Impact on mining industry of diverse federal law reforms in Mexico

Dear clients and friends,

Please find as follows some considerations in relation to diverse federal law reforms and their impact within the mining industry:

· Impact of the electrical reform on the mining industry, especially the part of strategic minerals.

The amendments to the Law of the Electric Industry were published at the Official Gazette of the Federation on March 9th, 2021, with a clear purpose of prioritizing the energy generated by the state controlled “Comisión Federal de Electricidad” (CFE) over the energy generated by particular parties, which most of the time, is generated from renewable sources. According to article 71 of the law, the electric industry was also considered as “public utility” industry, granting them preference over any other activity or industry that implies the beneficiation of the soil or underground resources, including mining industry.

This reform can have a negative impact to the mining industry in two ways, first, if the reform is applied the cost of the electricity in Mexico will likely increase in the following years, affecting the operative costs of the industry and making Mexico less attractive and competitive in this matter in relation to other countries from Latin America and the world with better electricity tariffs, since the reform is limiting the generation of renewable energy centrals and adjusted the regulation of the self-supply entities.

And secondly, the electrical reform created uncertainty for mining investors and risks the provision of minerals for supply chains, including a big economic impact and can create a legal conflict with the current legal language of the Mining Law. The so-called determination of “strategic minerals” could potentially affect already granted rights for particulars in Mexico. For example, the head of the Mexican Geological Service has recently stated in diverse forums that is false that Mexico has the biggest lithium deposit in the world and that the Mexican Government is still studying the treatment and public policies that they will have in relation to this element and other minerals related to the electric industry, however, at the same time, the current legal language of the Mining Law contemplates the lithium and other metals required by the electric industry within its framework, therefore, the Mexican authorities should be very careful to avoid the practice of “reserving” in detriment of particular rights of the exploitation of any given metals in favor of the Mexican State, as is currently the case of the radioactive minerals.

· Impact of the outsourcing law on the mining industry and reasons for it being a good or bad idea.

We believe that this set of reforms to the labor, social security, housing and tax related federal laws is of the highest relevance for the mining sector. The purpose of the reform was to eliminate wrongful practices of employers that in the past abused of the outsourcing scheme in Mexico to avoid the payment and recognition of some elemental labor rights, such as the payment of yearly profits and other benefits, which is always a good idea in every country. With the reforms, the subcontracting practices are limited to those that are specialized and that are not contained in the social purpose of the mining companies, prior registration of the provider of the service into a national online and public registry named REPSE with some additional obligations described in the corresponding laws.

We also believe that the mining industry is always a reference point in the strict compliance with labor obligations, it is an industry that before the reforms already paid for their employees a considerable higher salary and better labor benefits than other relevant industries in Mexico, including the payment of yearly profits, therefore, the mining industry in Mexico will not only comply with the reforms, but will continue to be an industry that exceeds the basic obligations as an employer, becoming a role model of an industry that respects labor rights, labor benefits, union freedom and other labor rights of the women and men involved in mining.

Please feel free to contact us in case you’d like to discuss further these reforms.

Thanks,

Lic. Rubén Alberto Cano Balcorta