Overview of the Mining Industry in Mexico
Mexico has significant mineral resources, such as gold, silver, and copper and this diversity is attracting a number of foreign investors every year into the country. Nowadays, the mining sector is one of Mexico’s most important industries and according to BMI Research, the industry is forecasted to reach $17.8 Billion by 2020, indicating an annual average growth of 3.3%. This makes Mexico one of the largest metals and minerals producers worldwide. In 2014 Mexico was ranked number 8th in the ranking of largest gold producers by the world gold council. Below you can find a graphic of the industry in Mexico:
Mining in Mexico
Environmental and CSR in Mining Investment in Mexico
This year the priorities for the Mexican mining industry are on environmental and social responsibility issues in Mexican environmental regulations have become very strict on both topics. All these new regulations are the result of international agreements between Mexico and other countries on environmental issues, such as the North American Agreement on Environmental Cooperation, the United Nations Framework Convention on Climate Change and the Convention on Biological Diversity. On account of these new agreements, all companies operating mines are obliged to obtain environmental impact permits from SEMARNAT before starting any exploration activities.
If companies do not obtain environmental permits needed to operate mines, high sanctions will be exposed by SERMANAT and PROFEPA. Only this year PROFEPA inspected more than 1000 mining concessions and 71 of them were closed because environmental permits were not acquired. Apart from environmental consciousness, social responsibility has become more and more important and sustainable closure plans are drafted for communities living in the surrounding of mines. In order to help to move forward with closure plans in communities mining funds are distributed with the help of the Mexican Ministry of Economy.
How to Establish a Legal Mining Company in Mexico?
The Mexican mining industry has huge potential and attracts a variety of foreign investors. But investing in Mexico’s mining industry can be complex. On top of this, setting up a mining company in Mexico requires several processes, permissions and authorizations.
Mining Due Diligence in Mexico
According to the Mexican Ministry of Economy, the mining industry represents 4% of the GDP of Mexico, as it is one of the main economic driving forces in Mexico. Its importance lies in employment generation and foreign investment. When planning to acquire a mining project in Mexico, either by transfer, buying a company or incorporating a company, the completion of a legal due diligence process is recommended to evaluate assets, liabilities and general legal status of the project. It is also important to obtain an appropriate evaluation of the risks and make a suitable decision, especially for growing junior mining companies in Mexico. Listed below is a brief overview of the key parts involved in completing a mining legal due diligence in Mexico.
When a mining concession acquisition transaction is completed through the execution of a transfer agreement, prior to establishing a price for the transaction, a complete mining legal due diligence must be completed, and the key parts are as follows:
At the Public Registry of Mining (PRM) the completion of the following steps is required:
- Confirm and certify ownership. If the holder is a company, verify its registration with the Public Registry of Mining.
- Confirm and certify the mining concession(s)’s validity and term of expiry.
- Certify if there are any liens, encumbrances, trials or proceedings that may affect the transfer of the mining concession(s). Commercial agreements, such as credit agreements or securities, may impose liens or otherwise create security interests in the concession rights as they are duly recorded with the Public Registry of Mining.
- Confirm the existence of any royalties that may affect the mining concession(s).
- Evaluation of compliance with obligations (payment of mining duties, assessment, and statistical reports).
- Verify infrastructures, such as road access, electric power, port facilities and landing strips.
Social, Safety & Environmental Licenses.
- Approval to access to the lands that cover the mining concession will be needed. Typically, the consideration payable for the lands is agreed between the parties. All agreements and arrangements must be duly reviewed in order to determine if the mining project of interest has the necessary social license to access the lands.
- Industrial Safety: Companies are responsible for industrial safety within their premises.
- Federal Safety, Hygiene and Work Environment Regulations: Each mine must set up a mixed commission for work safety and hygiene, comprised of employee and employer representatives. There should be a responsible engineer for safety at each mine.
- Natural Protected Areas: If a degree of restriction of mining activities is issued after the granting of a license, international treaties and federal provisions will provide either a compensation or an exclusion in order to continue with said activities.
- Forest Land-Use Change: When vegetation from a forest or natural land is totally or partially removed in order to use such land for non-forestry affairs, its developer is required to obtain a Forest Land-Use Change with the Ministry of Environment and Natural Resources.
- Environmental Impact Authorization: It is important to confirm if title holders follow environmental legislation and hold the corresponding Environmental Impact Authorization from the Ministry of Environment and Natural Resources.
II. Acquisition of a Mining Company:
- Confirm company ownership (organizational chart, including a list of the company’s affiliates, subsidiaries, and branches, including information relating to the shareholders or owners of each) and individual background checks.
- Review the current company by-laws, and any amendments thereto including:
- Legal representative and management
- Voting rights/structure
- Current share capital
- Registration with the Public Registry of Commerce and Public Registry of Mining.
- Minute books of the company and its subsidiaries (Board of Directors’ and Shareholders meetings minutes’ book).
- Share certificates of title and details of any pledges or other encumbrances or claims relating to the shares.
- Notarial instruments containing the granting and revocation of general and special powers of attorney, authorizations granted by the company and its subsidiaries and all public documents containing authorizations or evidencing the companies’ representatives’ authority to carry out their business or the transaction.
- Confirm the existence of liabilities, including but not limited to tax, labor, environmental legal proceedings, other private contract financial obligations, court orders, loans and/or credits, company asset register and confirm assets located in Mexico.
- Confirm with the General Bureau of Foreign Investment if there is any history of registered foreign capital.
- Review documents relating to financial arrangements.
- Documents related to real estate owned by the company.
- Insurance policies were taken out by the company or third parties in favor of the company or its employees.
- Equipment and the machine inventory.
- Audited financial statements of the company and its subsidiaries of the last three years.
Any other documentation or information that would be important and relevant in determining the state of the business of the company or its subsidiaries, or which should be considered or reviewed in order to determine the legal, financial or economic situation of the company or its subsidiaries.
Some of the advantages of acquiring a mining company include:
- All the permissions and licenses have already been granted.
- Mining operations may be already in process.
- Qualified staff is fully aware of working procedures, daily responsibilities, and community relationships.
It is essential that future investors are well-aware of the complete history of the mining concessions before making an investment; including the value, title chain, former payment of duties, existence of trials and granted permits.
A proper due diligence process will help you make a suitable business decision once all the risks are identified and provisioned. A thorough due diligence report will cover all these points and ensure that you make a well-informed mining investment in Mexico.
If you have any more questions regarding the mining due diligence process, get in contact with Biz Latin Hub Mexico. Reach out to Alex at email@example.com and see how our mining lawyers can add value to your Mexican mining investment.
If you want to learn even more about mining opportunities in Latin America, watch this video: