Mexico has consolidated its position as a key player in the worldwide
mining industry. In this strategic economic activity, Mexico can boast
being the top silver producer, second in bismuth and fluorite, eleventh
in gold (with the Penasquito mining unit ranked among the most important
gold and silver deposits worldwide), and twelfth in copper. Its natural
resources, such as oil, gas, silver, gold and copper, together with a
welcoming legal system (with the exception of oil and gas), complement
the country's safe harbour for foreign investments. This has catapulted
Mexico into the top five countries to invest in mining exploration and
first in latin America, according to a July 2011 presentation from the
Mexican Mining Chamber.
There are principal guidelines and legal considerations that foreign
companies, financial institutions, funds and individuals need to bear in
mind when considering Mexico as a target for their investment within
the mining sector.
Mexican Constitution
Mexico's mining industry finds its legal background in article 27 of
the Mexican Constitution. In its fourth paragraph, this article states
that 'it corresponds to the Nation the direct ownership of all natural
resources of the continental platform and undersea'. However this same
article states that, although the direct ownership of the nation of all
natural resources, including mineral deposits, is not subject to
transference, the use and benefit of the natural resources (mineral
deposits, not oil or gas) by individuals or Mexican companies shall be
exercised through concessions granted by the executive branch of
government, pursuant to the applicable laws and regulations.
Mining Law
The Mining Law (valid since June 26 1992) is a federal law, the main
purpose of which is to dictate rules, rights and obligations regarding
mining concessions and their holders. The Mining Law also lists in
article 4 the minerals subject to its scope. For the purposes of
defining them, these include all minerals with the exception of oil,
gas, radioactive minerals, rocks and construction derivatives and salt.
The Regulations of the Mining Law (valid since March 29 1993) provide
the administrative guidelines and requirements to comply with the Mining
Law in detail.
Free land
Within its provisions, the Mining Law, in articles 13 and 14, sets
forth the procedure to obtain a mining concession. It indicates that the
mining concession be granted over free land on a
first-come-first-served basis. Free land is defined as all land within
the Mexican territory with the following exceptions : mining reserved
zones, valid mining concessions and allotments; applications for
concessions or allotments procedures, mining concessions granted through
lottery, and mining lots that were not granted as concessions to a
third party due that lottery being cancelled.
One qualification to the granting of the concession is that the
applicant must have complied with the requirements of the Mining Law.
Such requirements include the filing of an application before a mining
agency or the General Bureau of Mines. This must include a report issued
by an expert recognised by the executive branch of government, and the
information on the location and characteristics of the free land to
claim.
Protected land
Besides mining concessions, the Mining Law also recognises mining
allotments, which are sites reserved for the Mexican Geological Bureau
to quantify and identify the potential mineral resources of the nation.
It also recognises mining reserved zones, which are areas where no
mining concession or mining allotments shall be granted, by instructions
and decree of the executive branch, on the grounds it is a public
utility or it is reserved for future national needs. In case the
executive branch decides to change the status of a mining allotment or a
mining reserved zone, and before converting such area into free land, a
lottery may be organised by the General Bureau of Mines among
interested and capable mining concession holders.
The Mining Law considers capable holders of mining concessions to be those that satisfy the following criteria:
- Mexican individuals
- Ejidos communities
- Indigenous people or towns pursuant to the applicable laws
- Companies incorporated under Mexican laws.
Regarding this last requirement, article 11 of the Mining Law states
that such companies must have a commercial purpose emphasised to carry
out the exploration and exploitation of minerals activities pursuant to
the Mining Law. It must also have its legal domicile in Mexico, and must
comply with foreign investments laws.
Foreigners (individuals) are also able to act as holders of mining
concessions as long as they waive any protection right from their
government in connection with the concession. This means that if
foreigners consider themselves as Mexican individuals, they can be
mining concessions holders.
Mining concessions grant to their holders several rights contained in
article 19 of the Mining Law. For example, they have the right to
perform exploration and exploitation activities within the limits of the
concession, benefit from the minerals obtained from the concession,
obtain the expropriation, temporal occupation or right of way of the
surface land necessary to perform exploration and exploitation
activities, transfer the rights over the concession (partially or
completely), and obtain authorisation from the ministry of energy to
benefit from the gas associated with carbon deposits.
In reciprocity, mining concessions impose on their holders several
obligations. This includes the duty to perform and proof assessment work
on their concessions – meaning to actually carry out or invest a
minimum amount per year in the concession, pursuant to a formula
obtained with the extension of the concession and the years from its
issuance set forth by the Regulations of the Mining Law.
Another is to pay mining duties twice a year. These are calculated
pursuant to a formula obtained with the extension of the concession and
the years from its issuance pursuant to the Federal Duties Law. It is
important to note that mining duties are not related in any way to the
extraction of mineral from the concession and/or related to the price of
commodities. It is a formula based on the number of hectares that each
concession covers and the years of validity that such a concession has.
This has been recognised as a relaxed and attractive jurisdiction to
invest in the mining industry in Mexico. Several attempts to modify
mining duties and tax the production by 2% or 3% have reached the
legislative branch of government, but for now they remain as attempts
only.
Mining concessions are considered movable property under Mexican law.
Mining concessions may be freely assigned and transferred to another
capable individual or company, through an assignment agreement notarised
by a Public Notary and registered before the Public Registry of Mines.
Mining concessions can also be mortgaged as collateral of an obligation
of a concession holder, and seized in compliance of a court order.
Foreign investments law
As stated earlier, Mexican and foreign individuals may be holders of
mining concessions, as well as Mexican companies. Mexican companies that
are holders of mining concessions may be fully owned by a foreign
company without any limitation. All restrictions that Mexico had on
foreign investment in the mining industry have been eliminated.
Mining authorities
In accordance with article 27 of the Constitution, the executive
branch of government has the authority to grant mining concessions. This
responsibility, at the same time, is granted to the ministry of economy
which has, as one of its many obligations, the duty to provide policies
in connection with the Mexican mining industry, promote investment in
the sector, and fund its development.
The ministry of economy is home to the General Coordination of Mines,
whose main objective is to act as a connection between the ministry and
four industry authorities: General Bureau of Mines, General Bureau of
Mining Promotion, Mexican Geological Bureau; and, the Mining Promotion
Trust (Fifomi).
The General Bureau of Mines acts as the enforcing agency and is in
charge of the surveillance and compliance of all mining
concession-holders while also maintaining the Public Registry of Mines.
The Public Registry of Mines' function is to keep records of all mining
concessions, mining allotments and mining reserved zones. All transfers,
cancellations, liens, encumbrances, judicial resolutions, contractual
acts such as royalties, registration of mining companies, and other
records. It is important to note that in line with the Mining Law, all
acts regarding mining concessions become valid between the parties and
third parties once they are filed before the Public Registry of Mines.
Surface rights
To simplify things a little, Mexico has two kinds of surface rights:
private property and ejido property. It is important to emphasise that
mining concessions grant their holders underground rights only,
therefore mining companies have to deal with the access to such
underground rights separately.
Private property pursuant to the first paragraph of article 27 of the
Constitution refers to the land which Mexico as a nation transferred to
individuals for their ownership and domain. Private property has, as
its main characteristic, the ability for it to be transferred from one
individual to another, as well as benefit from other actions allowed by
law (including leases, commodatum and liens).
On the other hand ejido property, which is also referenced in article
27 of the Constitution, refers to land granted by the government (its
creation goes back to year 1917) to individuals for agricultural
activities, as well as to carry out any legal activities that will
benefit the members of an ejido. Ejido property is owned by an ejido
community that has legal capacity and operates under its internal
regulations. Ejido property may not be transferred to an individual or
company, Mexican or foreign, unless a quite complicated and long
procedure is carried out to modify ejido property and transform it to
private property. This requires the approval of most of the ejido
community members and registration before the Public Registry of
Property.
Mining companies often have to deal with ejido property and enter
into long, fair and lasting relations with ejido communities to operate
freely on their land. Normally mining companies enter into temporal
occupation agreements with ejido communities. In exchange they pay a
type of lease for the use of the land, as well as social benefits such
as schools, town constructions, hospitals, roads, sports and leisure
constructions. These agreements need to follow a precise and specific
procedure, and receive approval by the Ejido Community Assembly, and
then be registered with the Agrarian National Registry. Failure to
comply with all legal requirements could lead to the nullification of
any agreements, resulting denial of access to the land where a mining
concession is located.
Environmental
Mexican law requires mining companies to comply with the Official Mexican Rule NOM-120-SEMARNAT-1997
that sets forth the specifications to protect the environment from
exploration activities on certain land. For exploitation activities, as
well as the operation of benefit plants and tailing dams among other
industrial activities, an environmental impact authorisation (Manifestación de Impacto Ambiental)
is necessary. The executive branch of government has the authority to
identify an area of land and, through a decree, recognise that area as
an ecological protected area, where mining activities are forbidden or
restricted.
Explosives
There is a specific procedure for the handling of explosives, managed
by the Bureau of Fire Arms and Explosives at the Ministry of Defence.
Mining companies that will need explosives in their mining activities
must obtain a permit for the use, transport and storage of explosives.
This will be related to the amount of explosives needed for their mining
operations. For the procedure of obtaining this permit, mining
companies need to prove they actually own concessions duly registered
before the Public Registry of Mines, as well as undergo several local
and municipal inspections and approvals.
Corporations law
Foreign mining companies that invest in the Mexican mining industry
normally incorporate a Mexican company in accordance with Mexican
Corporations Law. It is also normal practice in Mexico that foreign
mining companies enter into joint venture transactions with other local
or foreign mining companies, in order to combine risks, efforts, capital
and profits. Pursuant to Mexican Law, joint ventures can be formal
(where a new legal entity is created) or informal (which is ruled by an
association agreement or joint venture agreement).
The incorporation of a company that is compliant with Mexican
Corporations Law will be required. This law defines two kinds of
companies: Sociedad Anónima de Capital Variable (similar to the plc of the United Kingdom) or Sociedad de Responsabilidad Limitada de Capital Variable (similar to the Ltd of the United Kingdom). In 2005, an amendment to the Securities Law created a new modality of the Sociedad Anónima de Capital Variable, named Sociedad Anónima Promotora de Inversión (Investment Promoter Company) which has more flexible rules than the other types of companies.
All commercial companies in the Mexican legal system must have a
minimum of two shareholders, need authorisation from the Ministry of
Foreign Affairs to use a corporate name which shall not be reserved or
in use by someone else, have articles of incorporation or by-laws that
must be notarised by a Public Notary or a Commercial Public Notary, and
be registered with the Public Registry of Commerce of its corporate
domicile. In addition, mining companies need to be registered with the
Public Registry of Mines in order to act as mining concessions holders
and to have within their commercial purpose the exploration and
exploitation of mining concessions activities. Finally, if a Mexican
mining company is fully or partially owned by a foreign company or
individual, the Mexican mining company must be registered in the
National Foreign Investments Registry.
Tax
In short, Mexican companies have to pay income tax, value added tax,
flat tax, social security tax, pay roll tax, and real estate tax.
Income tax is paid at a 30% rate on all net profits (profits less
allowed deductions). The value added tax is paid at a 16% rate on all
sales of goods and services. Flat tax is a relatively new tax, imposed
on cash flows and paid at a rate of 17.5%, although only when a
comparison procedure proves it higher than the income tax. Social
security tax refers to the monthly payments of social security, housing
fund and retirement fund to all employees. This may float between 20%
and 35% of the monthly salary, depending on the risk of each employee in
the activities they carry out pursuant to the Mexican Labor Law. Pay
roll tax is a local tax imposed and paid by employers from 1% to 2.5%.
Real estate tax, another local tax, is imposed on transfers of real
estate assets or similar operations with real estate assets. The rate
depends on the state, but varies from 2% to 5%.
Labour
The Mexican Labor Law is a protective law for employees which grants
them several minimum obligated benefits, even if the parties to the
employment relationship agree otherwise in writing. These minimum
obligated benefits are profit sharing (10% of the net taxable profits of
a year divided among all employees), christmas bonus (annual payment of
two weeks' salary), holidays of seven days per year, and social
security, housing and retirement fund contributions.
The Mexican mining industry has strong and combative unions. However,
as with ejido communities, strong relations with the community,
employees and unions' representatives, together with an open and honest
strategy, will allow mining companies to carry out their operations in
peace.
Looking forward
The Mexican mining industry, although complex, offers a range of
opportunities for fresh investments in a variety of fields: exploration
or exploitation activities, service provision for mining companies, or
lending and investment activities. Mexico, through its legal framework,
infrastructure, political stability, and most importantly natural
resources welcomes and supports international and foreign investors in
the mining industry.
| Fernando Todd Dip
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Fernando Todd Dip is a partner at Todd y Asociados and a member of
the Rocky Mountain Mineral Law Foundation, National Association of
Corporate Counsels and American Bar Association.
Mr Todd has acted in complex corporate matters for domestic and foreign companies,
including worldwide leader companies in the natural resources
industry. This includes mergers, spin-offs, and capital increases and
reductions. He also acts as independent director of publicly traded and
private companies in Mexico. He advises mining companies with
participations in Mexico and abroad on their daily corporate and mining
operations, reorganisations, M&A including due diligence and
acquisitions/sales of mining projects through the purchase of assets or
companies. He also assists with the financing of mining companies for
the development of new projects.
He earned his Juris Doctor from Universidad Iberoamericana Mexico
City, Mexico; his LLM on Corporations Law at Universidad Panamericana,
Mexico City; and completed the Management Program for Lawyers at Yale
School of Management, Yale University.
He speaks Spanish and English.
Todd y Asociados
Schiller 316, Chapultepec Morales,
Mexico 11570 D.F.
T: 52 55 5203 6333
F: 52 55 5203 6006
E: ftodd@todd.com.mx
W:www.todd.com.mx
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