How Will Mexico’s New President Impact Silver Miners?

Preliminary results from the weekend’s Mexican presidential election indicate that Enrique Pena Nieto will likely be the new president. With 38 to 39 percent of the votes, as expected, he is the frontrunner. As leader of the Institutional Revolutionary Party (PRI), Nieto’s victory will return his party, which ran the country for 71 years before Mexicans voted for change, to power. Nieto is now the one promising change, both within his party and the nation.

Changes in the political landscape often create uncertainty in the markets. There is the risk that a new administration in Mexico may create a new business environment. Though Mexico is the top silver-producing nation, investors have seemed unconcerned about Sunday’s election. But because it raises questions about future tax rates and royalties, the Mexican election may be worth noting.

Aiming for economic growth

The old PRI had a reputation for heavy-handed, corrupt governance maintained by tactics such as poll rigging and coercion. But with the turn of the millennium came a turn of fate for the party. After holding the reigns of power for over seven decades, the PRI was ousted, and the National Action Party (PAN) took control.

For the past twelve years, PAN has attempted to live up to promises of economic growth, but it has failed miserably in the eyes of many Mexicans. While the Mexican economy has grown and its finances are considered to be in good order, almost half of its citizens are still mired in poverty.

According to a 2010 survey, about 46 percent of Mexicans live in poverty, on roughly 2,114 pesos (or on $180) per month or less.

Pena Nieto largely built his political reputation as the governor of Mexico state. While in that capacity he is credited for lowering debt and overseeing economic growth. He rose to become the young face of a revamped party that is now more open, just, and representative of modern Mexicans.

In a presidential capacity, Pena Nieto plans to produce substantial economic growth on the national level. He has vowed to promptly embark upon a mission for tax reform, and says his administration will aim to get big businesses to pay substantially more.

Mexico is an attractive destination for silver miners not only because of its mineral riches, but also because its taxes are lower than most its peers. Unlike other Latin American countries with sizable mining industries, Mexico charges no levies or royalties.

But the government must boost its tax take, according to Luis Videgaray, Pena Nieto’s campaign manager. He told the Financial Times, ”it cannot be a marginal reform. It can’t be a quarter or half a percentage point, it has to be significant.”

Royalties coming to Mexico?

Though miners were not specified as targets, it has become increasingly common for governments to attempt to squeeze more financial benefits from their resource sectors. Royalties are one of the main avenues to do so.

Some believe that the days of Mexican royalties are approaching. Mining executives reportedly expect it, and Camimex, Mexico’s mining chamber, is said to be considering it.

Eduardo Luna, sector expert and ex-president of Camimex, told a crowd at the PDAC that royalties are inevitable.

But, he also said that in Mexico there cannot be a specific special tax for the mining industry as it would be unconstitutional.

Given Pena Nieto’s commitment to growth, one must wonder how it will be achieved, and if the royalties will be imposed while he is in office.

Even if a legal strategy to tax miners is found, there is at least one reason why Pena Nieto may not want to see it happen during his term: imposing royalties is not investor friendly.

The World Bank said in a study on mining royalties that a nation with a strong desire to attract investors should consider either foregoing a royalty tax and relying on the general tax system or recognizing investors’ strong preference to be taxed on their ability to pay.

Pena Nieto may be very attentive to the perceptions of investors since one of the bold changes that he campaigned on is making PEMEX, the state-owned oil giant, accessible to alliances with the private sector. As it stands, PEMEX’s ability to do so is severely inhibited by the constitution.

While it is unclear how Pena Nieto will overcome the constitutional barriers to his plan, during Sunday’s elections Mexicans were also casting their ballots for Congress. It remains to be seen how much control the PRI will win.

At last report Monday morning, Pena Nieto was leading his closet competitor, leftist Andres Manuel Lopez Obrador, by 6 to 7 percentage points. The distant third in the race, PAN’s Josefina Vazquez Mota, had already conceded defeat.

Securities Disclosure: I, Michelle Smith, do not have equity interest in any of the companies mentioned in this article.