Interview: Xavier García de Quevedo Topete

How much will increasing the royalty tax to 7.5% impact foreign investment?

XAVIER GARCÍA DE QUEVEDO TOPETE: Two years ago, Mexico ranked as the best location for exploration in terms of the investment risk for mining, but the new royalty will constrain competitiveness on a global scale. On top of that, the fall in prices of silver, gold and copper – some of Mexico’s primary mining products – has led many miners to rationalise spending on capital expenditures and exploration, too. Even so, Mexico leads the world in silver and copper production, bringing in $5bn annually. Mining alone represents 3% of total GDP. The country ranks fourth globally and is the first in Latin America in terms of attracting investment to the mining sector, with a total of $25.6bn during 2007-12, competing with the world’s largest mining nations.

The sector has historically been competitive as a result of political and economic stability, legal certainty and the quality of the deposits. There is enormous unexplored mining potential and current known deposits have typically been of high quality.

What lessons can Petróleos Mexicanos (Pemex) draw from the mining industry’s investment model with relation to partnerships and concessions?

GARCÍA DE QUEVEDO: The reform passed in 2013 permits the federal Mexican government to conduct oil exploration, production and power generation activities via “productive state companies” such as Pemex or the Comisión Federal de Electricidad (Federal Electricity Commission, CFE), as well as through licences and permits awarded to private companies. Thus, we believe significant flows of investments will be poured into the energy sector, but not necessarily through Pemex and the CFE. However, it is important to mention that Mexican mining companies are granted a concession and that ore reserves are registered under the company, while in the case of the oil and gas sector, private investors are given a licence to operate, but hydrocarbons reserves still remain under the state’s control. The experience of centuries of mining exploration and a focus on converting proven reserves into ore production is positive for the oil and gas sector.

What measures have preventing security challenges from dampening production and investment?

GARCÍA DE QUEVEDO: While the majority of mining operations are not directly affected by security problems, we have implemented security measures in recent years. Certainly these measures increase costs in addition to the new mining royalty tax that affects competitiveness. The country has become a prime mining attraction in recent years due to stability in the licencing, tax and concession regimes. Some global investors and mining companies are already fleeing politically risky mining ventures in other parts of the world and looking for safer places to invest their money, with Mexico as one of their top potential destinations.

To what extent have higher costs of skilled labour, electricity and fuel deterred exploration projects?

GARCÍA DE QUEVEDO: Mining and metallurgical activities are a key aspect of the Mexican job market. The spike in metal prices since 2007 has boosted employment in provinces historically plagued by high rates of unemployment. While the mining industry faces a major challenge in containing high energy and fuel costs – energy costs are twice as high in Mexico as in the US and Peru – we expect it to come down a bit as a result of the 2013 energy reform and to be more competitive globally. Cost pressure is not critical, although margins will continue to tighten. The new royalty tax, fees for water rights and the end of the immediate deduction of exploration costs will negatively impact investments in exploration and new projects. As part of the industry’s initiatives to reduce costs, companies have begun to invest in energy self-sufficiency. For example, in 2013 our group invested $720m in auto-supply of electricity, developing two plants and a wind farm that will produce energy at a lower cost than the CFE.