If there’s been one consistent refrain in Canadian mining circles this millennium, it’s been mining personnel — from top executives to scruffy field geologists — singing the praises of Mexico and its rich mineral potential, easy permitting, mining-friendly culture, skilled population, low costs and enjoyable, snow-challenged lifestyle.
But that’s all changed in the last few months, and it accelerated in the last week of October, as Canada’s globe-trotting miners, especially executives in Vancouver and Toronto, have had to grapple with the dramatically higher federal mining taxes that are on the verge of becoming law in Mexico.
On Oct. 29, Mexico’s Fiscal Reform Act — already passed the previous week by the lower Chamber of Deputies — was approved by the upper Senate in a late-night, 73 to 50 vote.
This fiscal reform package includes a special mining fee of 7.5% on profits (specifically, on earnings before interest, tax, depreciation and amortization), plus another 0.5% gross royalty for gold and silver. The act also wipes out generous accelerated depreciation of assets and immediate deduction of pre-development expenses.
Other features of the act for miners include a 30% corporate income tax, a 10% employee profit-share tax and a 10% dividend tax.
The mining brain trust at BMO Capital Markets — which had been expecting a 3–5% special mining fee — have calculated the impact of Mexico’s new tax reform on the leading miners that are active in Mexico and trade on Canadian or U.S. exchanges, and it’s not pretty.
With that extra kick of the precious metals royalty, the gold and silver miners are naturally hardest hit, with Timmins Gold, Agnico Eagle Mines, Goldcorp, MAG Silver, Fortuna Silver Mines and Pan American Silver all suffering more than a 5% impact to their total net present values using current spot prices, according to BMO’s calculations. In base metals, Southern Copper gets walloped the worst, seeing a 5.1% impact to its NPV, and its parent company Grupo Mexico is threatening to direct much more of its investment pesos outside its home country.
The industry’s still at the shocked stage today, with most miners too busy calculating their quarterly results to formulate a public statement on the new taxes at press time.
However, a group of 16 mining company CEOs — such as Endeavour Silver’s Bradford Cooke and Coeur Mining’s Mitchell Krebs — took out ads in four major Mexican newspapers, urging Mexican President Enrique Peña Nieto to intervene. At this point, for the act to become law, it needs only the president’s signature.
In their open letter, the CEOs stated that the added tax burden unduly threatens the capital-intensive mining industry, and pushes the total tax burden on mining companies from 40% to more than 57%, making Mexico "one of the least competitive jurisdictions for mining investment in the world." The CEOs suggest the EBITDA tax be reduced to 4%, and the precious metal royalty be eliminated.
(According to CostMine, in 2011 the average annual compensation of a junior Canadian mining CEO was $1.4 million, while the median income in Mexico in 2011 was $3,200, according to the Organisation for Economic Co-operation and Development, or about 0.2% of an average Canadian mining CEO’s compensation. Now tell us again how moved the Mexican president will be by these ads.)
In his 2011 book, México, la gran esperanza, the generally pro-business Peña Nieto of the Institutional Revolutionary Party argues strongly for a reinvigoration of Mexico’s business culture, and proposes opening up state-owned oil behemoth Pemex to some private ownership.
Certainly cracking down on the relatively lightly taxed miners in the country will make it easier to push forward with his partial Pemex privatization, which is strongly opposed by the nation’s unions and public sector workers.
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