MEXICO CITY, Sept 10 (Reuters) – Mining companies have threatened to cut investment in Mexico after the government proposed a 7.5 percent mining royalty, arguing that lower metal prices, rising running costs and higher taxes reduce the country’s investment allure.

The royalty proposal was part of President Enrique Pena Nieto’s plan to bolster Mexico’s feeble tax haul, a reform which focuses on reaping more income tax from higher earners, closing corporate loopholes and widening the tax base.

In April, Mexico’s lower house of Congress approved a new percent royalty to redistribute miners’ profits to the states and municipalities where they mine. The bill was originally due for a Senate vote in coming months.

However, lawmakers later decided to fold it into Pena Nieto’s fiscal reform, which has upped the stakes, proposing a royalty of 7.5 percent of earnings before interest, taxes, depreciation and amortization (EBITDA). It would rise to as much as 8 percent for gold, silver and platinum miners.

Mining firms were already unhappy about the planned 5 percent royalty payment, and grumbling has increased following the proposal of a higher levy by the centrist government.

John-Mark Staude, chief executive of Canadian mining firm Riverside Resources Inc, said he has taken 45 percent of his local operations out of Mexico since discussions about a royalty scheme began about two years ago, and threatened to take half of what he has left if the higher levy is approved.

“I know I’m moving: we’ve moved into Canada; we’re still in Mexico, but we’ve moved into the United States,” Staude said. “I’m not saying it’s a death knell. But at this time, the investors are not willing to carry that risk.”

Keith Neumeyer, CEO of Canadian silver miner First Majestic , also criticized the plan. “If the law is passed as the government is presently proposing, it will majorly impact investment in Mexico,” he told Reuters.

Camimex, Mexico’s mining chamber, which argued against the first royalty scheme, said it was still analyzing the proposal.

The government says Mexico, the world’s biggest silver producer, has been too generous to mining firms for too long.

“This mechanism will not affect investment decisions and is much more favorable than those adopted in other countries where they simply tax revenues,” the government said in its proposal.

Unlike regional peers Brazil and Peru, which have already imposed mining royalty schemes in addition to charging mining companies an aggregate tax levy on profits of more than 34 percent, Mexico only charges miners income tax of 30 percent.

Mining is the fourth-largest industry behind carmaking, electronics and the oil sector, accounting for nearly 5 percent of gross domestic product in Latin America’s No. 2 economy.

TAXING TIMES

Mining companies invested more than $21 billion into exploration projects around the world last year, and Mexico saw about 6 percent of that, according to data from SNL Metals Economics Group, just below the United States.

Alongside the higher royalty, the Mexican government wants to charge a quarterly fee to mining companies sitting on mines that have not operated for more than two years.

Half the money made by the tax would be pumped into a social fund for the villages and towns where mining take places. But it is not clear how much money the government hopes to reap.

Mining executives say the timing of the proposal is awkward, given the recent drop in metals prices. Spot gold prices, for example, which had enjoyed a decade-long bull run, have fallen 20 percent since this time last year.

“We’re going to try and lobby lawmakers to tell them that the timing, the scale, the mechanism and the methodology behind this (Mexican) scheme, will only endanger, not boost, the public purse,” said Armando Ortega, Canadian miner New Gold Inc’s vice president for Latin America.

“If the low price cycle keeps falling … many companies are going to suspend operations,” he added.

While active mines are less likely to be affected, investment in exploration, which relies on high-risk seed money, could take a serious hit, said Staude at Riverside Resources.

“There’s already been a massive decrease in investment and if the mining laws are against it, there will not be a backflow of investment for exploration back into Mexico,” he said.