April 24, 2013 / 7:45 PM / 4 years ago

CORRECTED-Miners say security "tax" excluded in Mexico royalty calculus

5 Min Read

(Corrects spelling of Ortega's name, paragraph 15)

By Gabriel Stargardter

MEXICO CITY, April 24 (Reuters) - Mining companies in Mexico, worried by falling metals prices, are tense about a government plan to slap a 5 percent royalty on their pre-tax profits, arguing they already pay a covert "security" tax to shield themselves from drug-related crime.

Under the terms of the bill, which is expected to come before Congress for a vote on Wednesday, miners' profits would be redistributed to the states and municipalities where they operate in Mexico, the world's top silver producer.

The royalty scheme is part of Mexico's larger plan to broaden its tax take, the lowest in the 34-nation Organization for Economic Co-operation and Development (OECD), and to gain parity with regional competitors like Peru, Brazil and Chile, which have already implemented royalty regimes.

But foreign and domestic mining companies, already nervous after seeing gold prices plunge to their worst two-day loss in 30 years last week, say the scheme is poorly timed and fails to acknowledge the sky-high security costs of investing in Mexico.

About 70,000 people have died in drug-related violence in Mexico since 2007, when the government launched a military-led assault on the violent cartels.

"The mining industry is under attack," said Keith Neumeyer, the chief executive officer of First Majestic, a Canadian silver miner that spends about 10 percent of its annual budget on security costs. "We have armed guards around all of our mines; 10 years ago we didn't have any security."

"It's just the cost of doing business in Mexico," he added. "We have no choice."

Now, with prices falling and the royalty set to bite into profits, that cost is rising, and First Majestic has had to adjust its strategy accordingly.

In the last couple of weeks, the company cut its 2013 Mexico investment budget by more than 15 percent to $160 million, citing falling metals prices, the new royalty tax and the cost of guarding its assets and workforce.

Last year, Neumeyer said, First Majestic lost about $4 million worth of silver concentrate in hijacked trucks. They fly their heavier silver bars out of the country, and are now looking at moving more of their business abroad.

Golden Era

Investors pumped $25 billion into Mexican mining between 2007-2012, with 40 percent coming from abroad, as they hitched a ride on surging metals prices. That helped the mining sector - Mexico's fourth largest industry behind electronics, cars and oil - notch a 134 percent increase in income between 2009-2011.

Canadian companies make up about 70 percent of all foreign investment, and experts say those companies, many of which are only at the costly exploration stage, suffer most from the high security costs. Mining companies in Mexico are subject to 30 percent income tax.

Unlike Grupo Mexico, the largest domestic miner, which has diversified abroad and into infrastructure and railways, First Majestic's five mines are all in Mexico and thus disproportionately affected by the royalty scheme.

Miners' experiences with organized crime vary.

Armando Ortega, New Gold Inc's vice president for Latin America, said that although security concerns at their $100 million gold mine in the northern state of San Luis Potosi remained pressing, they had improved slightly in recent years.

"The security situation will not take people out of Mexico," he said, noting that his clients - mainly Canadian banks - assumed all transportation costs and risks. "Mining companies have learned to live with that."

Even so, about a year ago, Ortega said, a group of unknown assailants tried to kidnap the mine's head of security, in an attempt thwarted by the Mexican military.

But such events already proved too much for some.

"Do people appreciate the safety problems in Mexico?" said John-Mark Staude, chief executive of Riverside Resources Inc , who has moved 30 percent of his business out of Mexico due to safety costs. "(There are) many challenges to operate." (Reporting by Gabriel Stargardter; Editing by Simon Gardner and Kenneth Barry)

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