The Brazilian government has been signalling for years now that it will propose significant changes to Brazilian mining and royalty legislations. Recent
statements from the government indicate the proposal is in its final stages of preparation and should be submitted to Congress soon.
This regulatory framework has been eagerly awaited by the mining sector, but its text has not yet been disclosed and openly discussed. Nonetheless, from
what government officials have said publicly, I believe there will be four major areas of change: (i) the system for staking new ground for exploration;
(ii) establishment of fixed mine lives; (iii) creation of special rules for strategic minerals; and (iv) a likely increase in royalties.
Staking of new exploration ground
The government appears to want to move from a first-come, first-served system to a public bidding process to grant exploration and mining titles. This move
could have a significant impact on exploration activity, especially for greenfield areas. Moving from the current system, where private companies have the
initiative to stake ground for exploration, to a model where the government is responsible for organizing bidding rounds may significantly reduce
investment and mineral exploration opportunities, at least in the short and medium terms. In addition, the government’s department of mineral production
will have to be totally restructured to cope with this duty. The current agency does not have the financial and human resource structures to carry out this
mission. Such a change is likely to take quite some time.
Fixed mine lives
Under the current system, mining concessions are good for as long as the mine keeps running, but that is likely to change. Concessions will probably come
with an expiry date in the future. As long as the length of time is appropriate for each project, and rules for renewal are clear and objective, there
should not be much opposition to this idea. The issue right now is that the government has not been clear on what the proposed length of time will be, nor
the criteria for renewal. I expect, however, that the proposal will be balanced and well accepted.
The Brazilian government currently identifies potash and other fertilizer minerals as strategic. Brazil is a huge producer of agricultural goods, but it is
heavily dependent on potash imports. Special rules for fertilizer minerals will likely seek to incentivize investment in those minerals’ exploration and
production. Good opportunities should present themselves in these areas in the near future and the creation of special rules for strategic minerals is
something that should not be of great concern for miners. But the devil is in the details, and we currently do not know exactly what the government will
propose on this front.
Due to a policy of incentivizing exports implemented in the late 1990s, the producing states have very little room to tax mineral enterprises and are
dissatisfied with current legislation. What they mostly get are royalties and those are low when compared to other countries. Nonetheless, the overall tax
burden on mining (e.g. local, state, federal taxes) is very high. Very little has been divulged on how the government intends to deal with royalties, but I
expect there will be an increase to please the producing states. This increase will likely be offset by the reduction of other taxes, however, so investors
should not expect an increase in overall taxation of mineral enterprises.
A major concern is the transition from the old law to the new one. What will happen to existing claims and exploration licence? Will they be able to carry
on? Will producing mines retain mining rights until the depletion of their deposits, or will set periods of time be imposed? These and many other important
questions are creating uncertainty and there has not been any clear indication from the government as to what the answers will be.
To add to this concern, there has been a significant reduction in the granting of mineral rights for both exploration and mining. This reduction has
occurred gradually for more than a year, and a drop in the number of exploration licences granted, may, in the long run, hinder the knowledge of Brazil’s
mineral endowment. A reduction in the number of mining concessions may not only affect Brazilian mineral production but also significantly increase
so-called political risk.
The effects have already begun to be felt. Projects that are ready to start operations have been unreasonably delayed by the government’s stance. This
delay creates unnecessary uncertainty in the industry, making both the sector and the country less attractive to domestic and foreign investors.
Unless the decision to reduce the number of grants of mineral rights is reversed, the Brazilian mining sector will deteriorate. The reduction in the number
of grants of mineral rights may also be an indication of the level of discretion the government intends to exercise within the context of the new
One should keep in mind that Brazil’s legislation establishes very clear-cut rules for exercising discretion. Discretionary acts must be justified and must
be limited by the principles of reasonableness and proportionality. Therefore, the government’s reduction in the number of grants of mineral rights must be
subject to consideration as to its reasonableness and proportionality in view of its impacts on the parties concerned and on the mining sector as a whole.
Hopefully, we will soon have the details of the government’s proposal. Brazil is a mature democracy and a strong economy. I am confident that the country
will be able to reform its mining legislation in a sensible and balanced manner.
Carlos Vilhena is a partner of Pinheiro Neto Advogados in Brasilia, and head of the firm’s mining practice.