The Conversation (2)
Brazil’s new mining law has been watered down, but junior companies worry that the “use it or lose it” provision could be a drag on exploration.
That’s because Brazil has been threatening to write the mining industry’s latest chapter of resource nationalism through an overhaul of the country’s 46-year-old mining law. Last week Brazilian president Dima Rousseff unveiled the reforms, which include a doubling of royalties to 4 percent and a tightening of rules for owners of mining claims.
Rousseff has faced criticism for the legislation, first proposed in 2009, with many in the business community fearing it will have the same effect as reforms to the electricity and energy industries which have caused share prices of companies in those sectors to fall as costs increased and revenues declined. There is also concern that now is exactly the wrong time to impose more costs on mining just as its biggest metals customer, China, is facing an economic slowdown.
Brazil is a major exporter of iron ore, as well as gold, bauxite, nickel and manganese.
“The overarching concern here is that the government is facing a crisis of confidence in the business community,” Christopher Garman, Latin America director with Eurasia Group, a political risk advisory, was quoted by Reuters. “That crisis is forcing them to moderate. Because of it, while the bill is largely a negative for the industry, it’s probably going to be less of a negative than expected.”
Garman is referring to an earlier proposal for a federal levy, or “participation tax” — on sales or profits generated by the country’s most productive operations. Currently royalty payments are charged on net sales, while the new 4 percent royalty will be charged on gross sales. The new mining law does not go as far as to include a windfall profits tax, which Gold Investing News reported earlier this month was the reason behind Kinross Gold (NYSE:KGC, TSX:K) abandoning its Fruta del Norte project when it discovered that Ecuador’s new mining law included such a tax.
The royalty tax is also low by international standards; Australia for example charges up to 12 percent.
While the CEO of Vale (NYSE:VALE) — Brazil’s biggest miner and the world’s largest iron ore exporter — reportedly told media that he supports the bill because it “simplifies and modernizes the sector” — exploration companies are less impressed.
In contention are changes that force companies to explore and develop claims or lose their rights. The new concessions will run for 40 years and may be extended by another 20.
The Economist explained that the government plans to increase investment in the sector and competition among juniors by auctioning some licenses to the highest bidder, but such a provision could have the opposite effect:
“The aim is to increase competition, but firms say spending on exploration will fall if they risk losing the right to develop deposits they have discovered. They will lobby for this provision to apply only in areas already thought to be rich in minerals, not the two-thirds of Brazil’s territory that is still a geological blank.”
Still, the law has to be an improvement over the current situation, wherein new exploration has come to a virtual standstill since the mining ministry in 2011 stopped issuing new licenses pending the new legislation. Over 5,000 projects and at least 20 billion reais (US$8.9 billion) are on hold according to the Brazilian Mining Association, including about 20 juniors with pending projects forced to fire geologists or shut down, according to The Economist.
Securities Disclosure: I, Andrew Topf, hold no direct investment interest in any company mentioned in this article.
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Kinross Scraps Fruta del Norte as Ecuador Votes on Mining Reforms