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The Mining Industry in Mexico: A Long Tradition, A Promising Future
2 The Mining Industry in Mexico: A Long Tradition, A Promising Future
Mexico is one of the world’s largest producers of metals and minerals. Total output has risen sharply over the past two decades, reaching a peak of
over 60 million tons in 2014. The bulk of production is comprised by base metals and minerals, and non-metallic minerals. However, precious and non-ferrous metals are by far the most valuable, despite the recent volatility in international prices, representing over three-quarters of the country’s output’s value.
1The Mining Industry in Mexico: A Long Tradition, A Promising Future
Milliontons
Non-Metallic minerals Base Minerals & MetalsPrecious MetalsNon-Ferrous minerals
70
60
50
40
30
20
10
-1995 2000 2005 2010 2015
Mexico: Mining production by Type
Sources: INEGI, EY
Billion pesos
Non-Metallic minerals Base Minerals & MetalsPrecious MetalsNon-Ferrous minerals
1995 2000 2005 2010 2015
Mexico: Mining production by Type
Sources: INEGI, EY250
200
150
100
50
-
Compared to other producers, Mexico is in a privileged position on most of the main mining products. Overall, it ranks among the ten largest producers (2015). It is the principal silver producer, for example, with a share equivalent to over a quarter of global output.
At first glance, the industry is highly competitive, with over 500 companies holding roughly 25,000 concessions. In practice, however, activity is dominated by large firms. These account for an astounding 97% of main metals’ total output (gold, silver, copper, zinc and lead) and tend to dominate the most profitable niches, such as precious metals. Cumulatively, investment has risen sharply over the past decade. It currently hovers around US$5 billion per year —but well below the peak it reached in 2012.
Sources: INEGI, EY
Mexico: Mining production rank, Global 2015
Copper
Gold
Zinc
Lead
Silver
- 1 2 3 4 5 6 7 8 9 10
Mexico: Mining production share, Global 2015
Copper
Gold
Zinc
Lead
Silver
0% 5% 10% 15% 20% 25% 30%
2 The Mining Industry in Mexico: A Long Tradition, A Promising Future
1,000
27.0
26.5
26.0
25.5
25.0
Area
32
30
28
26
24
222012 2013 2014 2015
Mexico: Mining companies by size, 2014
Total
Small
Medium
LargeSources: CGM, EY
0 200 400 600
2014 2009Number Million hectare
Mexico: Mining concessions
Sources: CAMIMEX, EY
Mexico: Mining production share by company size, 2015
Medium & small
0% 20% 40% 60% 80% 100%
Large
Sources: CGM, EY
Mining is effectively concentrated in a handful of states, mostly located in northern Mexico and holding the bulk of the country’s most valuable resources. Sonora and Zacatecas, in particular, account together for 55% of the country’s aggregated mining Gross Domestic Product (GDP). Other northern states with significant mining activity include Chihuahua, Coahuila, Durango and San Luis Potosí. A handful of central states also mine, but are generally specialized in specific products of lesser value.
Sources: CAMIMEX, EY
Billion dollars
9
8
7
6
5
4
3
2
1
-
Mexico: Mining investment
2005 2007 2009 2011 2013 2015
3The Mining Industry in Mexico: A Long Tradition, A Promising Future
Nonetheless, compared to other sectors, the mining industry is relatively marginal in terms of its economic weight, representing only 1% of the country’s GDP, according to official data. By comparison, the other key extractive industry (oil & gas) is about five times larger. Similarly, the mining industry’s contribution in terms of exports and employment is relatively negligible compared to the country at large.
Mexico: Mining GDP by state
Millionpesos200
150
100
50
-
Sources: INEGI, EY
2003 2005 2007 2009 2011 2013 2014
San Luis Potosí
ChihuahuaZacatecas
Durango
Other
Sonora
Coahuila
México
2004 2006 2008 2010 2012 2014
Mexico: Mining GDP
Billion pesos170
150
130
110
90
70
50
Sources: INEGI, EY1.1%
1.0%
0.9%
0.8%
0.7%
Value % of country
1995 2000 2005 2010 2015
Mexico: Mining Exports
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
Value % of country
Sources: INEGI, EY
Billion dollars
500
400
300
200
100
-
2005 2007 2009 2011 2013 2015
Mexico: Mining employment
0.70%
0.68%
0.66%
0.62%
0.60%
0.58%
Employees % of country
1,000
350
330
310
290
270
250
Sources:CAMIMEX, INEGI, EY
4 The Mining Industry in Mexico: A Long Tradition, A Promising Future
The sector is governed by the Mining Law, first enacted in 1992 and amended several times since then. The law establishes the notions of concessions and a corresponding national registry where these are recorded. Tax matters pertain to other legislation.
Concessions can be granted either to private individuals, companies, villages and indigenous communities, or to the Mexican Geological Service. The former encompass both exploration and production for 50 years, and may be renewed. The latter only apply to exploration, last only 6 years and cannot be extended. The purpose is to identify prospective areas that may attract the interest of private investors.
The size of concessions is not specified, nor does the law distinguish between the various types of metals and minerals or between onshore and offshore locations. Concessions are granted upon demand on a first-come, first-served basis, but may be subject to bidding if deemed necessary by the authorities. All concessions are recorded in the Public Mining Registry in order to ensure transparency, together with the Mining Map. It should be noted, though, that the law does not mandate nor impede the publication of a concession’s real beneficiaries. However, as Mexico intends to join the Extraction Industries Transparency Initiative (EITI), it is anticipated that such information will be eventually required from all concession holders.
Contrary to the other extractive industry -oil & gas- mining in Mexico is not overseen by a ministry, but by the General Mining Coordination, which in turn depends on the Ministry of Economy. Despite its long history, mining has been overshadowed by oil & gas over the past century, both in terms of symbolism and economic weight. However, the government is taking steps to grant the industry more visibility within the cabinet, as well as to foster more transparency. The Mining Registry, for example, will soon become available online.
With regards to tax matters, in general terms the framework applicable to the mining industry is federal. Mining companies are indeed subject to similar taxes as other industries (e.g., income tax, VAT, import duties, etc.), in addition to a set of specific royalties or “mining fees”. The latter were established in 2014, and largely feed a Mining Fund intended to finance infrastructure in mining communities.
Legal & Tax Considerations
5The Mining Industry in Mexico: A Long Tradition, A Promising Future
The collapse of commodity prices from mid-2014 delivered a devastating blow to the mining industry, and Mexico was no exception, with production plunging by a fifth in 2015. Yet the country remains an attractive option for mining investors.
Indeed, Mexico has a number of attributes that make it stand apart when compared to other countries, in Latin America and elsewhere. As noted, the country’s resources are significant and diverse, offering opportunities for many types of companies. By the same token, Mexico has a strong mining tradition, going back centuries. As a result, qualified staff is abundant, and in most regions local inhabitants are accustomed to mining activities, which helps reduce potential conflicts (which nowadays tend to occur mostly in “new” areas with no previous exposure to mining). In practice, some of the largest companies finance social and environmental projects in the areas where they operate. These initiatives help to build trust and prevent conflicts, particularly in regions with an important presence of indigenous peoples.
Another advantage is the relative legal and tax stability. The current system of concessions, for example, is over two decades old, and has functioned well so far. On the tax side, even if royalties were hiked two years ago, most players were expecting such changes, as duties were hitherto too low compared to many other countries. The fact that Mexico is part of the North American Free Trade Agreement (NAFTA) has also helped
channel financial resources. The Toronto Stock Exchange has emerged as a key source of funds for mining projects in Mexico, given the presence of numerous Canadian mining companies, which represent about two thirds of all the foreign firms operating in the country.
As in any other country, however, there are risks. Some are intrinsic to the industry: global prices, financing, strategic focus, cost control, project execution, productivity gains, access to energy, etc. Other challenges are local: land tenure, social responsibility and security issues, to name but a few. Access to land is a particularly convoluted problem, notably in self-proclaimed indigenous communities, given the regime of communal ownership that still prevails in large portions of Mexico. Companies must generally engage in delicate negotiations when launching a project. Similarly, security can be an issue, particularly in remote areas.
Last, but not least, the Mexican tax authorities (SAT) have begun to realize that the mining industry is less marginal in economic—and tax—terms than previously thought. This does not mean that royalties will be increased once again, but merely that the SAT will excercise greater oversight beyond large companies, particularly with regards to transfer prices, in order to ensure industry participants are properly taxed. New entrants will thus require extensive fiscal advice to navigate the country’s complex rules governing the mining industry.
Business Opportunities & Risks
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