AMLO to lithium: My precious!

Here in Mexico the big midterm elections coming up in June are absorbing a lot of attention right now, but before we talk about that we just wanted to make some comments on a topic currently flying a bit under the radar: Lithium mines.  The issue is, prior administrations granted a number of concessions to foreign private companies for the exploration and eventual production of lithium in Mexico, and a small number of these companies have been out in the desert scratching around in hopes of finding a viable mining site.  Two things make this more important to Mexico now than it may have seemed a few years ago: First, a massive lithium deposit in the northern state of Sonora is being developed by foreign capital with plans to begin commercial production within two years; and second, Mexico is currently governed by a president who views the private sector — and particularly foreign companies — to be exploiters, thieves and enemies of the nation.  

No one can deny that the history of the Global South is fraught with examples of exploitation, thievery and abuse by colonial interlopers and multinational corporations.  Recognizing this reality is important for avoiding the mistakes of the past and pursuing more enlightened, fair and effective public policies, not to mention for bonding with like-minded new friends while drinking mate at 2:00 a.m., if you happen to be in college.  Basing public policy on the premise that all private businesses are the enemy, however, creates complications for the implementation of these policies in practice.

Mexican President Andrés Manuel López Obrador (AMLO) won the presidency in July 2018 with a substantial congressional majority for his personal political party, Movimiento Regeneración Nacional (Morena) in part on the grounds that the previous two parties to govern, the PRI and the PAN, were hopelessly corrupt and in league with international neoliberal robber-barons to the detriment of the fatherland.  We take no issue with the “hopelessly corrupt” part (they absolutely were) and we could even ignore the 1960s-era nationalist sloganeering, as long as we could move forward with progressive public policies and less corruption.  One big problem, however, has been that in his relentless drive to bring industrial activity under state control and vastly increase government revenue, Mr. López Obrador has not hesitated to invalidate the terms of international contracts or regulatory commitments undertaken by prior administrations.

In its first year, the López Obrador government refused to allow an international gas pipeline mega-project to begin operations, instead forcing the Canadian-led consortium to renegotiate terms more favorable to Mexico’s state-owned electricity company, the CFE.  Since then, AMLO has pursued a dogged campaign of questionably legal regulatory changes to concentrate the energy industry in the hands of the CFE and the state-owned oil and gas company, Petróleos Mexicanos (Pemex).  The rule changes enacted but largely suspended by the courts would fundamentally undermine the legal framework underlying billions of dollars of investment by foreign energy companies, particularly for the development of wind and solar electricity generation infrastructure.

The Sonora lithium project arousing covetous glances from AMLO and Morena (together commonly referred to as the 4T) is one of over 30 concessions for lithium exploration issued by the Mexican government, although few of these are under active exploration, according to a report by Canadian and Mexican NGOs on the topic.  The Sonora project is considered by some estimates to be the largest single lithium deposit under development in the world.  The demand for lithium, used in the manufacture of rechargeable batteries for electric vehicles (EVs), computers and mobile phones, among other applications, is growing rapidly and holds enormous potential as EVs replace fossil fuel-powered vehicles going forward.  Alas, the holder of the development concession for the Sonora lithium project is a consortium of companies from Great Britain and China – a veritable Mr. Burns of international investment, in the eyes of the 4T.  (Note: Bacanora Lithium, the leader of the project, was founded in Canada and subsequently headquartered in the UK, and is listed on the London Stock Exchange.  The Chinese partner is Ganfeng Lithium.)  Bacanora obtained its initial exploration licenses for the Sonora site in 2010, and has been carrying out testing, evaluation and preliminary engineering ever since.

In the decade since Bacanora began developing the Sonora lithium project, the metal has steadily gained prominence as critical to the future of the automotive and personal electronics industries.  In November 2020, a Morena Senator introduced a bill that would modify the Constitution to nationalize lithium as the exclusive property of the state.  Various senators immediately expressed support for the bill, which was sent to committees for consideration and as of this writing has not yet been enacted.  When asked about his position on nationalizing lithium at a press conference on March 3, 2021, President López Obrador said “we are going to continue reviewing the possibility of nationalizing this resource.” Perhaps noticing some extra-frantic scribbling by the assembled reporters, the president added “we don’t want to expropriate just for the sake of expropriation…I say this so our adversaries don’t start sowing fear.”  We feel that the president need not worry about his adversaries sowing fears over nationalization, when he himself just volunteered the words “nationalization” and “expropriate” in a public statement on lithium reserves currently being developed by private companies.  In the immortal words of Sir Desmond Glazebrook, If you spill the beans, you open up a whole can of worms. How can you let sleeping dogs lie if you let the cat out of the bag?

Against the backdrop of the bait-and-switch regulatory changes currently churning through Mexican courts, hand-wringing over the prospect of lithium nationalization has surely commenced.  In an April 14 presentation hosted by the Institute of the Americas, Secretary of the Economy Tatiana Clouthier assured attendees that the 4T has improved conditions for foreign direct investment in Mexico.  Right or wrong, we imagine energy and mining investors would beg to differ.

It is important for us to make clear that there is nothing unfair about Mexico wanting to ensure the country benefits from the exploitation of its natural resources.  The 4T may argue that the taxation of lithium production and fees charged to private companies for the right to extract the metal are insufficient.  Nationalization of the resource long after companies have begun to develop and operate mines, however, raises at least two problems.  First, it will be yet another high-profile demonstration that the AMLO administration feels no obligation to respect agreements or contracts entered into by previous administrations.  This will likely halt production at mines currently under development, inflicting major economic losses on the investors, but also scare off future potential investors whose capital is needed to develop mines, build power plants and fund other large industrial infrastructure.  Second, once the Mexican state takes ownership of the lithium deposits, how will the government convert the newly confiscated treasure into benefit for the nation?  Due to its geological characteristics, lithium is notoriously difficult to extract and commercialize at an economically viable cost.  Bacanora and other Canadian companies such as Organimax Nutrient Corp. and One World Lithium have spent years and millions of dollars of risk capital testing and preparing the Mexico sites to which they hold concession rights, and as far as we can determine none of them has yet delivered any commercial lithium to market from these locations.

Industry specialists cited in various reports on the topic suggest that the Mexican government would need to create a new state enterprise to actually mine the lithium, a depressing prospect considering the catastrophic financial state of the country’s flagship state-owned enterprise, Pemex.  But creating a new burdensome money pit in the federal government would be the easy part – the 4T is already doing it with AMLO’s prized white elephant supreme, the Dos Bocas oil refinery currently going over budget at its construction site in the delicate wetland ecosystem along the Tabasco coast. But is AMLO really willing to commit the Mexican government to a long-term mining enterprise that will cost billions with no guaranteed timeline for profitability?  He has not said so, and we imagine that even AMLO would be reluctant to get into such a quagmire with practically no chance of a happy ending.

Other industry analysts opining in the media have asked why it would be necessary to nationalize lithium, if private companies have been mining gold, silver and all kinds of other valuable metals and minerals in Mexico for decades, and lithium could be added to the regulatory scheme under which gold is extracted without modifying the Constitution.  AMLO’s handmaidens in Congress have demonstrated an alarming proclivity to justify his most autocratic initiatives under a blanket pretext of “national security”, but this is how countries become tinpot dictatorships and we would much prefer more nuanced arguments for public policies so critical to economic development.

As we see the lithium issue at this juncture, there are three basic paths the government could follow: 1) Make no policy changes and allow the existing concessionaires to develop their holdings, with potentially sub-optimal benefit to the nation from future wealth extraction;  2) Nationalize lithium and debate how to take advantage of it for years until a future government chooses an alternative course; and 3) Design a regulatory scheme with input from government officials, industry representatives, mining and lithium specialists and public policy technical experts that would allow private companies to put up the necessary capital to develop the deposits for a profitable return, while at the same time providing maximum economic benefit to the nation and ensuring strict adherence to environmental sustainability protocols.  Under a hypothetical option 3, the new regulatory scheme is imagined as applicable to lithium concessions going forward, with existing concessions either renegotiated in good faith with incentives, allowed to continue under their prior agreement conditions, or taken to court (not preferred).

Naturally, we prefer option 3, because this is how we see the best role of government in industry: to establish clear and dependable rules for doing business that create economic incentives for the investment of risk capital, while ensuring economic benefit to society as a whole and protecting the environment for future generations.  We would argue that industrial policy is best designed with participation from multiple key actors including government, private sector and technical specialists, and not by thumbing through the “Che Guevara” entry on Wikiquote, which is how it often appears Morena comes up with their great ideas.  Either way, we expect to hear much further braying on this subject in Congress going forward.

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