Reforms to Brazil’s Mining Code

After years of uncertainty and debate, Brazil’s government, on 18th June 2013, submitted its mining reform bill to Congress in a move to tighten state control over one of Brazil’s main export industries. This article analyses the extent of the reforms proposed.

Mining in Brazil is regulated by Decree-Law 227, 1967 (the ‘Mining Code’) along with the rulings of the National Department of Mineral Production. Brazil has been considering the reform of the Mining Code since 2008. At the heart of the debate has been the subject of royalties. While the government has sought to increase them, arguing that royalties are lower in Brazil than in any other country, mining companies have countered that imposing additional taxes would make Brazil an expensive place to mine. The slow progress in the debate has been exacerbated by divisions within President Dilma Rousseff’s government and amongst its allies in Congress.

Mining is hugely important for Brazil’s economy. Taking place in all 26 of the country’s states, the annual value of the country’s mineral production is US$42bn. Brazil is the world’s second largest iron-ore exporter and a large exporter of bauxite, nickel and manganese. Gold and copper exports are expected to surge in the near future and Brazil also holds large reserves of potash and uranium. Undoubtedly, Brazil offers a great deal of opportunity for mining companies. Brazilian company, Vale, is the world's second-largest mining company and the biggest producer of iron-ore, with aspirations to become the world’s largest nickel producer this year. Brazilian companies like MMX and B&A Mining, and foreign companies such as Anglo American, are also expanding operations in Brazil. However, the prevailing uncertainty regarding legal reform has deterred many companies and delayed $20 - $75 billion of expected mining investments in the sector (Brazilian mining association, Ibram). In 2011, the Ministry of Mines and Energy suspended its approval of mining permits pending changes to the Mining Code, granting just three exploration concessions in May 2013, after a hiatus of two years. An estimated 120 mining projects are currently on hold awaiting permits (Metal Bulletin May 2013).

A new ‘urgent’ bill has now been presented to the Chamber of Deputies and Congress to overhaul the current Mining Code. The first part of the bill, regulatory in nature, replaces the current system of distributing mining rights on a first come, first-served permit basis, where concession holders are under no obligation to develop their rights. The bill proposes the organisation of auctions for strategic mining assets. Certain mining activities such as mining for mineral water and construction materials will be excluded from the auction system. Concessions, which are currently unlimited, will be granted for forty years, renewable for a further twenty upon satisfaction of specific investment and environmental goals. However, since the current bill does not establish a detailed mechanism for the organisation of mining auctions, it is subject to secondary legislation, which may further delay the granting of new concessions. The bill also places additional restrictions on the transfer of mining concessions between firms, a relatively common occurrence at the moment. Companies which already have licences for exploration granted by the National Department of Mining will keep their rights provided that their projects will not be amended.

The second part of the bill governs the issue of royalties. The bill proposes to increase the highest rate for royalties to 4%, double the current ceiling for most minerals. If the bill becomes law, the government will set the actual rate for each project by presidential decree, according to the location and mineral involved. Each decree would then be subject to congressional review. Although state governments, which receive royalty payments directly, may welcome the proposed rise, many are concerned about the implications for the mining industry. With the lack of compensatory measures, such as a reduction of other taxes, the increase could deter investment. Furthermore, the bill seeks to calculate mining royalties based on companies’ gross revenues rather than net earnings, which will place a heavier burden on companies, who will no longer be able to deduct costs such as transportation before the royalties are calculated. This change will be particularly significant for Brazilian entities whose competitors have the geographical advantage of being closer to China, the main global market for iron ore and other metals.

However, it was not all change on the issue of royalties. Despite reports that the government was considering redistributing royalties to non-producing states, the bill proposes to retain the existing allocation of royalties; with 65% going to municipalities affected by mining, 23% to producing states and 12% to the federal government. This contrasts with the contentious redistribution of government revenues from oil production, which was recently enacted in a reform of the hydrocarbon regulatory regime, and may prove unpopular with states like Rio de Janeiro and Espírito Santo, which have large oil reserves, but little mining. The municipalities which receive the majority of the royalties are concentrated in Serra dos Carajás in Para and the Iron Quadrangle in Minas Gerais.

The final part of the bill seeks to create an independent mining regulator, replacing the National Minerals Production Department. The new regulator, to be known as the Agência Nacional de Mineração, modelled on Brazil’s National Petroleum Agency (ANP), will be granted the power to auction mineral rights, set minimum levels of investment and terminate concession agreements in the event of non-compliance. Many have praised this proposal, encouraged by the precedent of the establishment of the ANP in the 1990s, which was a turning point for the oil & gas industry in Brazil, signalling the end of the State’s monopoly and the start of significant growth in the oil industry. The bill also proposes to establish a National Council for Mineral Policy to oversee the new regime.

However, despite proposing some important changes to the regulation of Brazil’s mining sector, the bill does not go as far as expected. Faced with political pressure, especially from the big mining states of Pará, Minas Gerais and Bahia, and strong opposition from the private sector, the reform has been proposed as a bill, rather than an interim measure, which would have taken immediate effect. The government has also decided not to charge special taxes on highly-productive reserves. Finally, the royalty provisions proposed are not as onerous as expected, with the government curbing initial plans to raise royalties up to 6%. Indeed, the top rate of 4% contained in the bill is only a third of basic royalties charged in other countries, such as Australia.

The 2.4% increase in Vale’s shares on 18th June may indicate private sector approval of the proposed measures and relief that more extreme adjustments to the royalty regime do not seem to have been endorsed. Congress must now debate the bill and a vote is expected by the end of 2013. It is to be hoped that reforms can be agreed, to put an end to the prevailing uncertainty and kick-start renewed investment in Brazilian mining.