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Canadian Company Mining Projects in Mexico

Canadian and International Legal Issues

by Tad Gruchalla-Wesierski

Mine Mexico Sept. 27, 2010

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Canada is the major player in Mexican Mining

• 70% of mining exploration investment is by foreign companies

• 76% of the 260 foreign-owned mining companies are Canadian (i.e. 198 companies)

(Economía D.G. de Promoción MInera)

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TSX is the exchange for the (Canadian) companies involved in Mexican Mining

• Number of issuers with mining operations in Mexico (as of March 31, 2010) is: TSX 60, TSXV 138 (total 198)

• $1.6 Billion raised for Mexican mining projects in 2009 in 101 financings by these companies

• 55% of the world's public mining companies are listed on the TSX or TSXV

• Number of mining issuers listed (as of Aug. 31, 2010) is: TSX 333, TSXV 1,141 (total 1,474)

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Canada is the major player in Mexican Mining

• Canadian companies have:– >50% of the foreign mining concessions in Mexico– 73.3% of foreign owned mines currently in

development– 67.8% of foreign owned mines currently in production– 80% of new mines in Mexico in the past 4 years prior to

2010 (US $ 1.5 billion) – 66% of new mines in Mexico in 2010 (US $2 billion)

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Legal Issues in a Mexican Mining Project

1. Structuring the investment:a) Tax planning (income tax, customs, other)

b) Treaty protection and benefits

2. Mineral Rights

3. Surface Rights

4. Permits etc.

5. Personnel

6. Other Legal Risks

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1. Structuring the investment:

a) Tax planning (income tax, customs, other) - Canada/Mexico Tax Convention

• Avoids double taxation• Provides national treatment • Withholding tax with respect to certain income is

generally limited to a maximum of:– on dividends:

• 5% if to a 10% shareholder, and • 15% to other shareholders

– on interest 10%

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1. Structuring the investment:b) Treaty protection and benefits

- NAFTA Investment Protections

• National Treatment (Article 1102)• Most-Favored-Nation Treatment (Article 1103)• Prohibition to impose a nationality requirement on senior

personnel employed (Article 1107)• Prohibition on expropriations without payment of

compensation equivalent to fair market value (Article 1110)

• Obligation to permit transfers of funds related to its investments (such as profits, dividends, interest and royalty payments) without delay (Article 1109)

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1. Structuring the Investment5. Personnel

- NAFTA: Personnel, Customs, Dispute Settlement

• Permits the temporary cross-border movement of business travelers between the NAFTA countries

• Tariffs on virtually all originating goods traded between Canada and Mexico were eliminated in 2008

• Establishment of a clear set of rules for dealing with the settlement of disputes

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1. Encourages investment

2. Not a deterrent to investment

3. Mild deterrent

4. Strong deterrent

5. Would not pursue investment due to this factor

Topic: 1 2 3 4 5

Uncertainty Concerning the Administration, Interpretation, and Enforcement of Existing Regulations

42% 40% 15% 1% 1%

Environmental Regulations 27% 59% 10% 1% 3%

Regulatory Duplication and Inconsistencies 19% 51% 27% 3% 0%

Taxation Regime 22% 57% 18% 3% 0%

Uncertainty Concerning Disputed Land Claims 17% 35% 40% 6% 2%

Uncertainty over which Areas will be Protected as Wilderness, Parks, or Archaeological Sites

19% 63% 13% 5% 0%

Socioeconomic Agreements/Community Conditions 5% 60% 29% 6% 0%

Political Stability 14% 43% 34% 9% 0%

Labour Regulations/Employment Agreements 10% 57% 27% 7% 0%

Security Situation 5% 18% 44% 32% 2%

Uncertainty over Taxation Regime and Future Tax Levels 12% 51% 31% 6% 0%

Considerably more hostile

Somewhat more hostile

Less hostile

Considerably less hostile

No Change

Are You Concerned that Attitudes towards the Mining Industry are Becoming . . .

8% 33% 12% 9% 39%

6. Legal Risks: Fraser Institute - Survey of Mining Companies with respect to Mexico - 2010 Mid-Year Update

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6. Legal Risks:Fraser Institute - Policy Potential Index

Source: Survey of Mining Companies (2009/2010)- 2010 Mid-Year Update

Mexico

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1. Encourages investment

2. Not a deterrent to investment

3. Mild deterrent

4. Strong deterrent

5. Would not pursue investment due to this factor

Topic: 1 2 3 4 5

Uncertainty Concerning the Administration, Interpretation, and Enforcement of Existing Regulations

42% 40% 15% 1% 1%

Environmental Regulations 27% 59% 10% 1% 3%

Regulatory Duplication and Inconsistencies 19% 51% 27% 3% 0%

Taxation Regime 22% 57% 18% 3% 0%

Uncertainty Concerning Disputed Land Claims 17% 35% 40% 6% 2%

Uncertainty over which Areas will be Protected as Wilderness, Parks, or Archaeological Sites

19% 63% 13% 5% 0%

Socioeconomic Agreements/Community Conditions 5% 60% 29% 6% 0%

Political Stability 14% 43% 34% 9% 0%

Labour Regulations/Employment Agreements 10% 57% 27% 7% 0%

Security Situation 5% 18% 44% 32% 2%

Uncertainty over Taxation Regime and Future Tax Levels 12% 51% 31% 6% 0%

Considerably more hostile

Somewhat more hostile

Less hostile

Considerably less hostile

No Change

Are You Concerned that Attitudes towards the Mining Industry are Becoming . . .

8% 33% 12% 9% 39%

6. Legal Risks: Fraser Institute - Survey of Mining Companies with respect to Mexico - 2010 Mid-Year Update

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6. Legal Risks:Fraser Institute - Survey of Mining Companies with respect to Mexico - 2010 Mid-Year Update

What Miners are Saying in their words:

"Mexico has big opportunities for investment in mining business."

"The increase of criminal organizations in Mexico posing as anti-mining groups is problematic. These groups continue to extort mining companies and create false claims in the press which damage companies' reputations."

"Mexico is becoming increasingly more dangerous and the drug cartel activities continue to increase and spread the violence to historically non-violent areas."

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6. Legal Risks:Fraser Institute - Security Situation

Mexico Source: Survey of Mining Companies (2009/2010)- 2010 Mid-Year Update

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6. Legal Risks:

Security is a big issue

• Alien Tort Statute claims in the US• Proposed Canadian legislation: "An Act Respecting

Corporate Accountability for the Activities of Mining, Oil or Gas Corporations in Developing Countries" (Bill C-300) requires meeting certain human rights (and environmental) standards

• Consider how to control security services– Consider reputation of those you wish to use

– Use in-house security (to avoid risks with contractors or joint venturers)

– Contractual provisions (for contractors, joint venturers)

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6. Legal Risks:

Corruption is an issue

• Need to control employees, contractors, joint venturers, consultants etc. from paying bribes

• Anti-Corruption legislation and standards– Canada: Corruption of Foreign Public Officials

Act

– United States: Foreign Corrupt Practices Act

– Other

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6. Legal Risks:

Imposition of foreign/international standards to obtain financing

• International Financial Institutions: – IFC (e.g. Policy on Social and Environmental Sustainability)

– IDB (e.g. Environment and Safeguards Compliance Policy)

• Equator Principles: Voluntary international standards for project financing adopted by most international banks from developed countries

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Canadian and International Legal Issues

1. Structuring the investment:a) Tax planning: Tax Conventionb) Treaty protection and other benefits: NAFTA

5. Personnel: NAFTA6. Other Legal Risks:

– Government/NGO/Activist investor litigation or pressure (e.g. Canadian Bill C-300, Alien Tort Statute Claims)

– Foreign Legislation (e.g. Corruption of Foreign Public Officials Act, FCPA)

Calgary Toronto Moscow Almaty Caracas Bogotá Rio de Janeiro

Canadian Company Mining Projects in MexicoCanadian and International Legal Issues

by Tad Gruchalla-Wesierski

Telephone: (403) 267-8149 (direct)Facsimile: (403) 264-5973E-mail: tad.gruchalla-wesierski@macleoddixon.comWebsite: www.macleoddixon.com

Macleod Dixon LLP3700 Canterra Tower400 Third Avenue SWCalgary, AB T2P 4H2