On April 21, 2022, the Mexican government passed the Lithium Reform. This reform classified the mineral as “strategic” and dictates that all concessions, licenses, contracts and authorizations for exploration, exploitation and use of lithium would be managed by the government. Nearly a year later, on February 18, 2023, Mexican President Andres Manuel Lopez Obrador (AMLO) signed a decree handing over responsibility for lithium reserves to the energy ministry to step up the nationalization process. This decree established a more than 900-square-mile (235,000 hectare) lithium mining zone labeled “Li-Mx 1” in northern state of Sonora, citing the intention to prevent exploitation by foreigners from Russia, China, or the United States. AMLO is exploring ways of increasing government revenue in the future through lithium exploitation as demand for the mineral is expected to increase for electric vehicle battery manufacturing.
It is unclear how the nationalization is expected to play out. The Mexican economy ministry counterintuitively asserted that the existing concessions “remain safe” from revocation and expropriation despite the nationalization, but AMLO also stated that existing concessions will be “reviewed,” which creates great uncertainty. Both the government and the largest currently-operating lithium miner and battery maker in Mexico, Chinese company Ganfeng, have so far declined to comment to news sources.
There are also conflicting reports about whether the government will be open to public-private partnerships in extracting the lithium. On November 15, AMLO urged US and Canadian firms to participate in the lithium market, but analysts expressed skepticism, saying that companies are more likely to favor Chile or Argentina’s more market-friendly policies. One report from February 19 cites the chief executive of the state-run lithium production company as saying that Mexico would be open to partnerships with private companies as long as the government retained a majority stake. However, a more recent report from February 24 suggests that it remains unclear and highlights that AMLO has rejected public-private partnerships in other sectors in the past (e.g. petrol extraction) and may treat lithium in a similar protectionist manner.
Analysis
The crux of the issue is that the Mexican government’s actions may be repelling foreign direct investment that may prove to be indispensable for accessing the lithium at all. The lack of clarity surrounding AMLO’s reform is creating an environment of uncertainty and investment risk, which may raise red flags for would-be investors in an otherwise-promising industry. Mexico is estimated to have some 1.7 million tonnes of lithium. The exact value of such deposits is uncertain, but past estimates suggest that it could be worth more than USD 860 billion – which is more than four times Mexico’s foreign debt.
The economic potential is self-evident and attractive to investors, but the political circumstances could jeopardize those gains. Independent industry consultant Chris Berry told Reuters that state intervention would likely “scare away” private capital. Berry highlighted the example of CATL, a prominent producer of electric vehicle batteries (which use lithium), which has been seeking to open a plant in North America but is unlikely to build a factory in Mexico if the stability and long-term feasibility of the investment may be at risk.
Additionally, complicating matters is the fact that much of Mexico’s lithium is trapped in clay-based soil rather than in hard rock or brines. Lithium has thus far never been extracted commercially from clay. The difficulty and costliness of lithium extraction from Mexico’s uniquely clay-based soils renter it unlikely that the government alone can tap into these lithium resources without foreign technology and investment. The Mexican state-run company LitioMx lacks the necessary “capacity, technology, or mining know-how” to tackle this challenge. Even without this added extractive complication, other countries’ experiences (e.g. Bolivia’s) highlight how inefficient and failure-prone state-owned lithium extraction can be. These facts underscore the necessity of attracting foreign capital and technology to realize the full potential of Mexico’s lithium deposits.
Forecast
Investment in mining Mexico’s lithium will be highly risky in the short-to-medium term. Mexico is unlikely to tap into its lithium deposits’ full potential because, politically, AMLO’s government is fostering an environment of investment risk which it is unlikely to be willing or able to reverse. Additionally, the mines would be located in territory held by the local drug cartel.
Prospective mining sector investors are facing the risk of heavy governmental involvement. Investment in lithium mining in Mexico remains risky in the absence of 2 critical elements: the first is an unequivocal clarification by the government not only about what the “review” of current concessions entails but also about what public-private partnerships might look like under the current administration; the second is a clear, action-based commitment by the government not to overreach into private enterprise.
While the first element is within reach for the Mexican government, the second may remain elusive. Clarification should be easy step for the government to take and is to be expected in the near future. However, credible restraint by AMLO’s government remains questionable. Two recent examples highlight the AMLO administration’s involvement in private investment and subversion of existing institutions. First, in the midst of recent talks of a possible Tesla direct investment in the country, various analysts suggest that AMLO is trying to tip the scales in favor of the investment going to states controlled by his own political party. Second, the revisionism of his administration is exemplified by his overhaul of the National Election Institute, which signals a weakening of democracy to some observers.
Amidst demonstrated political involvement and revisionism towards established institutions, any AMLO government commitment not to exercise a tight hold over potential lithium mining partnerships will not be credible. Investors must be wary of the risks involved.
Finally, the local organized drug cartel (the Sinaloa Cartel, or CDS) could also pose a risk to mining operations. Violent crime in the mountainous region has reportedly been on the rise in recent years. The report noted that the risks have grown to the point that the government had to deploy specialized police to protect the mines’ infrastructure and supply line, but the report otherwise critiqued AMLO’s underwhelming response to the violence. A recent Forbes article on Mexico’s mining sector more generally echoes these concerns about cartel violence and AMLO’s unhelpful attitude towards private mining companies. Overall, these risks may deter US electric vehicle automakers from sourcing lithium from Sonora.
To reiterate, the Mexican government may provide the necessary clarity in its lithium nationalization plan, but it may not be able to credibly commit to future restraint from heavy-handed involvement. Therefore, the lithium mining sector will remain risk-prone in the future. The implication is that the potential revenues from lithium mining may remain untapped. Counterproductively, the Mexican government’s nationalization of lithium may lead to the immobilization of those resources.
By Giacomo Mattei, Guest analyst – Americas Desk at Hozint – Horizon Intelligence
