EconomyFinancialMoody's advice: do not use the same model for...

Moody's advice: do not use the same model for lithium as in Pemex

The rating agency Moody’s has advice for the Mexican government: avoid doing the same thing with the new lithium company that has been done with the state-owned Pemex.

The agency has been a constant critic of the actions that the Mexican government has taken around the national oil company and has repeatedly assured that limiting private participation in the oil extraction market and decision-making based on political criteria has added to the losses of the company that continues with debt levels above 100,000 million dollars despite government efforts. Moody’s downgraded the state company’s rating last July, reaffirming the position of its notes within the speculative grade.

Now, Moody’s says that the federal government should avoid replicating the Pemex model in Lithium for Mexico –or Lithium MX– and thus lead the second company to be operationally inefficient, not to take advantage of the mineral and thus not add the projected resources. to public coffers. “If the model that has been used for Pemex is the one used for lithium, we see that the risk of operational inefficiency is high,” says Gersan Zurita, Moody’s senior vice president, in an interview.

“When decisions are made that are not economic, but more than anything political or related to the national budget, then sometimes these types of companies, which are from the government, have to take action to undertake projects or not undertake them according to economic criteria, which it leads to, and we have seen this in Mexico, to operational inefficiencies (within companies)”, he adds.

The Mexican government has given few details of what it expects around lithium and its extraction. But in the latest documents published by the Treasury, regarding the 2023 budget year, it says that in a medium-term horizon the mineral value chain will contribute an additional 0.3 percentage points of the Gross Domestic Product.

When Zurita speaks of not replicating the same business model as Pemex in the extraction of lithium, he refers to the actions around the state company that have privileged taking action for political reasons beyond economic criteria, not allowing private participation despite that they do not have federal resources and opt for businesses that do not generate cash flow for the company.

The discourse surrounding the new state lithium and the terms of mineral exploitation have changed constantly. The change to the Mining Law –approved in April– established that the production of the mineral would be the sole responsibility of the Mexican State and that private participation in any of the parts of the value chain would be prohibited. Later, with the publication of the decree for the creation of LitioMX, the door to the association of the new state-owned company with private institutions was left ajar and a few weeks ago President López Obrador said the company would be public-private because it requires “enough investment ” . Until now, no further details of the operation of the state company have been given.

“Flexibility is better than inflexibility because market conditions change,” he explains. “As it is something new for Mexico, but it is not for companies from other places, that could potentially be positive. Being flexible can be quite positive.”

The Mexican administration has compared the model that it wants to implement in the country with the one launched in Bolivia, where it had chosen to leave the total extraction of the mineral to the State, but which recently chose to implement a kind of rounds to associate with companies private companies with greater experience, technology and resources.

Zurita says that the most viable model for the exploitation of lithium is the Chilean one, which leaves the State as market regulator and gives private companies the license to exploit the mineral in exchange for royalties. This activity already leaves the Chilean hacienda with more resources than the National Copper Corporation of Chile or Coldelco, the state copper company.

But Zurita rules out a radical stance, saying that although there are no great examples of state companies dedicated to lithium and with successful results in their operation: “Whether it is public or government is not necessarily negative, everything depends on the execution, on how it is carried out. establish the company, what incentives are given to the managers to be able to function from a point of view not only in view of how to complement the national budget, because then the decisions will be political and perhaps not optimal for the execution of projects ”, he says in a call.

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