A proposed 7.5% additional tax on the mining sector in Mexico will be “prohibitive” for many smaller players, Haywood Securities analyst Stefan Ioannou told BNamericas.

While the planned tax will not be a “mine killer” for mid-tier miners with established operations, such as Vancouver-based Capstone Mining (TSX: CS) and compatriot Alamos Gold (TSX: AGI), “as you move down the scale, to some of the local miners and privately owned companies, it could be quite prohibitive to some of these guys,” Ioannou said in a telephone interview.

The impact could be even more severe when combined with plans to force companies to actively mine and explore concessions, through increases in per-hectare fees for concessions left inactive for long periods.

This “use it or lose it” system forces juniors to spend money on their concessions “whether the markets are there or not” to raise finance, Ioannou said.

Precious metals miners will also face an additional 0.5% tax on gross revenues under the proposals in the government’s tax reform bill, presented earlier in September.

IMPACT ON INVESTMENT

While established miners are unlikely to cease operations in Mexico as a result of the proposals, exploration companies who may not wish to spend “time, energy and money” on Mexican projects if they are going to be charged 7.5% on top of other taxes, when other jurisdictions may not charge so much.

While on paper the tax will bring in more revenue to the government, “what they need to consider as well is the lost revenue from foreign entities that are no longer going to look on Mexico as a preferred investment destination,” Ioannou said.

But he said the “real question” is whether the 7.5% is going to be the actual figure imposed, or if it is a number put forward by the government from which to negotiate downwards towards the earlier 5% figure.

“They could start high and then chisel away at the figure so as to not upset so many people,” he added.

Mexico is one of the few jurisdictions not to charge an additional tax or royalty on mining production, profits or sales, with companies paying general corporate taxes and concessions fees.