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Will Goldcorp Close Up Shop in Mexico?

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Apparently Mexico never heard Chief Justice John Marshall's famous dictum that "the power to tax involves the power to destroy," because the government is setting out to destroy broad swaths of Mexico's economy as it grasps for more revenues.

From soda to food manufacturers, pet-food companies to the maquiladoras, the companies that export food, Mexican industry is under assault from new tax levies. Gold miners are the latest to feel the brunt of the attempt to rake in more revenues, as the government passed a 7.5% tax on profits of resources plus an additional 0.5% on precious-metals miners.

Grupo Mexico, whose subsidiary Southern Copper  (NYSE: SCCO  )  is the country's largest copper producer, has also said it would be "obliged" to look elsewhere for places to invest the $3.5 billion it has available. Goldcorp  (NYSE: GG  )  has said the new tax would push its effective tax rate to more than 40%, making Mexico the highest-cost country in which to do business. While it probably won't close any of its working mines, it also won't be investing any more money there, either.

Mexico is the world's biggest silver producer, and according to the industry watchers at Metals Economics Group, it is the fourth biggest location for miners to invest in behind Canada, Australia, and the U.S., accounting for 6% of global exploration spending. The country is also the 10th largest producer of gold and copper. It's still a politically stable country, which makes it attractive, but stability can't outrank cost, and Mexico may have just shot itself in the foot.

The country's mining association predicted that with passage of the tax, investment in the sector would be cut by more than half as investments fall from $30 billion to $12 billion over the next five years and the total tax burden on the industry surges to 57%.

The move is just part and parcel of the resource nationalism that has gripped other countries following the rise in commodity prices. These nations suddenly want a greater share of the pie's riches, yet Mexico's loss could be the gain of Chile, Peru, and even the United States.

Goldcorp just got its environmental permit for the $4 billion Chilean El Morro copper project restored by the country's supreme court, and while Newmont Mining's (NYSE: NEM  ) Conga project is stalled in Peru, Freeport-McMoRan (NYSE: FCX  ) has a very viable asset in its Cerro Verde open-pit copper and molybdenum mining complex. It's in the midst of an expansion program that would provide incremental annual production of approximately 600 million pounds of copper and 15 million pounds of molybdenum beginning in 2016.

As tempting as it might be to take all its marbles and leave Mexico, Goldcorp just doesn't have that luxury. It reported third-quarter earnings last week that witnessed a massive plunge in profits from $498 million last year to just $5 million this year. Its Cerro Negro project in Argentina has been halted, causing it to defer spending at the project and suspending all its exploration activities, and it has had to push back first gold production for six months.

So Goldcorp won't hang up a "Gone Fishin'" sign in Mexico, but it will redirect its money elsewhere. For example, its Marigold and Wharf mines in Nevada and South Dakota, respectively, can continue to be efficient producers for the gold miner.

Miners everywhere are under pressure already because of falling prices, and higher tax burdens from grasping countries are a risk of doing business. It seems unfortunate, though, that Mexico has chosen to go from being a mining-friendly country to one that will be a place too burdensome in which to do business, and Goldcorp won't be alone in avoiding the possibility of letting Mexico destroy its finances further.

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Read/Post Comments (2) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 03, 2013, at 5:47 PM, SSBN620 wrote:

    At the risk of being attacked by mainstream fools, here goes:

    1) The western powers have unilaterally decided the way to preserve the status quo is money printing

    2) Precious metal values pose a direct threat to paper currency values

    3) Precious metals values are based not on the reality of supply and demand, but mostly on paper futures contracts through COMEX, easily manipulated through HFT by big banks

    4) The up and coming power in the world is seeing things differently. The Chinese government is hoarding every ounce of it's considerable production, and the Chinese population is buying up 95% of the entire production of the rest of the planet.

    Common sense has me siding with China, because an ounce of gold beats an ounce of paper in anybody's poker game.

  • Report this Comment On November 06, 2013, at 3:26 PM, CopyCat3000 wrote:

    We would be wise to observe whats happening in Mexico. 40% tax rate is destructive to enterprise. We seem determined to allow government tell us whats best for us while taking our money. That will likely lead to our undoing.

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