JUNIOR MINING SPECIAL — Revised Mexican laws find favor with

Changes in foreign investment and mining laws as well as improvement in the tax structure have encouraged foreign companies to invest in Mexico.

Late last year, the government of President Salinas de Gotari passed a law to regulate foreign investment in Mexico’s economy. This law (Ley de Inversion Extranjera) allows 100% foreign capital participation and control in Mexican mining companies with few exceptions. Such investment in the Mexican mining industry has been restricted to a maximum of 49% for the past three decades.

The new Foreign Investment Law closely follows the provisions of the North American Free Trade Agreement (NAFTA) that went into effect Jan. 1, 1994. In general, NAFTA promotes closer economic ties between Canada, the U.S. and Mexico.

Specifically, NAFTA requires that each member country treat the investors of the other member countries no less favorably than it treats its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, sale, or other disposition of investments. Article 1109 of NAFTA also provides that there can be no restrictions on the transfer of dividends, interest, capital gains, royalties, management fees, or similar payments between member countries.

In affirmation of the NAFTA rules, Article 4 of the Mexican Foreign Investment Law states that foreign investors can participate to any proportion in the equity of Mexican companies, acquire fixed assets, enter into new areas of economic activity, manufacture new lines of products, open and operate businesses, and expand or relocate existing businesses unless otherwise stipulated by other articles of the law.

The law excepts foreign investment in petroleum, other hydrocarbons and radioactive minerals. These minerals are reserved to the government. In addition, the Mining Law of 1992 excludes from mining concessions sand and gravel, granite, limestone and similar material used in construction, dissolved minerals in underground waters, and certain salt deposits. These substances can be exploited under laws other than the Mining Law. During the past three years, more than 200 foreign mining companies have become active in Mexico, mainly in the northern states of Sonora and Chihuahua that have attractive mineral targets.

The migration of foreign companies is also beginning to be noticed in other states such as Durango, Sinaloa, San Luis Potosi, Zacatecas and Guanajuato, as the news of Mexico’s benefits spreads. The majority of the companies are from Canada and the U.S., although some are from England, Germany, Japan, Australia and Spain.

Most of the investments made during the past three years have been as joint ventures with Mexican partners along the lines of what had been possible under the previous laws and regulations and prior to the Foreign Investment Law of December, 1993.

However, because of the new mining and foreign investment laws and NAFTA, more companies wholly owned and controlled by foreign investors will become common, although joint ventures with Mexican companies and individuals will continue.

The increase in productive foreign investment in mining is attributed in part to an improved sense of security on the part of investors and the feeling that their investments are welcome. This investment climate did not exist prior to the Salinas de Gotari government.

As well, the increase can be attributed to the growing regulatory burden in Canada and the U.S. and the mounting antipathy of environmentalists and their allies in government toward mining. These conditions in the industrialized north would promote greater investment by mining companies in Latin America even if such investments were not as encouraged as they are. “Only a small percentage of Mexico has been adequately explored,” Ingeniero Manuel Contreras, the head of the government’s mining agency in Durango, pointed out. “So, it is the obligation of the government to promote an intensified exploration of the minerals of Mexico.

“And with the changes affecting foreign investment in mining,” he continued, “there remains only an improvement in the world price of minerals, especially silver, for mining in Mexico to experience a `boom’.”

— The writer is a partner with Encinas y Gerling, a mining consulting firm with offices in Durango, Mexico.