Mining in Mexico
The sovereign take
A new royalty rattles investors
BRADFORD COOKE runs his finger along a vein of ore rich in silver and gold and comes as near to purring as a veteran Canadian miner can. “This place has been mined for 450 years yet this little treasure box has been hiding less than 25 metres below ground,” he says. He points to the mine’s British manager, scrambling excitedly across the newly blasted rocks, and chuckles: “This is what Dave calls ‘horny’.”
But the object of their affection is rapidly tarnishing before their eyes. On October 30th, the day that Mr Cooke brought the board of his Vancouver-based company, Endeavour Silver, on their annual inspection of one of its three mines in central Mexico, the upper house of Congress approved a new mining tax proposed by the government of Enrique Peña Nieto. “If it goes through as is, our fourth mine will not be in Mexico,” declared Mr Cooke.
Mining is not the only industry up in arms over Mr Peña’s broad tax overhaul. In fact, there is hardly a business group that has not dispatched lobbyists to Congress in a forlorn attempt to soften its impact; from soft-drinks and food manufacturers who face a new anti-obesity tax, to manufacturing exporters (maquiladoras) who lose tax privileges, to pet-food firms hit by higher value-added tax.
The government needs to raise revenue in a country where tax avoidance is rife. The mining levy—a royalty of up to 7.5% on profits, plus 0.5% on revenue from precious metals—makes sense in principle. But it comes just when metal prices have swooned. For instance, Endeavour’s silver prices fell by 21% in the third quarter compared with the same period last year.
Miners say the royalty will threaten investment and jobs. Grupo México, a copper producer and conglomerate, said on October 28th that a $5.3 billion investment programme after 2014 could be redirected towards lower-tax jurisdictions, such as the United States, Canada, Peru or Chile. Rosalind Wilson, head of the Canadian Chamber of Commerce’s mining task-force in Mexico, says that in 2012 the country took 53% of the $1.9 billion raised on the Toronto Stock Exchange and its junior twin to finance mining in Latin America. In the first eight months of this year, the figure had fallen to 17%. “Mexico is completely pricing itself out of the market,” she says.
The finance ministry expresses surprise at the reaction but is unrepentant. It claims Mexico has been overgenerous in not charging any royalty. It disputes the industry’s assessment of the severity of the 7.5% tax, saying that there is a generous allowance for the depreciation of investment.
Mexico has seen a mining boom since opening the industry to foreigners in 1990. The result is evident at Bolañitos mine near Guanajuato, a town still resplendent from silver wealth dating back to Spanish colonial times. After taking it over in 2007, Endeavour increased the daily volume of ore it crushes from 50 tonnes to 2,000 tonnes. The “sovereign take”, as a member of the company’s board calls the royalty, means this kind of productivity-boosting investment may now come more slowly.
