The Northern Miner, first published in 1915, during the Cobalt Silver Rush, is considered Canada’s leading authority on the mining industry.
A proposed 7.5% mining tax on companies in Mexico and as much as 8% on those extracting precious metals is creating uncertainty in the industry about investing in a country that until now has been thought of as one of the world’s most attractive mining jurisdictions.
The mining tax — which some are describing as a royalty, and has yet to be passed into law — would be on earnings before interest, taxes, depreciation and amortization, and is part of President Enrique Pena Nieto’s goal to reform the tax base in the country.
The original proposal in April had been a royalty of 5%, and many executives complain that every time the subject of a royalty is raised, the figure bandied about keeps getting higher.
“They’ve been talking about this for two years and they’ve had something like three different rates,” says John Gravelle, head of the mining group at PricewaterhouseCoopers in a telephone interview from Brazil. “Every time they make an announcement it’s a different rate, and every time it’s higher.”
What this does is reduce confidence, create uncertainty and increase risk, Gravelle maintains, and companies who made investment decisions based on the previous tax regime are now stuck. “Sometimes you spend billions of dollars on your mine and then overnight the tax regime changes substantially, and it’s a raw deal for the mining companies.”
For anyone not in production looking to raise money to build a mine, says Rob McEwen of McEwen Mining (TSX: MUX; NYSE: MUX), which is developing the El Gallo complex in Sinaloa, “it’s just another hurdle that you have to get over, and in this market, it might stop a project.”
McEwen notes that many if not most politicians make decisions based on “looking in the rear-view mirror.” So when gold is trading at US$1,900 per oz., they believe that the mining companies are making money and set in motion plans for legislation. But by the time the legislation comes to pass, market conditions may have changed substantially, like they have today, “where many mines are right on the edge of profitability and closing.”
McEwen says they “don’t seem to appreciate that fact. The passage of legislation takes a lot longer — it’s almost like permitting — and it can come into effect at the wrong time . . . you see capital markets collapse after the price of metal collapses, and the flow of money all but disappears. For countries that put more punitive measures in place, it just ensures that it takes a lot longer for the country’s mining industry to get up and running. They don’t realize it cuts back on exploration and on capital expansion of plants and further employment, which they’re looking for.”
Andrew Thomson, president and CEO of Soltoro (TSXV: SOL; US-OTC: SLTOF), which is advancing a number of precious metal properties in Jalisco state, compares what is happening in Mexico now with what happened in Honduras years ago, when the government made so many changes to the rules at the bottom of the market that “everyone just put their hands up in the air and left.”
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