MEXICO CITY A new mining tax could hurt the profitability of Mexican steel companies and miners, and could curb mining investment, steelmakers in the country told AMM sister publication Steel First.
The Mexican senate recently approved a 7.5-percent tax on miners earnings as part of a wider package of tax reforms (amm.com, Nov. 7). The tax will become effective Jan. 1, 2014.
Mexico can expect a drop in mining investment as it becomes "more attractive for an investor to carry out their mining investments outside Mexico," a spokesman for ArcelorMittal Mexico SA de CV said.
The Mexican mining royalty exceeds the taxes charged in other Latin American countries such as Peru and Chile, ArcelorMittal noted.
Peru has a 1- to 3-percent mining royalty on companies gross sales, while Chilean miners pay a royalty of up to 5 percent on operating margins, according to data released by Mexican mining chamber Camimex.
Miners operating in Mexico currently pay only a charge that is largely based on the area of their mining concessions. There is no payment on the revenue or the profit generated from mining operations.
The new tax will be based on earnings before interest, taxes, depreciation and amortization.
While ArcelorMittal expects the new taxes to cause a "negative impact" on the Mexican steel industry and mining companies, it will "support reforms to develop a favorable impact on the development and economy," the spokesman said. "We expect to see good distribution of these resources in order to create programs that boost the growth of the domestic market, and help create mechanisms to get these resources into local communities where mining operations are established."
Although the new taxes are "logical" and "appropriate," there will be an effect on profitability and business, Francisco Orduña, a spokesman for Mexicos biggest integrated steelmaker, Altos Hornos de Mexico SA de CV (Ahmsa), said.
But Ahmsa believes that "there are some positive aspects, such as the distribution of the royalty, to the Mexican states," he noted. "Previously, revenues from mining activity were incorporated into federal funds, and the states and municipalities did not receive any direct benefit."
With these new measures, the national government will take 20 percent of all money raised by the tax.
Of the remaining 80 percent, 62.5 percent will benefit the local communities where mining operations are established and 37.5 percent will be earmarked for other states with mining activities.
But Ahmsa, which had invested about $1.5 billion in its Fénix expansion project, doesnt expect the new mining tax to affect investments as much as feared by some miners and mining associations.
To the level "of scaring away investments out of the country, no. But obviously each company should review its own situation and adjust their plans and projects to the new reality," Orduña said.
Neither Ahmsa nor ArcelorMittal Mexico would say how the new tax would affect their bottom lines.
The impact of Mexicos new mining tax on Ternium SAs margins will be "limited," as it is not a big producer or exporter of iron ore and it consumes all of the steelmaking raw material it produces, chief financial officer Pablo Brizzio told analysts in a conference call Nov. 6.
A version of this article was first published in AMM sister publication Steel First.