Mining: Brasília plans to auction mining reserves that are near authorization

13 hours and 31 minutes ago

Brasília plans to auction mining reserves that are near authorization

By Daniel Rittner and André Borges | Brasília

The federal government is planning to auction mineral deposits that were already one step from having their production authorized. These are reserves whose mining authorizations were depending only on a signature from the Mines and Energy Ministry. The possibility of these areas being auctioned can fall like a bomb among companies.

Edison Lobão

The private sector calculates that at least 120 requests for exploration of new deposits have completed all necessary proceedings at the National Department of Mineral Production (DNPM), got environmental licenses and only need the signature of Minister Edison Lobão. In November 2011, the government suspended granting authorizations and froze the processes, until the new mining code comes into effect.

Wednesday, at an event at the Palácio do Planalto, seat of the presidency, Mr. Lobão said the government aims to introduce the instrument of auction in the sector. The winner will gain the right to extract resources from the auctioned deposit for a period of 30 years, renewable for 20 years, he said. Such measure was already being expected by the mining industry. What surprised it was the minister’s comment that auctions will be used not only for new areas, but also for mines that had their authorizations nearly ready.

“We understand that, while the mining license is not granted, the process has not been concluded. Therefore, it’s liable to be auctioned,” Mr. Lobão said. The minister said that the Office of the Solicitor-General of the Union (AGU) is close to conclude a legal analysis on the subject “to see if we have security in cancelling and restarting” the processes.

The Brazilian Mining Association (Ibram) reacted with skepticism and surprise when informed of Mr. Lobão’s comments. “We live in a democratic state governed by rule of law, where contracts are and will be respected,” the trade group’s president, Fernando Coura, said. Ibram estimates that there are R$20 billion in dammed-up investments because of the halt in authorization grants.

For Mr. Coura, grants of licenses already requested are companies’ “acquired right” and can’t be subject to auctions. He added he has “full conviction” that the new code measures will not violate “legal security” in the sector, but acknowledged concern with the comments made by the minister.

According to Ibram, only one in every thousand works of geological research results in commercially viable exploration of a mineral reserve. Because of this, it’s a risky investment for those who conduct the research and it doesn’t make sense to auction these areas, Ibram argues. The list of pending mining licenses include projects of companies such as Vale, AngloGold Ashanti, Anglo American Brasil, ArcelorMittal, Vetorial and Companhia Brasileira de Alumínio.

The list includes processes that were started in 1973. So, there was a gap of four decades between the first research activities and the prospect of starting production. “It doesn’t make sense to travel this entire path and then go through an auction,” said lawyer Plínio Gustavo Prado Garcia, who’s specialized in the industry. “What they are trying to do is a legal aberration. The law can’t be retroactively imposed to those who already had the right to mining license,” he said.

Mr. Lobão said the new mining code is nearly concluded and provides for a rise to 4% from 2% in the average rate of the Financial Compensation for Mineral Resources Exploration (CFEM), the mining royalty. The minister said it’s been decided the creation of a special participation tax, as it happens in the oil and gas industry, for high-productivity mineral reserves. Proceeds will go mainly, he said, to municipalities affected by the mines.

Moreover, Mr. Lobão confirmed the DNPM will be converted into a regulating agency, as expected.  Another change is that only companies — and no longer individuals — will be able to get mining licenses for the exploration of mineral resources.

The creation of special participations in mining results, measure that causes concerns among mining companies, is being advocated by the states of Minas Gerais and Pará, the two heavyweights of national mining. The Pará government also asks for the creation of a mining fund which would get part of the collected CFEM.

Bruno Feigelson, a mining specialist partner of the Ribeiro Lima Advogados law firm, said the decision of auctioning already researched areas will put a halt on the sector. “It’s necessary to invest in research in several areas, with huge chance of loss, to make a single project viable. It’s in this context that the country, historically, opted for the right of priority to issuance of research and mining licenses, guaranteeing the priority as a way of rewarding those who are willing to run the research risks,” he said. “Changing rules after companies have made heavy investments may lead to legal questioning.”

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