In the late hours of April 28, 2023, Mexico's Senate approved into law a sweeping range of reforms affecting the mining industry. The original proposal, raised in late March 2023 by President López Obrador as a suite of a dozen bills, included the Mining Law, National Water Law, General Law of Ecological Equilibrium and Environmental Protection, and General Law for Prevention and Integral Management of Waste Residues.
After some original indications by the Senate that it would evaluate the legislation without expedition, the President's Movimiento Regeneración Nacional (MORENA) party managed a rapid and radical result over the course of a weekend.
This article proceeds to discuss the main aspects of the new law, considering Mexico's existing obligations under international law. It submits that Mexico will need to tread carefully implementing the mining reforms in light of the anticipated investment and technical expertise required to become a dominant lithium producer.
Effect of Lithium Boom
The mining reforms arise in the wake of Mexico's nationalization of the lithium industry. Mexico sits within the "Lithium Triangle," a network of countries including Argentina, Bolivia, and Chile, that contains more than 60% of the world's known lithium resource. By decree on Feb. 18, 2023, Mexico nationalized its lithium industry. The decree designated a lithium mining reserve zone in Sonora, and formed a state-run company Litio para Mexico (LitioMX) which, under the auspices of the Ministry of Energy, will oversee exploration, exploitation, and management of the economic value chain of the mineral.
Mexico has made various pledges on decarbonization and has ratified the Paris Agreement. Lithium is a critical mineral for the production of electric batteries, the pathway to clean energy, and as such has increased in importance with the development of batteries. At the same time, the evaporation method used for lithium extraction is water-intensive. President López Obrador has specifically cited the need to manage water use as a justification for the mining reforms.
The technical expertise and capital of international mining industry is pivotal in achieving energy transition goals. This is more important in the case of lithium, where miners are leading efforts to address the consequences of the water-intensive extraction practices. Mexico's terrain presents additional challenges as its lithium deposits are in clay-based soils, and no commercial-scale lithium extraction from these types of soils has been achieved to date. This means new technology and methods will be required to fulfill the stated agenda.
However, nationalization sent a chilling message to the international mining community. Consequently, the mining reforms, which come on the heels of the lithium nationalization program, present both opportunities and risks.
Existing Protections For Foreign Investment
Investor-state relationships are typically governed by the terms of specific concessions, various investment laws, and international treaties. Investors in mining concessions, a notoriously capital-intensive industry, often invoke the international framework of protection of the investment as part of the investment criteria.
Mexico has ratified 32 bilateral investment treaties protecting foreign investors exploiting its large mineral resources, and is also a member state of trade alliances including NAFTA (1992), USMCA (2018), and the CPTPP (2018), all of which also contain investor protections.
Under Chapter 14 of USMCA for example, foreign investors in Mexico are entitled to the national treatment (Article 14.4) and most-favored nation treatment (Article 14.5), and the USMCA also includes requirements for minimum standard of treatment (Article 14.6). In addition, USMCA provides for a right to adequate compensation following an expropriation (Article 14.8), and for special protections in case of armed conflict or civil strife (Article 14.7).
Policy Behind Mining Reforms
Governments are forever faced with the "resource paradox," the balance between the need to stimulate foreign direct investment, including technology and skills promotion, with the imperative of generating fair revenue from their national resources. Mexico, as the world's leading producer of silver, the fifth largest producer of gold, and as owner of the world's ninth largest identified lithium resources—totaling 1.7 million tons—is acutely aware of this balancing act. The market value of the national mining sector was $1.81 billion in 2021.
The mining reforms represent a material change to how Mexico strikes this balance and would substantially alter the manner in which Mexico grants, regulates, and terminates mining concessions and water concessions relating to the mining sector.
Among other things, the mining reforms would:
- Facilitate the government's expropriation of assets it deems necessary for public use or in the public interest and favor the exploitation of minerals by state-owned entities.
- Eliminate existing provisions in the Expropriation Code that currently provide that the government's compensation for the expropriation of private assets cannot affect the terms and conditions Mexico already agreed to under international treaties.
- Exclude the requirement for the payment of adequate and fair
compensation for the expropriation of assets if:
- A party does not comply with administrative acts.
- The termination or annulment responds to what the government deems to be in the "public, general or social interest."
- It deems that the investment has been recovered by the private investor already.
- Allow the government to revoke existing concessions due to changes in public policy, social or economic circumstances, or other factors affecting the public interest.
The lack of clarity in the proposed provisions, along with a broad invocation of public interests appear designed to enable the cancellation of concessions, making investments in this sector less stable and more unpredictable.
Consequently, following the mining reforms, eligible investors with mining concessions in Mexico would face a higher risk of expropriation, breaches of the full protection and security and the fair and equitable treatment standards as contained in various bilateral and multilateral treaties. Moreover, foreign investors would also possibly violate the substantive protections of the national treatment standard which prohibits discriminatory treatment between domestic and foreign investors in investments.
The mining reforms, read in the context of the lithium nationalization decree, appears to give preferential treatment to LitioMX, the state-owned enterprise in securing and administering concessions. Such discriminatory treatment would very likely constitute a violation of several treaties ratified by Mexico, notably Article 14.4 of the USMCA.
The mining reforms additionally aim to considerably shorten the duration of existing mining concessions. While the first version provided for reducing the duration of 50 years to 15 years, the version approved on April 28, 2023, indicates that the new duration of concessions shall be 30 years. The first five years will be dedicated to pre-operational activities, and the concession can be extended for a duration of 25 years. This change raises several questions and is notably problematic on two points.
- First, a shorter term, coupled with a more expensive bidding process and higher mine operating—and closure— costs, undermines the profitability of mining activities. Hence, foreign companies, fearing that the concession shortened term may no longer be sufficient to justify the high up-front expenses, could be more reluctant to invest in Mexico.
- Second, the fate of the concessions previously granted remains unclear. For example, the mining reforms do not indicate whether all pre-existing concessions would benefit from the current 50-year extensions and whether the concerned concession holders would still be able to extract minerals not expressly indicated in their concession title.
Specifically, paragraph Nine of the legislation's "transitory" provisions states that the "administrative processes and actions relating to mining and water activities commenced before the approval of this bill, will be processed and resolved in accordance with provisions existing at their inception ... as long as they do not oppose what is provided for in this decree."
This language is vague but potentially permits Mexico to alter the current administrative and regulatory framework retroactively to the detriment of existing concessions. Other "transitory" provisions would also require existing concessionaires to post a letter of credit within 365 days from this legislation's enactment, require the removal of final material deposited in environmentally sensitive areas, and require water concessionaires to obtain within 90 days a new water license for mining purposes, instead of the current industrial purpose. On this point, it should be noted that Article 14 of the Mexican constitution prohibits the retroactive application of stricter provisions.
The mining reforms significantly shift the country's public policy to emphasize environmental, health, and indigenous interests over economic rights. For example, the reforms provide for a consultation process of indigenous communities in the vicinity before a concession can be granted.
Pursuant to the new provisions, a minimum of 5% of the income derived from the given operation would be transferred to the local communities—this amount was reduced from 10% in the original bill. Such amendments appear in keeping with Mexico's commitments under the 1989 Indigenous and Tribal Peoples Convention ratified by several Latin American states.
In the context of Mexico's unique experience, which encompasses water scarcity and sanitation management as critical national issues, more demanding requirements regarding water management and water licenses appear prudent. Around 25% of Mexico population lives in rural areas, and less than half of the rural households have piped water in their homes.
Data shows that water stress is a growing national concern. In 2020, out of 653 aquifers and 731 hydrological basins, more than 200 are overexploited or have availability problems. In addition, water pollution and contamination due to mining activities has particular resonance given the high-profile 2014 Grupo México tailing dam disaster.
The reforms to Mexico's mining industry appear more multifaceted than simple resource nationalism. Nevertheless, the bold message behind the lithium nationalization program, and the questionable due process by which the reforms were rushed through Senate, confirm the MORENA government's willingness to take acts to the detriment of economic development including security and protection.
On the other hand, the promotion of the water conservation agenda has historical resonance and apparent attractiveness. How Mexico implements the new law, and protects mining rights already acquired, will be paramount in determining whether its lithium ambitions could be realized with the much-needed assistance of the mining industry.
Copyright 2023 Bloomberg Industry Group, Inc. (800-372-1033) Reproduced with permission. Mexico's Mining Reforms: Another Test For The Industry.
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