The head of the Senate's mining commission, Geovanna Bañuelos, of the Mexican Labor Party (Partido del Trabajo: PT), said on 26 November 2018 that an existent mining draft law would be discussed with members of President-elect Andrés Manuel López Obrador's cabinet and the mining sector before the start of any formal debate in Congress.

• The draft law seeks to strengthen the enforcement of environmental, social impact, and human rights standards in the industry while granting the government greater powers to cancel concessions.
• The contents of the draft law will likely increase project delay risks in the sector. Projects opposed by communities also faces risks of project cancellations via referendum, regardless of the draft bill.
• Discussions with the private sector and differences within Andrés Manuel López Obrador's party will delay passage of the bill. However, approval in 2019 is still likely.

The Mexican mining sector represents 2.5% of the country's GDP, but Mexico is a major player in the production of silver (world's top producer in 2017), copper (world's eighth-largest producer in 2017), and gold (world's ninth-largest producer in 2017). The draft law seeks to strengthen the enforcement of environmental, social impact, and human rights standards in the industry while granting additional regulatory powers over the sector to the Mexican Geological Survey (Servicio Geológico Mexicano: SGM) and the Ministry of Economy. It was officially introduced by Senator Angélica García Arrieta, a member of President-elect Andrés Manuel López Obrador (AMLO)'s National Regeneration Movement (Movimiento Regeneración Nacional: MORENA) on 15 November 2018. The draft law's preamble is critical of companies that operate in the sector and how mining has been managed and regulated by past governments in Mexico. The preamble, for example, criticizes the SGM and the Ministry of Economy for neglecting the enforcement and analysis of social impact studies at the project level and the enforcement of consultation of local communities affected by mining in Mexico.

The preamble also quotes the view of non-governmental organizations (NGOs) such as the Mexican Network of those affected by Mining (Red Mexicana de Afectados por La Mineria: REMA), which claims to have records of at least 15,000 social conflicts connected to mining in Mexico. Other NGOs quoted in the draft law (the views of the mining sector were not included in the draft) include Fronteras Comunes, Fondo Acción Solidaria, and Greenpeace México, to bring attention to the environmental, social, and human rights impacts associated to mining in Mexico.

Draft law content

Specifically, the draft law seeks to amend the existent mining code to allow the Ministry of Economy to:

• Declare whether an area affected by social conflicts is no longer suitable for mining operations.
• Conduct social impact studies, together with the SGM, prior to the awarding of any mining concession.
• Assume responsibility, together with the SGM, over all processes related to the obtainment of the free, prior, and informed consent of local communities inhabiting in any area of influence nearby mining projects in Mexico.
• Inform any concession holder of any potential or existent social conflict that could affect mining operations.
• Propose, after coordinating with the Ministry of Finance, the minimum resources that concessions holders should allocate towards social investments, including in areas such as sustainable development, health, education, and local employment. Such social investment rules would also be proposed to be included in any mining-related bidding for the award of contracts.

The draft-law also states that mining firms should:

• Deliver an annual social impact report to the SGM, detailing the identification of any social conflict, valuation, and forecast of social conflicts and mitigation plans.
• Mining concessions would be cancelled if the area is declared as no longer suitable for mining by the government, if the company fails to produce its annual social impact report, fails to execute a social conflict mitigation strategy, or fails to invest the minimum resources agreed in terms of social investments and the sustainable development of affected communities.

The Mexican Mining Chamber (CAMIMEX) has said that the contents of the draft law are worrying, and that it has approached members of the incoming government to express that they consider the basis and arguments used to justify the draft bill as erroneous and far from reality. Mining firm Grupo México, a major player in Mexico's mining sector, also reacted by stating that some of the contents of the law are already featured in Mexico's legislation and that it would seek to work together with the incoming government and Congress to harmonize points of view.

Outlook and implications

IHS Markit expects AMLO's government to deepen scrutiny of social, environmental, and land-related issues affecting local communities operating in Mexico's mining sector, as well as energy and hydropower projects. This will likely translate into greater environmental and social scrutiny of mining firms. This will increase the risk of mining projects being postponed or cancelled on ideologically or socially motivated bases, and most likely via informal referendums. President-elect AMLO himself is setting the tone by promoting informal referendums, such as the one that ended cancelling Mexico's largest infrastructure project, the USD13-billion Mexico City airport. In September 2018, he also said he would support the staging of a local sentiment survey to determine the viability of the Los Cardones mining project, owned by Mexico's Invecture Group.

The opening of a dialogue process with the mining sector is in principle positive, as it will ensure that companies that operate in the sector are heard before a full discussion in the Mexican Congress takes place. The application of greater standards will mitigate risks for firms operating in Mexico and the commitment of the state to lead on the consultation of local communities will likely aid private firms in the mitigation of conflicts. However, Mexico's institutions are weak and likely to struggle implementing these and all other requirements included in the draft-law. This provides scope for local communities and NGOs to frustrate or force abandonment of projects. Passage of the mining draft law is unlikely in 2018, as the government's main priority after taking office on 1 December will be the approval of the 2019 budget. There are divisions within MORENA regarding this law that will delay its approval. Nonetheless, MORENA has enough seats in both Houses to pass the draft bill in 2019 without having to negotiate with the political opposition, and after having formed a unified view on the matter and hearing the views of the mining sector in Mexico.

Posted 30 November 2018 by Carlos Cardenas, Director, Latin America Country Risk and Forecasting, S&P Global Market Intelligence