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Once a popular destination for Canadian explorers, Mexico’s recent mining reforms are driving away investment — even as a looming Supreme Court decision is likely to toss out the new law, deemed by industry sources as unworkable.
The reforms introduced last May by President Andrés Manuel Lopez Obrador (known by his initials as AMLO), require pre-consultation with communities before exploration, impact studies and cash bonds in case of damage that junior explorers may find difficult to raise. Authorities can cancel exploration concessions after two years if no work is completed and critics say water allowances have become harder to get. AMLO has also nationalized the country’s still-developing lithium sector and proposed a ban on open pit mining.
“If you plot a graph of the discoveries and production of gold and silver in Mexico, it starts a very rapid upward climb year on year from 1992, when they opened up exploration to foreign companies. And now, what you’re seeing is a cliff,” the chief executive of a mid-tier silver mining company operating in the country told The Northern Miner. “And we’re going over the cliff because no one’s doing exploration. You don’t have future mines if you don’t do exploration.”
Canadian companies accounted for up to $8 billion in exploration spending and 70% of foreign investment in Mexico’s mining sector between 2012 and 2022, according to figures from the country’s mining chamber, Camimex. They’re eyeing next week’s Supreme Court ruling like a traffic light for project exploration and development.
They’ve already been hard hit by AMLO’s mining reforms, Exploration Insights mining analyst Joe Mazumdarsaid.
“People with exploration assets in Mexico have a hard time getting funded,” he told The Northern Miner.
Mexico’s mining production was valued at $16.7 billion in 2021, according to the U.S. Department of Commerce. Camimex says the new law will cost the country $9 billion in investment and 420,000 jobs.
Mexico mining law expert Santiago Suarez Sevilla says over 500 constitutional challenges (Amparos) have been filed against the law, with the Supreme Court recently issuing new guidance walking back some of the reforms and, in some cases, grandfathering those filing an Amparo from enforcement of the new rules.
AMLO’s term ends in November, but his hand-picked successor Claudia Sheinbaum leads the polls ahead of an election scheduled for June. Sources were divided on what a win for her could mean for miners.
Given the regulatory uncertainty, several companies and investors The Northern Miner spoke to declined on-the-record interviews. That uncertainty affects not just individual companies but the economic ties between Mexico and Canada.
One senior executive of a gold-silver miner in Mexico says the political noise created by AMLO’s mining and other reforms has overshadowed traditional investment concerns in Mexico, such as the influence of drug cartels and violence.
Mexico’s mining slowdown has been in the making for some time. Camimex says there has been a 51% fall in exploration investment to $572 million in 2022 from $1.2 billion in 2012 since fiscal reforms in 2013 removed tax incentives.
Since taking power in 2018, the AMLO administration has not granted any new concessions. And about a year ago, his Morena party shook miners when senators approved a new mining law in an accelerated late-night process that excluded opposition legislators.
Companies complain that the reforms have created disincentives for mineral exploration, introducing exploration and water resource management plans that amount to burdensome red tape, time, and money.
Perhaps the most controversial aspect for explorers is the stipulation that only the state can conduct greenfields exploration in partnership with the proponent. However, once a deposit has been proven, an open bidding process is still required, and the original proponent must match the highest bid to retain the concession.
That means there’s no security of tenure for exploration assets.
AMLO threw fuel on the fire in February, pushing a new constitutional amendment banning open-pit mining.
Such a decree could crush the sector since open pit mines generate more than 60% of Mexico’s mined production, Mazumdar says.
Top producers such as Grupo Mexico’s Buenavista del Cobre, Newmont’s (TSX: NGT; NYSE: NEM) Peñasquito, two of Fresnillo’s (LSE: FRES) gold-silver mines, and several others owned by Industrias Peñoles are open pit operations.
Mazumdar points out that the economics for many projects such as San Nicolas, a joint venture between Teck Resources (TSX: TECK.A, TECK.B; NYSE: TECK) and Agnico Eagle Mines (TSX: AEM; NYSE: AEM), are based on an open pit scenario. Agnico paid $580 million for half of the project last year.
GoGold Resources (TSX: GGD; US-OTC: GLGDF) has adapted its Los Ricos South gold-silver project to transition from a wholly open pit plan to underground mining initially. Other projects may never be developed if the open pit ban is implemented.
There are certain ironies to AMLO’s mining reforms. The apparent ban on open pit mines contrasts with the nationalization of lithium mining in Mexico early last year. Hard rock lithium mining is usually best suited for open pit, bulk mining methods.
One mining executive operating in Mexico noted the contradiction between populist AMLO’s advocacy for Indigenous and remote communities and his actions that undermine the mining sector.
Mines in Mexico, often located in remote areas, contribute to local development by building schools and hospitals, and providing job training and economic opportunities. Yet, AMLO’s policies are essentially “cutting the hand that feeds” the very people he claims to support.
Law expert Sevilla points out that AMLO’s proposed constitutional reforms need the support of two-thirds of Congress for approval. The Morena party and its coalition hold 273 of the 334 votes required for a qualified majority in the 500-seat Chamber of Deputies. In the 128-seat Senate, they have secured 71 of the needed 84 votes.
“Following this trend, we believe it will be very difficult for Morena to reach the necessary majority to approve constitutional changes in this and the next period,” Sevilla said. “The new mining law is highly unlikely to survive a challenge of unconstitutionality, a fate that open-pit mining also faces.”
In the upcoming election, Claudia Sheinbaum, the candidate for the ruling Morena party and its coalition, Let’s Keep Making History, is competing against Xóchitl Gálvez of the Broad Front for Mexico coalition.
Sources expect Sheinbaum to maintain the government’s hardline approach and the status quo. However, several see the potential for her to take a more moderate approach once in power, depending on how strong AMLO’s influence over her remains.
Though chances of forming a government are slim, the opposition is strongly pro-mining.
Camimex says, for its part, it is ready to work with the incoming government come November.
“As a business chamber and representatives of the mining industry in Mexico, we always maintain open channels of dialogue with the authorities with the aim of guiding and providing support in technical matters of public policies,” it said in a statement to The Northern Miner.
“We are currently working with the authorities to build communication bridges that allow them to learn about the best practices that the industry has.”
