Mining Reform in Mexico: Principal Amendments, Effect, and Implications for Foreign Investors

On May 8, 2023, several amendments to laws concerning the mining industry, commonly referred to in the media as the "Structural Reform of the Mining Industry" (the "Mining Reform"), were published in the Official Federal Gazette. The Mining Reform imposes tighter regulations on the mining industry through amendments to the Mining Law (Ley Minera), the National Water Law (Ley de Aguas Nacionales), the General Law for Ecological Balance and Environmental Protection (Ley General de Equilibrio Ecológico y Protección al Ambiente) ("LGEEPA"), and the General Law for the Prevention and Integral Management of Waste (Ley General para la Prevención y Gestión Integral de los Residuos) ("LGPGIR"). 

The Mining Reform will have negative repercussions for foreign investors in Mexico. Affected foreign investors can pursue remedies under international law through applicable investment treaty protections, as many of the changes could constitute violations of international law. There are also remedies available to foreign and domestic investors under Mexican Law, but their availability will have to be determined via a review of each governmental concession or action taken against the relevant concession holder. Such case-by-case analysis will be necessary to determine whether there is an available domestic remedy, such as an appeal (recurso de revisión, amparo, among others). 

Preliminary Analysis of the Mining Reform 

The importance of the Mining Reform cannot be overstated as it will impact any future concession granted and could affect a concessionaire's ability to comply with its existing obligations. Some of the most notable proposed amendments are:  

• Significant changes to the current process for granting a mining concession through the public bidding process; 
• A reduction of the term of such concessions to 30 years, with the possibility of an additional 25-year extension;
• Conditioning the granting of a mining concession on the availability of water;
• The creation of a social impact assessment process, featuring a requirement for prior, free, and informed inquiries with the country's indigenous and Afro-Mexican communities; 
• The term "industrial use in mining" is added to the wording concerning the exploitation, use, or management of national waters, and specific regulations are established for that purpose; and 
• A new obligation is established to create and implement a Restoration, Closure, and Post-Closure Program for mining activities. 

Given the importance and potential magnitude of the Mining Reform, we have highlighted below the key amendments to each of the affected laws. 

Amendments to the National Water Law 

The amendments define "industrial water" as "underground water that must be extracted to conduct construction works and mining exploration and exploitation." The "water authority" can reduce or cancel the volume of water included in a concession if there is a risk to the availability of water for human and domestic consumption.  

In addition, the term "industrial use in mining" is included along with a specific regulation pertaining to it, including the following provisions: 

• Concessions for industrial mining will have a maximum term of 30 years, which may be extended for up to a further 25 years;
• Additional measurement obligations will be required;
• Concession holders must provide water for tilling; and
• The use of water for the transportation of mining materials will be prohibited. 

In granting mining concessions: 

• Water availability will be taken into account;
• Approval of the mining concession must be issued; and
• Approval of the Restoration, Closure, and Post-closure Program must be issued by the Ministry of the Environment and Natural Resources (Secretaría de Medio Ambiente y Recursos Naturales). 

The amendments also include new reasons for the revocation of concessions. 

Amendments to the Mining Law 

The amendments to the Mining Law condition the granting of mining concessions on the availability of water and modify the current process for obtaining concessions by including a public bidding process. They eliminate the "preferential" nature of mining activity and the expropriation for mining purposes and replace it with an agreement between the owner of the land subject to mining and the mining company. 

In addition, the amendments create a social impact assessment process to be executed once a favorable ruling is obtained after the bidding process. They also create a process requiring prior, free, and informed consultation with indigenous and Afro-Mexican people and communities to be carried out by the Ministry of Economy, with the cost to be covered by the winner of the bid. 

The term of concessions is now 30 years, which may be extended for up to a further 25 years. However, concessions assigned to Mexican government-owned companies (empresas del sector público paraestatal) will have an indefinite term and will not be transferable.  

Mining concessions can now be used as collateral by their owners, but the transfer of mining concessions requires the prior approval of the Ministry of Economy. The concept of constructive approval (afirmativa ficta) has been eliminated.  

The amendments establish new grounds for the cancellation of concessions, including: 

• The existence of an imminent risk of ecological imbalance, irreversible damage to, or the deterioration of, natural resources;
• Contamination with dangerous repercussions for the ecosystem or for public health; and
• Failure to inform the Ministry of Economy of any accident that has caused damage or endangers the safety of people or the environment.  

Finally, concessions to certain minerals or substances are limited, and new mining offenses, such as alienation and the trafficking of non-concession minerals, have been created. 

Amendments to the LGEEPA 

The amendments prohibit the granting of mining concessions in natural protected areas (Áreas Naturales Protegidas). Also, they create the concept of a Restoration, Closure, and Post-Closure Program to guarantee compliance with environmental protection obligations at the end of a mining concession. Finally, restoration actions will be required from the commencement of mining activities through to their completion. 

Amendments to the LGPGIR 

The LGPGIR now includes the management of mining and metallurgical waste as one of its objectives, separately defines mining and metallurgical waste, and establishes that mining and metallurgical waste may be finally disposed of at the site of their generation. Generators of hazardous mining and metallurgical waste may transfer that waste to other industries to be used as inputs when this has been authorized through a management plan. 

The LGPGIR grants the federal government the power to regulate the management of mining and metallurgical waste, as well as to enter into agreements with the states. It also creates the concept of a guarantee of responsibility for mining and metallurgical waste, establishing that such responsibility is permanent and nontransferable from the concession holder, regardless of the management regime to which it is subject. 

What Can Foreign Investors Do to Protect Their Investments in Mexico?  

Many of the aforementioned amendments could negatively impact foreign mining investors operating in Mexico. Foreign investors may protect their investment through one or more international investment treaties, of which there are more than 2,500 in force today. Mexico is a party to more than 46 international investment treaties, including bilateral investment treaties, free trade agreements, and international treaties with investment provisions. One of the key features of international investment treaties is that they give foreign investors the right to initiate international arbitration directly against the state in which the investment is located should a treaty breach occur, and the right to seek monetary damages for that breach in a neutral forum. 

Not all investment treaties are created equal, however. Some may contain less favorable jurisdictional and/or substantive protections than others. For example, each treaty might contain unique procedural requirements, such as temporal limitations for bringing an investor–state arbitration claim. Some treaties also contain so-called "fork-in-the-road" provisions requiring an investor to choose between bringing a domestic proceeding or an international arbitration. In some cases, fork-in-the-road provisions are so stringent that investors potentially could be foreclosed from all international fora under the applicable treaty if they initiate an action in local Mexican courts.  

In terms of substantive treaty protections, while each treaty is slightly different and will be interpreted according to its own terms, in general, most investment treaties provide a set of specific substantive protections. These protections typically include: the right to fair and equitable treatment ("FET"), the protection against unlawful expropriation without compensation, the right to full protection and security ("FPS"), as well as guarantees of national treatment and most-favored-nation treatment.  

A brief summary of each is included below: 

The FET guarantee is often broad and provides a guarantee of due process and access to the courts of justice and other tribunals, and requires states to refrain from committing a denial of justice. Violations of the FET provision may occur when a state's actions or omissions: (i) are not transparent and create an unstable or unpredictable legal framework or business environment for the investment; (ii) violate the investor's legitimate expectations, which were relied upon by the investor to make the investment; or (iii) are discriminatory or arbitrary.  

Expropriation clauses will generally state that neither contracting party shall expropriate or nationalize investments except when it is for a public purpose, is done in a nondiscriminatory manner, is in accordance with due process of law, and only if full and adequate compensation is promptly paid to the investor. Expropriation may include outright takings of property (i.e., direct expropriation) as well as a substantial deprivation of value or control of the investment through a series of governmental measures that effectively expropriates the investment (i.e., indirect expropriation).  

The FPS standard creates an obligation for the host state to refrain from directly harming investors/investments through physical acts attributable to the state and to protect investors and investments against similar actions of private parties, e.g., in the course of civil unrest. FPS clauses generally require signatories to ensure, at minimum, the necessary level of police protection as required under customary international law, although some FPS clauses also include legal protection in addition to physical protection.  

The national treatment and most-favored-nation treatment obligations require each contracting party to accord to investors of the other contracting party and to their investments treatment no less favorable than the treatment it accords in similar circumstances to its own investors and their investments, or to investors of a noncontracting party and to their investments, respectively.  

The types of legislative amendments contained in the Mining Reform have, in the past, led to state conduct that has been held to violate investment treaties and international law. For example, the transformation of the current process for the granting of mining concessions and the establishment of a mandatory obligation to create and implement a Restoration, Closure, and Post-Closure Program for mining activities could potentially be deemed to contravene an investor's legitimate expectations, under the FET obligation, to maintain a stable legal framework and business environment. A reduction of the term of existing concessions to 15 years could, in certain circumstances, constitute an unlawful indirect expropriation or a violation of the FET obligation. And conditioning the granting of a mining concession on water availability and imposing a requirement to conduct mandatory consultations with indigenous communities—depending on the method of implementation—could arguably constitute a breach of FET's principles of transparency and nondiscrimination.  

Importantly, the ability to access the above investment protection guarantees is determined by the nationality of the investor and the location of the investment. If, for example, the investor is incorporated in State X and the investment is located in State Y, the international protections afforded to the investor and investment would derive from a treaty in force between State X and State Y. Choosing a corporate structure that maximizes treaty protection before a dispute arises is therefore a worthwhile endeavor to ensure that, when a dispute arises or is foreseeable, the foreign investor and its investment can access the most advantageous international law protections possible. 

Conclusion  

As mentioned, it may be possible to challenge the Mining Reform via one of a number of different legal remedies, the most appropriate of which must be determined via a tailored analysis. 

If you are concerned about your existing or future investments in Mexico, you should analyze your investment's corporate structure to determine whether it is already protected by a robust investment treaty. If so, it is helpful to carefully examine each applicable treaty given that international law protections and the strength of such protections vary widely. If no treaties (or only subpar treaties) are available under the existing corporate structure, it is possible to restructure existing investments with respect to disputes that are not yet foreseeable to ensure that one of the corporate vehicles in the chain of ownership provides the protection of a robust international treaty. Restructuring too late could be considered by an arbitral tribunal as illegitimate treaty shopping, foreclosing treaty protection for the foreign investor.