Alejandro Armenta, a member of the ruling party and head of the Mexican Senate’s finance commission, is proposing a giant leap backward for that country. He says Mexico should nationalize its lithium resources. His proposal includes forming a state agency, LitioMex, to “regulate” lithium mining.
Armenta is quoted saying:
“We are currently giving away our lithium to Chinese, Americans, and Canadians… We shouldn’t be a paradise for exploitation. That’s called looting.”
I disagree:
- Mexico is not giving anything away. The state sells mineral concessions for a lot of money, and even staking generates revenue for the government.
- Companies take huge risks and spend a lot of money (to the benefit of local economies) exploring for and defining resources that add to the aggregate wealth of the community, country, and world.
- The state collects substantial tax revenue from production—without having to bother with all the risk and difficulties of operating mines itself.
Lawful businesses that comply with regulations, enrich local communities, and pay their taxes can’t be called looters—just the opposite is true.
And there’s no need for a new bureaucracy to “regulate” one mineral. It’s already covered by existing law and regulation. The idea here is clearly to grab potentially valuable resources that others have done the work of discovering and proving up.
If Pemex is the model for LitioMex, then it pays to remember that Mexican President Lázaro Cárdenas expropriated US and UK oil companies in 1938 to create that state-owned company. Cárdenas is still regarded as a hero in Mexico today. I’m sure politicians like Armenta are well aware of this.
But if lithium is the new oil, maybe Mexico should treat it the same, for the good of the nation?
No.
Stealing is stealing. Violating contracts is violating contracts. Utilitarian arguments don’t change this.
But the utilitarian argument fails anyway…
Given what a disaster Pemex is (declining production for almost two decades), the last thing Mexico needs is to turn lithium mining over to the government.
That would only ensure it’s done as inefficiently as possible, benefiting the people as little as possible.
I have seen governments take over mines before, only to run them into the ground.
And I’ve seen mines bankrupted by governments brought back to life by private sector entrepreneurs.
If Mexico wants to benefit from the new energy paradigm, its best way to do so is to unfetter Adam Smith’s invisible hand and let a truly free market deliver the goods.
Sadly, as my friend Doug Casey likes to say, the chances of that are slim to none, and Slim’s out of town.
Hopefully, Armenta’s proposal won’t be realized.
Or, Mexico might decide to create LitioMex without confiscating other people’s discoveries. It would still have unfair advantages, but at least current contracts would be respected.
But if Mexico goes ahead and expropriates Chinese, American, and Canadian “looters,” it will be a clear warning to all investors.
Why, if it’s just lithium, which is not yet a big business in Mexico?
Because any new nationalization establishes a principle and a precedent that could be applied to other resources—or industries.
Mexico has nationalized other businesses before: railways, airlines, banks. This dismal performance of many of these state-run businesses seemed to have taught a valuable lesson over the course of the 20th century. Mexico has been a more -business-friendly jurisdiction in recent decades. It’s still got plenty of challenges, but its rule of law is much-improved this millennium.
If Armenta’s proposal goes forward, it won’t result in instant nationalization of everything. Even if the country moved in that direction, it would take many years to implement—and it would face local resistance.
I would not sell—am not selling—any shares in gold and silver companies working in Mexico, because of this proposal.
Remember that silver and gold miners already face an extra windfall surtax in Mexico. Even a greedy politician can understand that it’s foolish to kill the goose that lays the gold (and silver) eggs. And I do think that it would take time for the destructive contagion of nationalization to spread to other resources and businesses.
But if I owned shares in any of the lithium companies currently threatened, I’d want to get out of potential harm’s way, until the coast is clear.
That said, the start of a new wave of nationalization in Mexico would indeed be an unmistakable warning shot fired across the bow of all investors.
It’s a warning they ignore at their own peril.
The irony here is that the proposal regards lithium. Lithium is one of the more common metals in our universe. The world’s existing big producers are capable of greatly increasing their output, and there are new lithium projects moving ahead all around the world.
I guess it’s a good thing that typical government intelligence is being applied here. The proposed plunder is of something that has seen falling prices for years.
If LitioMex is created and it expropriates known deposits, it might never make a dime on any of them.
It would serve them right—and hopefully serve as an instructive example.
Meanwhile, watch this space.
I’ll do the same, and let you know if things take a turn for the worse that warrants more urgent action.
That’s my take,
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