Mexican Mining Tax

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Will Mexican Mining Tax Curb Silver Supply?

Late last month, the upper house of the Mexican Congress approved a new mining royalty tax. The Mexican mining tax would provide for a royalty of up to 7.5% on mining profits, plus a 0.5% tax on mining revenue.

Mexico, the largest silver producer in the world, is home to such mining companies as First Majestic (AG), Endeavor Silver (EXK), Alexco Resources (AXU), Auricana (AUNFF), Great Panther (GPL), Pan American Silver Corp (PAAS) and Silver Standard Resources (SSRI).

Mexico is also one of the largest gold producing countries in the world with GoldCorp (GG) having a large gold mine in the country. Junior gold miners Newstrike Capital (NES.V) and Westridge Resources (WST.V) also have presences in Mexico.

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Reduction in Production?

Will the new law, described as “mining reform” lead to a reduction in the world’s production of silver and gold?

Keith Neumeyer, First Majestic’s CEO said “If the law is passed as the government is presently proposing, it will majorly impact investment in Mexico.”

Bradford Cooke, Endeavor Silver’s CEO said recently regarding the new mining tax “If it goes through as is, our fourth mine will not be in Mexico.”

Sixteen mining company CEOs, including Endeavor’s Mr. Cooke placed ads in four major Mexican newspapers, requesting that Mexican President Enrique Peña Nieto not sign the mining tax legislation.

Great Panther seems to be moving ahead with plans to develop another mine in Mexico.

Many mining companies, however, have properties outside of Mexico and may decide to forego development of their Mexican mines if the new tax legislation is signed into law by the Mexican President.

Chuck Jeannes, Goldcorp’s CEO said that new tax will not cause Goldcorp to close its existing Mexican operations but it would make them hesitant to develop new mines in Mexico.

“My concern is that this will impede new investment in the country as opposed to cause us to shut anything down today.” Jeannes said.

Demand For Physical Gold and Silver Is Increasing

We have noted on this blog the tremendous demand seen recently in the east and west for physical gold and silver.

Demand for physical gold and silver is clearly on the rise and may be out stripping supply soon. The United States produced 32 million ounces of silver in 2012 and has sold over 39 million ounces of its 2013 silver eagles already this year.

Investment demand is higher in India and China as these charts show and industrial demand is projected to reach record levels in 2013.

Driving precious metals prices down via via naked paper short selling, spurs physical demand.

With demand for gold and silver remaining strong and production almost certainly to be reduced if the Mexican mining tax is signed into law, we ask again: Is a Gold and Silver Supply and Demand Price Adjustment Coming?