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Brazil’s New Mining Regulatory Framework
Affonso Aurino Barros da Cunha
Partner Responsible for the Mining Practice Group at
TozziniFreire Advogados
[email protected]
The Brazilian Ministry of Mines and Energy (MME) is preparing a draft of a Bill of Law
to be
examined by the President of the Republic’s cabinet and then submitted to voting by
the
Congress. The draft Bill aims to replace the present Mining Code, enacted in 1967,
which no
longer meets Brazilian political, social and economic scenario. The draft Bill’s wording
has
not yet gone public but society has already started discussions about what seems to
be the
main innovations to be voted in Congress.
Some experts anticipate that the new regulatory framework will be, at least in some
aspects, similar to the one enacted for the energy sector. It would include the
transformation of the Brazilian Department of Mineral Production (DNPM), a
governmental
agency operating within MME’s structure, into an independent regulatory agency,
thus
reducing today’s great political influence over the entity.
One of the most debated subjects is how to transform the present system for
obtaining
exploration authorizations (based on the granting of priority rights over an
unencumbered
area to the first applicant) into a bid process. This has been dealt with by Normative
Rules
enacted in July, 2008 by the DNPM, but the theme should be consolidated in the new
Mining
Code nonetheless. On the other hand, if approved, the new bidding system might
raise the
need of a vast program by the Federal Government to level geological information
available
in the several Brazilian States. Remunerating mining companies for investments
made for
identification of areas with mineral potential could be an alternative. In this case,
such
mining companies would not automatically take the priority right over the area (as
occurs
today). They would have to participate in the bid process and would still be somehow
reimbursed for investments made if they do not win.
One topic that could mean good news for foreign mining companies investing in
Brazil
concerns their activities within the country’s border zone. The rules could become
more
flexible for companies that not only exploit the area, but also industrialize their
products
within Brazil, advancing one step further into the production chain.
Even though the MME understands that a consolidated piece of legislation would be
desirable, it is unlikely that a single law will be enacted to govern all of the legal
aspects of
the sector. There are too many sensitive issues to be discussed, such as mining
activities in
indigenous reserves. The market believes that the Government’s strategy will be to
enact
one or more laws to trigger the sector’s modernization process, while laws on the
more
difficult subjects are under discussion in the Congress.
The draft wording of the Bill may become available for public consultation. In
addition to a
general simplification of the process for obtaining the mineral exploitation,
concession
players expect to find other important aspects, such as: the creation of a Federal
Consulting
Brazil Mining.doc 2
Council to supervise and help planning and defining a national development program
for the
sector; the regulation of the use of mining rights as security for bank loans; the
improvement of the applicable environmental legislation, especially rules governing
the
recovery of environmental damages and contaminated lands; and the reformulation
of the
tax system applicable to mineral activities, especially as regards the levying and
destination
of mining royalties (CFEM).
The presentation of the draft Bill to the President of the Republic’s cabinet is
expected to
take place soon. However, many players and even congressmen show some concern
as to
the timing for its delivery to Congress, once Congress’s agenda is full for the second
half of
2009 and 2010 will be a busy year due to the presidential election. Nevertheless, in
case
the Bill is sent for voting still this year, Brazil might have its new mining regulatory
framework already in 2010.
*****
Brazil’s national government is making big plans to reform the country’s mining
code. In the process it is likely to raise the royalties paid to the government by
mining companies. In the view of the government’s current leadership, the
reforms are designed to help ensure Brazil can be competitive with other
countries for new mining sector investments.
Brazil's minister of mines and energy Edison Lobao declared there is a real need
for a new approach to mining in the country. The government, in his view,
needs to make regulatory bodies more agile and it must better protect the
interests of the home market.
"The regulatory framework being drafted is intended to replace an obsolete
model," he explained.
Mining in Brazil
Despite the fact that mineral extraction and metallurgy constitute only 5% of
Brazil’s GDP, it is still one of the Brazilian economy's most important
industries. Brazil’s ranking in worldwide reserves makes it the most important
mineral producer in Latin America.
The country is now the world’s largest exporter of iron ore and niobium alloys –
and it enjoys the benefits of a broadly diversified mineral production that
spreads into many parts of Brazil’s vast geography.
Scope for growth
Brazil’s Mining Institute (which is known as Ibram) has lately boosted its
forecast for mining investments, mainly because of sustained output and sales
growth. Ibram president Paulo Camillo Penna said both Brazilian and global
investors are likely to spend more than the $47bn, which is now budgeted for
mining through to 2013. The primary cause of their expanded forecast is the
country’s rapid recovery from the global economic crisis.
"Brazilian and global investors are likely to
spend more than the $47bn, which is now
budgeted for mining through to 2013."
While macroeconomic stability has laid the foundations for sustained economic
expansion, Brazil's average growth has remained below global and Latin
American averages – this was true even before the global financial crisis hit the
country's economy.
Nevertheless, Penna said investors had reduced spending early in 2009, backing
away from some of their previous investment commitments. This occurred as
demand shrank due to the economic slowdown. Budgets were cut, primarily in
iron ore projects, which usually account for two thirds of the total.
Penna said that production recovery has been fastest in phosphates, which are
used in fertilisers, and in industrial minerals, which are used in construction.
Strength and expansion
Despite the huge environmental damage wrought by poorly supervised mining
operators - which Brazil’s government has done little to prevent or ameliorate the government is making moves to strengthen its leading position since it is
also one of the major producers of niobium, iron, kaolin, tantalite, bauxite,
graphite, asbestos, cassiterite, magnesite, vermiculite, ornamental rocks, talc,
phosphate rock and gold.
The mineral exploration spending and objectives outlined by the Brazilian
Ministry of Mines and Energy are to:
triple mineral production value, to $50bn by 2020
increase by six times the mining royalty revenue collecting though the
widening of the fiscal basis and more efficiency in royalty payment
control, increasing the total annual value from $809m to $4.8bn by 2020
generate 460,000 new direct jobs in the mining sector and about 4.3m
additional jobs in the mining, to increase total mining labour force to
7.3m employees by 2020
invest $57bn 2020 – 80% in iron, nickel and bauxite and alumina.
Consequences
Consider for a moment the situation in the gold sector: the Amazon region has
been responsible for a major share of Brazilian gold production in recent years.
The region has witnessed a sizable gold rush, comparable only to the California
gold rush last century.
"Development of new mines and exploration is
expected to increase significantly in the next
few years."
Brazil's gold rush has spawned a powerful informal mining sector and has
attracted many people, some who have come to the region in search of wealth
and some who were already there, but were displaced from other, unsuccessful
economic activities. What these people encounter at the mining sites are
dreadful living and working conditions.
Gold mining causes substantial environmental problems, which may persist
whether gold deposits exist or not. There have been severe environmental
effects of gold mining in the region, one of which is mercury pollution.
Mercury, an important input in gold extraction, is being discharged into the
atmosphere and rivers at alarming rates, and the environmental costs of the
present extraction technology will be faced primarily by future generations
because of natural chemical processes.
Change must come
There are near-term changes coming to the mining sector, in part because
Brazil is now keenly interested in diversifying the sources from which it
procures both equipment and services. Driving this need for new equipment,
development of new mines and exploration is expected to increase significantly
in the next few years. With increased mining activity there is a tendency to
outsource services and equipment.
Most machinery and equipment used by the mining industry is produced
domestically, either by branches of international capital goods companies or by
Brazilian firms using imported technology. There are as many manufacturers of
mass-produced equipment as there are tailor-made.
Where will Brazilian mining companies be investing?
Equipment – sample analysis mining laboratory equipment, trucks, shovels,
drilling equipment, front loaders, wheel dozers and environmental
control equipment.
Services – drilling, exploration, airborne geophysics, contract mining and
engineering services, materials handling and environmental
management.
Software – mining, exploration and geophysics.
Brazilian miners Vale and MMX could benefit from planned changes
to the country's mining concession rules that could favor existing
domestic producers over newcomers, Banif analysts said in a note to
clients.
The Mining and Energy Ministry is working on a proposal to revamp
mining rules in its mining industry, including the introduction of
auctions to award exploration permits, Valor Economico newspaper
said on Thursday. Currently, the government awards permits based
on requests put forward by miners.
According to Banif, the new rules could present an advantage to
companies that offer the most for the concessions, commit to
investing more in the early years of a project and hire more local
suppliers.
Market incumbents like Vale, the world's biggest iron-ore miner,
would be better positioned to meet all the new industry conditions
than newcomers, Banif noted.
"We see this potential change as a good advantage for investors in
Vale and MMX, as we foresee that local players will have a
competitive advantage," the bank said.
The government unveiled plans on March 9 to improve regulatory
oversight and shorten the duration of mining concessions to
discourage speculation in mineral properties. A draft should be sent
to lawmakers as early as April, Valor said.
More than 150,000 concessions will be auctioned off as part of the
plan, Valor said, quoting Claudio Scliar, a top ministry official. He
added that the plan also aims to reduce Brazil's dependence on
imported mining equipment, Valor reported.
According to Banif, Vale and MMX have greater knowledge of the
local mining reserves and market, more proximity to local suppliers,
and lower cost production that could spur expanded capital
expenditures in the early stage of the projects.
The government's proposal seeks to create a new regulatory agency
and would also require holders of concessions for areas with
commercial mineral potential to start exploring for and exploiting
deposits in a shorter time than required now.
China imported 405 million tons of iron ore so far this year,
an increase of 30% from 2008.
Much of this iron ore came from Brazil—specifically from Brazil’s
gargantuan iron miner Vale SA. Vale has ridden the commodity-toChina wave and has made a tremendous amount of money in the
process. Its year-to-date stock price is up 120% (compared to the S&P
roughly 20% rise) and its market capitalization today is roughly
US$140 billion.
Things may soon change, however. Brazilian legislators are
considering the implementation of a new royalty payment system in
the mining sector. This royalty could increase fees that mining
companies like Vale pay to the Brazilian government, especially those
that simply export ore and do not “add value in Brazil.”
Miguel Nery, Head of Brazil’s National Production of Mineral
Production (DNPM), stated that the plans are in motion to send the
new royalty laws to Brazil’s Congress, along with other, wide-ranging
changes to Brazilian mining laws. “It hasn’t been decided yet, but the
royalty rate will likely be higher for mining companies that do not add
value to the raw material in Brazil,” said Nery, who argued that he
does not believe that the laws will in any way slow down new
investments in the mining sector. Brazilian mining companies,
meanwhile, chafe that new royalty payments will make certain new
projects less financially viable.
Vale, the world’s largest iron ore mining company, has been especially
singled out. The pressure could force Vale (NYSE: VALE) to take
larger stakes in Brazil’s steel companies. Last week, Vale’s CEO met
with Brazil’s President Luiz Inacio Lula da Silva following strong
government criticism that the company was not doing enough to
advance the country’s steel industry. Lula insists that Vale should not
simply export raw materials but should also develop higher valueadded products. To its credit, Vale has made minority investments in
the Brazilian steel industry. But the company insists it wants remain a
minority shareholder in most of its projects in order to avoid
competing with its clients.
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