Mexico Lithium Reform: The Legal Aspects

The enactment of the lithium reform could also breach Mexico’s obligations under the over 40 bilateral and multilateral investment treaties, including the USMCA. Here a lithium photo used by Mexico's Economy Ministry.

Christopher M. Ryan, Cynthia Urda Kassis and Anna Stockamore, Shearman & Sterling. (Latinvex collage)


The lithium reform outlaws all direct private investment and production in the lithium sector.

BY CHRISTOPHER M. RYAN, CYNTHIA URDA KASSIS AND
ANNA STOCKAMORE

Following the rejection of the electric power reform by Mexico’s congress on April 17, 2022, Mexico’s President Andrés Manuel López Obrador (AMLO) introduced a proposal to reform Mexico’s mining law (Ley Minera) on the exploitation of lithium as fast-track legislation.

On April 18, 2022, the lithium reform passed the Chamber of Deputies (lower house), after a failed attempt by the opposition to suspend discussion of the reform in “fast-track” and to send it first to congressional committees for analysis, as is usual. Of the 500-seat chamber, 289 legislators voted in favor of the reform and 193 abstained, claiming lack of familiarity with the proposed legislation. The proposal was transmitted to the Senate where it was approved on April 19, 2022 with 87 votes in favor, 20 against, and 16 abstentions.

In sum, the lithium reform outlaws all direct private investment and production in the lithium sector and creates a state-owned entity to extract, process and sell lithium. Previous proposals called this entity Litiomex, and the Morena Party has now initiated a public survey to choose between “Litiomex” and “Amlitio” as the legal name for such entity. The president has 90 business days after the law takes effect to establish a mechanism to create the state-owned entity.

In particular, the bill amends articles 1, 5, 9 and 10 of Mexico’s mining law, which the reform argues have promoted “an economic orientation in favor of large mining companies, both national and transnational corporations, to the detriment of the fundamental rights of Mexicans.” These amendments are summarized as follows:

Article 1: The Secretary of Economy is stripped of any and all powers related to the exploration, exploitation and use of lithium. Instead, a decentralized public body will be in charge of the exploration, exploitation and use of lithium.

Article 5: The exploration, exploitation and use of lithium is declared to be of public utility, for which no concessions, licenses, contracts, permits, assignments or authorizations will be granted. Further, lithium deposits are considered mining reserve areas and lithium is part of the national heritage. Lithium value chains are publicly controlled through the state-owned entity with the state guaranteeing rights related to lithium exploration, including living in a healthy environment and indigenous rights.

Article 9: The National Geologic Service (SGM) will assist the state-owned entity with exploration.

Article 10: This clause allows the state to nationalize other minerals declared strategic by Mexico. Further, it states that the state-owned entity will operate in accordance with the president’s preferences.

The bill has been met with resistance from the opposition in Mexico’s congress, the mining industry and the international trade community. Certain members of the Chamber of Deputies have criticized the deputies who voted in favor of the reform without even knowing the content of the initiative. As a member of the Partido Acción Nacional (PAN) commented: “Nobody knows what lithium is, 90 percent of the legislators who are going to vote in favor of this reform do not know what [lithium] is and much less know the reform because they will not be able to read it….”

It has further been criticized as unconstitutional, with a member of the Chamber of Deputies explaining that “you cannot prohibit a concession in a law, it has to be done from the Constitution. What they are doing here is failing the minimum legal principles and that is why it will be unconstitutional.” Former Mexican Supreme Court justice Jose Ramon Cossio also commented that the reform could trigger a constitutional dispute.

It is unclear at the time of publication what constitutional challenges the lithium bill will face in Mexico, if any; but the Mexican Antitrust Commission (Comisión Federal de Competencia Económica-COFECE) could challenge the lithium bill as anticompetitive given that it filed similar constitutional challenges against the electricity-related legal reforms championed by AMLO during the past few years.

Additionally, if any of the existing concession holders are affected by any “revisions” made to their concession titles (as announced by AMLO), they may file a constitutional challenge (known as an amparo) to enjoin any such attempt to adversely modify their rights under their concessions.

The bill has generated significant concerns among mining companies in Mexico, especially since AMLO stated on April 19, 2022, that the government will review all existing concessions for lithium extraction. The AMLO administration could seek to pressure the existing concession holders to renegotiate their concessions, similar to the tactics the AMLO administration used with some gas pipeline projects in 2019. AMLO specifically said that the government was reviewing the contracts of “a Chinese company” in Sonora, apparently referencing Gangfeng Lithium, the owner of Bacanora Lithium which manages the only lithium mining project in Mexico that is relatively close to reaching commercial production, which is expected by 2023. This contradicts, in part, his previous promise not to touch licenses already granted to private companies if exploration work had already begun and license requirements were met.

The reform has also triggered trade concerns. As Kenneth Smith Ramos, who led the technical negotiations for NAFTA, warned, defining lithium as an exclusive strategic mineral of Mexico would violate the United States-Mexico-Canada Agreement (USMCA). He explained that “lithium cannot be reserved as a strategic mineral exclusively for the state if this particular sector was not already embodied in the treaty as a specific reserve. And it is not.”

Status of the Lithium Industry in Mexico

The government’s nationalization of lithium, however, is no guarantee that it will be able to successfully exploit and commercialize the metal. Although the lithium reform was introduced with the expectation that Mexico has substantial lithium reserves, this has yet to be proven. At present, there is no lithium production in Mexico, although clays with lithium contents have been detected in over 80 locations.

According to information provided by the AMLO administration, currently there are approximately eight concessions for the possible extraction of lithium in Mexico. As noted above, only Bacanora Lithium appears to have performed substantial exploration activities on site. However, other sources indicate that Organimax and One World Lithium (both Canadian junior mining companies) may also be able to demonstrate that exploration works have occurred in at least certain locations within their respective concessions. Mexico is ranked 10th out of 23 countries with lithium reserves.

The exploration and exploitation of the lithium deposits in Mexico will require significant resources, including specialized technical knowledge. It is possible that the government will decide to do so with the help of private industry as many other countries have done.

Potential Disputes Arising out of the Lithium Reform

With the passing of the lithium reform, the existing lithium concessions and exploration projects are subject to significant uncertainty. The consequences of enacting this reform could include breach of investors’ contractual rights, deprivation of investors’ ownership rights and impairment of the economic value of investments, all of which would likely give rise to commercial and investor disputes.

The commercial disputes that may arise will depend on the specific terms of an investor’s commercial contracts, and would likely include claims for breach of contract, force majeure, material adverse change and changes to local laws and regulations. Investors should analyze their contracts to identify potential claims and liabilities that could arise with the enactment of the lithium reforms. Investors should also take special care to review any applicable contractual notice requirements to ensure that their claims are preserved.

The enactment of the lithium reform could also breach Mexico’s obligations under the over 40 bilateral and multilateral investment treaties (hereafter, “Investment Treaty” or “Investment Treaties”) to which Mexico is a party. These include Investment Treaties, among others, with the United States, Canada, the United Kingdom, China, Germany, France, Brazil, United Arab Emirates, Argentina, Spain and Italy. Investors may be able to bring a claim against Mexico under one or more of these Investment Treaties.

Investment Treaties protect “investors” from the treaty country making “investments” in another treaty country from certain adverse government actions by the country in which the investments are made. Such investments include physical assets owned in Mexico, equity shares held in a company, debt instruments, property interests, certain contractual rights and other tangible and intangible interests arising out of capital investments made in Mexico. Subject to the nationality of the investor and the terms of the specific treaty, investments in lithium mining in Mexico likely to be affected by the proposed reform should be covered.

Investment Treaties serve two principal purposes.

First, they define the types of protections accorded to foreign investors and investments. Protections invoked in Latin American mining disputes:

Expropriation: Expropriation occurs when a government seizes private property for a public use. Such property includes physical assets (e.g., a lithium mine), as well as contractual rights, such as mining concessions. An expropriation can occur directly, where a government formally seizes title and possession of an investor’s property, or indirectly, where the investor retains title and possession of its property, but the value of that property is materially diminished through a government’s action (including the passage of laws and regulations). While a government may lawfully expropriate private property, it must compensate the owner for the value of the expropriated asset. Investment treaties permit investors to bring claims against a government where their property is expropriated and either no compensation or inadequate compensation is provided.

If the current lithium concessions and companies’ assets are nationalized as a result of the lithium reform, this will likely constitute direct expropriation by the government. Whether an investor will have a claim will depend on how the provisions are applied and the compensation (if any) received for the expropriation.

For example, in Rusoro Mining Ltd. v. Venezuela, an arbitral tribunal found that Venezuela unlawfully expropriated an investor’s rights in a gold mine operation through a series of measures that nationalized gold in Venezuela and by failing to pay prompt, adequate and effective compensation.

Discriminatory Treatment: Investment treaties prohibit treaty parties from discriminating against investors or investments from other treaty partners. Specifically, a host government must treat a qualifying investment from a treaty party as well or better than it treats similar investments made by either local investors (National Treatment) or other foreign investors (Most Favored Nation Treatment). For example, Mexico would have difficulty enacting measures that prefer domestic mining companies over foreign mining companies operating in the same sectors. Overall, the anti-discrimination provisions in investment treaties are intended to ensure that similarly situated parties are treated equally, regardless of nationality. Depending on how the lithium bill is enacted and enforced, there is the potential for discriminatory treatment. For example, in Quiborax v. Bolivia, an arbitral tribunal found that Bolivia discriminated against a Chilean investor on the basis of nationality by revoking and annulling the investor’s mining concessions in response to public pressures, nationalist sentiment, and riots against Chilean natural resources investment.

Unfair and Inequitable Treatment: Foreign investors are protected against unfair and inequitable treatment and are entitled to the full protection and security of the law. These provisions require a host state to ensure a certain level of transparency and stability within the law and may hold a state responsible where its actions undermine a foreign investor’s reasonable expectations regarding the investment climate in which it is operating. The lithium reform will materially affect foreign investors’ expectations regarding the operating environment for lithium mining companies.

For example, in Infinito Gold v. Costa Rica, an arbitral tribunal found that Costa Rica violated the right to fair and equitable treatment by enforcing a legislative ban on new mining concessions against an investor whose pending application for an exploitation concession pre-dated the ban.

Ultimately, the full scope of how such expectations may be affected will not be known until the reform is enforced. It is clear, however, that the nationalization of lithium mining rights will fundamentally undermine the existing regulatory regime and investment environment.

Second, investment treaties provide private investors a direct right of action against a host government for violations of international law. Most investment treaties give investors the right to bring claims either in the local courts of the host country or before an international arbitral institution.

Each investment treaty will contain its own dispute resolution provision with the options and requirements for bringing claims against a host state. Investors wishing to bring investment treaty claims against the Mexican government would need to do so in compliance with the procedures set out in the various treaties. For example, certain of the Investment Treaties to which Mexico is a party require investors to wait six months after a dispute has arisen to initiate arbitration and impose a limitations period of three years,[after which claims may not be made in respect of the underlying alleged violation that occurred]. Additionally, many of Mexico’s treaties require an investor to waive their right to initiate or continue related proceedings in local courts. Investors, therefore, will need to ensure they have complied with the necessary preconditions to initiating arbitration so as not to put their claims in jeopardy.

Mexico has been a party to several investment arbitrations (including as a respondent in the mining context) and has prevailed in eleven of twenty-two completed disputes. Investors considering investment treaty claims against Mexico are recommended to obtain legal counsel with expertise in investment treaty disputes, as well as the mining, energy and natural resources sectors.

Additionally, as noted above, Mexican constitutional claims—including amparos—may be available for concession holders affected by any revocation or revisions of existing concession terms by the Mexican government.

Pre-Dispute Considerations

Investors faced with changing regulatory environments or emerging disputes should take steps to protect both their legal and commercial interests. While there are a variety of steps companies can take, the focus should be on preserving critical data, assisting in the prosecution of their claims and minimizing corporate disruption.

Ultimately, the steps that a particular investor should take are highly fact-dependent, so consultation with experienced international arbitration practitioners is recommended.

Christopher Ryan is a partner in the international arbitration practice at Shearman & Sterling, Cynthia Urda Kassis is Global Project Development & Finance Practice Group Leader and Anna Stockamore is an associate in the international arbitration practice at the firm.

Partner Garreth Wong, counsels Christian Rudloff and Augusto Ruiloba and associate Robert O’Leary co-wrote this note.

Special thanks to visiting attorney Pedro Lladó for his contributions to this note.

This article is based on a Shearman & Sterling note. Republished with permission.

 

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