agencies, and a judicial system that is ineffective in promptly and fairly resolving disputes, the new legislative measures will reinforce the view that carrying out mining in Mexico is now far more challenging than it was less than a decade ago and carries a higher level of risk.

These legislative changes will make it extremely difficult for mining companies to make long-term investment decisions, given the risks posed by the multiple approvals needed from government authorities over many decades. Initial estimates from Mexico’s mining business chamber indicate that the new laws could cost the country approximately 9 billion USD in investments and up to 420,000 jobs.

The impact of these amendments will disproportionately fall on Canadian private investors who collectively represent 70% of all foreign investment in the Mexican mining sector (based on 2020 data), followed by 11% from the US and 4% from China. Many of these investments were made at a time when Mexico was considered a hospitable jurisdiction for mining.

These new legislative measures in addition to limiting the flow of private foreign investments in the mining sector — will also adversely impact the universally accepted climate change objectives.

Many of the minerals mined in Mexico, including silver and copper, are critical for energy transformation towards renewable sources. When coupled with Mexico’s insistence that its domestic oil sector should continue to be favored and prioritized over the renewable energy sector (thereby unfavorably impacting foreign investments made due to the positive conditions created by the 2013 reforms), clearly confirm that Mexico’s “resource nationalism” goals are bring prioritized at the expense of achieving the universally accepted goals of reducing the production and use of carbon-based energy.

Complexity and Discretionary Decision Making

The new legislation contains far-reaching alterations to the existing Mining Law, the National Waters Law, the General Law of Ecological Balance and Environmental Protection, and the General Law for the Prevention and Comprehensive Management of Wastes and will significantly modify the laws related to obtaining concessions, transfers of concessions, operational issues, term and expiration of mining and water concessions, the management and disposal of mining waste, and closures of mines.

Additionally, the government’s ability to reverse its own decisions based on public interest grounds, including terminating mining and water concessions, has been made easier, even if the grounds for termination were not present at the time of the initial decision and the circumstances prompting the termination are beyond the control of the private investor.

These onerous measures were pushed through at the very end of the legislative session without debate or input from the opposition party or key stakeholders. As a result, foreign investors have been shocked by the breadth of the changes and, even more so, by the speed with which the government implemented these legislative changes without any consultations.

Summary of Legislative Amendments

While many of these legislative changes are expected to be applied prospectively, they will also impact current mining operations and existing investments. They can be summarized as follows:

1. Term of New Mining Concessions: The term of new mining concessions will be reduced from 50 to 30 years, with a possible one-time extension of another 25 years, totaling a maximum of 55 years. Previously, the initial term of a mining concession was 50 years, with a further extension of an additional 50 years, or a total of 100 years. While the mining concession term for those already granted prior to April 28, 2023, will remain unaffected for the initial period, any extension thereafter will be limited to 25 years. On the other hand, state-owned enterprises can obtain mining concessions without any term limits.
    
2. Bidding Process: Previously, investors that first applied and satisfied the applicable criteria could obtain a mining concession. The new law will require a public bidding process. It is likely that the bidding process will drive up the cost of the already limited supply of mining concessions and permit the government to extract additional commitments from investors.
    
3. Limits on Concession: The new law will limit mining concessions to specific minerals or substances to be explored and exploited, rather than all minerals found within the concession area.
    
4. Transfer of Concessions: The new law will require authorization from the Ministry of Economy, whereas under the previous law, there was simply a registration obligation.
    
5. Additional Requirements: Onerous obligations for mining companies will continue after obtaining mining concessions. Specifically, the mining company must obtain: (1) a Social Impact Authorization; (2) Authorization of the Mine Closure Plan and the Restoration, Closure, and Post-Closure Program; (3) the Concession Title for the Use of National Waters specifically for industrial use in mining; (4) a Guarantee to cover for possible damages; and (5) any additional authorizations required by law.
    
6. Reporting: Several incremental reporting obligations will need to be satisfied, including submitting annual reports of works and activities of ore processing plants, notification of the beginning of activities, and giving notice of accidents, etc.
    
7. Social Contribution: Legal obligation has been imposed to disburse 10% of mining profits to local communities.
    
8. Water Extraction: Water extraction permits with be subject to oversight by the Water Authority, which will have the ability to alter the available water used for mining relative to the total availability for other uses.
    
9. Environmental Restrictions: Mining concessions will not be allowed in protected natural areas where local populations or water availability may be at risk.
    
10. Consultation with Stakeholders: Consultations with indigenous and Afro-Mexican communities will be a legal obligation.

While the focus of this client alert has been on the changes to the mining and ancillary laws, there are many other administrative and criminal law measures that have already been implemented or proposed to be implemented, that will have drastic consequences on the economic stability and predictability of investments made by private investors in Mexico whether in mining, energy or infrastructure.

These measures claim to be aimed at fighting corruption, protecting public finances (e.g., challenging what the government determines are aggressive tax planning arrangements), combatting actions detrimental to the public interest (broadly interpreted), and retroactively revoking administrative acts based on subsequent events, criminalizing the employment of former public servants, and limiting claims for compensation made against the government in either domestic or arbitration proceedings.

Investment Protection and Planning

In light of these and other past developments in Mexico, well-managed and prudent foreign investors in Mexico, including those in sectors other than mining (e.g., energy and infrastructure), with current and planned investments in Mexico, should conduct a thorough review of the risks to which they are likely to face from adverse government measures.

Foreign investors should also plan to implement or enhance their risk mitigation strategies, including, where possible, reinforcing their ability to rely on investment protection treaties and trade agreements containing these investor-state arbitration mechanisms to challenge arbitrary, discriminatory, unlawful, and generally unreasonable actions by the Mexican government.

Even in instances where foreign investors decide not to pursue a claim to the point of seeking arbitration to resolve a dispute, the availability of these legal investment protection instruments can provide negotiating leverage against government measures that breach international law commitments.

Investors should also consider that not all investment protection treaties and agreements are the same. With proper advanced planning, a corporate ownership structure can be implemented to optimize the use of available investment treaties. Furthermore, over time new investment treaties are ratified and implemented and other treaties are modified or terminated. Therefore, investors should undertake a regular “tune-up” check to ensure that they are receiving the best investment protection possible in their circumstances. Mexico has an extensive network of investment treaties and trade agreements, which makes proactive planning to obtain the best available protection very much feasible.

ArentFox Schiff LLP has represented private investors under NAFTA in bringing claims against the United Mexican States and is involved in an ongoing arbitration on behalf of a Canadian mining company.