DUE DILIGENCE ROADBLOCKS IN MINERAL TRANSACTIONS IN THE AMERICAS
| Jurisdiction | Derecho Internacional |
DUE DILIGENCE ROADBLOCKS IN MINERAL TRANSACTIONS IN THE AMERICAS
Pizarro-Suarez & Rodriguez Matus
Mexico City
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JUAN E. PIZARRO-SUAREZ V.L. is the senior partner of the law firm Pizarro-Suárez & Rodríguez Matus, in Mexico City. His practice is mainly focused in the areas of corporate law, mining law, international agreements, foreign investments, international commercial arbitration and, in general, representation of Mexican and foreign companies mostly of the United States, Canada, Peru, Chile and some Asian and European countries, doing business in México, Central and South America. Mr. Pizarro-Suárez received his legal education from the Law School of Universidad La Salle, in México City and has post graduate studies and Diplomas on International Commercial Arbitration, in a joint program of the Escuela Libre de Derecho and the Mexican Chapter of the International Chamber of Commerce (ICC); and on Letters of Credit, in a program of the Mexican Chapter of the ICC. Mr. Pizarro-Suárez is member of institutions such as the Legislative Committee of the Mexican Mining Chamber (CAMIMEX); the Rocky Mountain Mineral Law Foundation; Latin-American Mining Lawyers (Abogados Mineros Latinoamericanos, AMLA) based in Santiago, Chile; International Mining Professionals Society (IMPS); and, member of the Arbitration Commission of the Mexican Chapter of the ICC.
I. Introduction.
Several considerations must be made when carrying out a due diligence with the purpose to close a transaction on a mining project in Mexico, starting from the need to first determine the scope of the due diligence itself, where it is necessary to distinguish between (i) a due diligence suitable for a transaction having as purpose the acquisition of a complete company or corporation holding one or various mining projects, where all aspects pertaining to the targeted company to be acquired must be reviewed, such as corporate, mining, labor, environmental, taxes, financing, permits, real estate, litigation, contingencies, etc.; and (ii) a due diligence adjusted to a transaction which main purpose is only to acquire mining concessions as assets or to acquire mining rights derived from said concessions. In this paper we will focus in the second case, with the idea of illustrating certain important aspects that must be taken into consideration in a due diligence aimed at acquiring mining concessions or the rights directly deriving from such concessions, such as the right to explore and exploit concessible minerals.
II. Brief General Background of the Mexican Legal System.
The United Mexican States (Mexico) are constituted in a representative, democratic and federal Republic, comprised by free and sovereign States pertaining to the internal regime, and by Mexico City.1 The powers not reserved to the federal government are the competence of the States and Municipalities. The mining matter is federal and it is specially regulated by the Mining Law,2 which is ruled by article 27 for the Constitution in the area of mining and its provisions are of the public order and observance in all the Mexican territory and its application corresponds to the Federal Executive through the Ministry of Economy.3 The Mexican legal system is of a civil tradition (also known as codified system).
III. Mining Concession. Rights In Rem vs. Personal Rights.
In order to better understand the matter, first it is necessary to understand the reasons why, according to the Mexican laws, the mining concession itself does not grant to its holder any right over the surface land where the concession is located and, in the opposite
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manner, why the ownership of a real estate property does not grant to its owner the right to explore and exploit the mineral resources classified by the Mining Law as concessible resources, therefore, it is important to go through the relevant constitutional principles in order that based on same it is possible to establish what it must be understood as an administrative concession in general and, within such concessions, what must be understood as a mining concession, and the legal provisions applicable to know if the mining rights are whether real property rights or personal rights pursuant to the Mexican legislation.
III.1 Constitutional Aspects.
It is of utmost importance to differentiate the principles under which the Political Constitution of the United Mexican States acknowledges, on the one hand, the source from which the private property over the surface land arises and, on the other hand, the exclusive right of the Mexican State to concede the exploitation, use, utilization and disposal of certain mineral resources located the Mexican territory.
Having said that, the first paragraph of article 27 of the Constitution sets forth the following:
" Art. 27. Ownership of the lands and waters within the boundaries of the national territory is vested originally in the Nation, which has had, and has, the right to transfer title thereof to private persons, thereby constituting private property."
This principle that remains in effect in Mexico since the origin of the Mexican State and is characteristic of the legal systems of civil tradition, as our system is, recognizes the so called "original ownership" belonging to the Nation, with respect to all the lands and waters located within the Mexican territory and, therefore, it must be understood that being the Mexican Nation the original owner of said assets (goods), it is only when the Mexican Nation transfers title thereof to private persons that "private property" appears, understanding the latter as the right to use and enjoy granted to an individual over a portion of the surface land.
On the other hand, the same article 27 of the Constitution in its paragraphs fourth and sixth, establishes in relation to the use and utilization of natural resources (within which the mineral resources are obviously included), the following:
" It corresponds to the Nation, the direct domain of all natural resources of the continental platform and submarine shelves of the islands; of all minerals or substances which in veins, layers, masses or beds constitute deposits whose nature is different from the components of the ground, such as the minerals from which metals and metalloids used in industry are extracted; the deposits of precious stones, rock salt and the salines formed directly by marine waters; the products derived from the decomposition of the rocks, when their exploitation requires underground works; the mineral or organic deposits of materials capable of being utilized as fertilizers; ..."
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"... the domain of the Nation is inalienable and imprescriptible, and the exploitation, the use or utilization of the resources concerned (minerals), by individuals or entities organized in accordance with Mexican laws may only be carried out by means of concessions granted by the Federal Executive (Power) in accordance with the rules and conditions set forth in the laws... The legal provisions relative to works of exploitation of the minerals and substances to which paragraph fourth refers, shall regulate the execution and proof of works carried out or to be carried out from their effective date, independently of the date of issuance of the concessions, and the non-observance thereof shall cause their cancellation ..."
As a conclusion of that mentioned above we can say that there is a clear constitutional differentiation between: (i) the surface land (ground), which may constitute private property when title has been transferred to private persons either individuals or legal entities; and (ii) the right to use, utilize and dispose of mineral resources classified by the special law (Mining Law) and located within the Mexican territory, which may only be carried out through the granting of concessions by means of which the Mexican State authorizes individuals or private legal entities therefor.
Deriving from the foregoing it is important to understand that a surface land owner does not only own the surface of his/her property, but also owns -with certain limitations- the upper space over said surface and, in principle, whatever is located in the underground4 as long as no minerals or substances different from the components of the ground exist there, given that, in case such minerals or substances so exist, they shall belong to the Mexican Nation, which is the only legally authorized to grant -through the Executive Federal Power- one or more mining concessions for its exploitation and enjoyment.
III.2 General Concept of a Concession and of a Mining Concession.
The concept of concession is not expressly defined in our legislation; however, we can say that the theory largely accepted defines such in the following manner "The concession is the unilateral administrative act by means of which the administration and exploitation of a public service or the exploitation and utilization of assets under the State domain is granted in a temporary manner to an individual or entity".5 From the abovementioned proposed definition we can...
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