Mining: Secretary of Energy details changes to new Brazilian mining code.

Mines and Energy minister details changes to new mining code

By Daniel Rittner and André Borges Brasília
Facing company complaints, the government has promoted last-minute changes in the discussions of the new mining code, which is expected to be object of an executive order (MP). In addition to abandoning its plans to charge a special participations tax on high-productivity reserves, the government should set in law the maximum royalty rate at 4%, instead of the initially considered limit of 6%. With this, the idea is to avoid a situation of instability in the sector, with a permanent risk that price highs of metallic commodities on international markets turn into an extra dose of taxes over mining companies.
Aline Massuca/Valor
Edison Lobão
“We’ve retreated in some issues, after comments from the industry,” said the ministry of Mines and Energy, Edison Lobão, in an interview with Valor. He himself cited examples. “We will probably no longer include special participations in the new code,” he said, referring to an additional tax on big reserves, such as the mining explorations in Serra dos Carajás, Pará, and in the Iron Quadrangle of Minas Gerais, as it happens with the oil and gas industry.
The maximum rate of the Financial Compensation for Mineral Exploration (CFEM), the mining royalty, will rise less than expected. Today, it varies from 0.5% to 3%. Iron ore is taxed at 2%. “In a first though, we considered a maximum of 6%, but now limited it to 4%,” Mr. Lobão said.
Such limit will be set in law, preventing the hypothesis that a mere presidential decree may raise the charge, which creates a shield of sorts against thirst for tax revenues at moments of high prices on international markets. “We don’t want to generate instability,” the minister argued.
The minimum rate will fall to zero. This will allow a tax cut on decorative stones, construction aggregates (such as clay, sand and crushed stone) and inputs for agriculture fertilizers. With the new royalty policy, the government estimates annual CFEM revenue to be at the R$4 billion level. In 2012, it produced R$1.8 billion. Collection will be based on mining companies’ gross revenue, not net revenue, but the abandonment of creating special participations and tax cuts on basic ores reduced the prospect of leveraging these values even further.
Mr. Lobão made a point of saying: “These are decisions we’ve reached, but they may be revised up to the last minute.” The new code is very close to be announced by President Dilma Rousseff, he said, and the package tends to be sent to Congress in the form of an executive order. “This is our inclination, to give it more speed. If we were to send this as a message to Congress, this discussion would take two or three years. And an MP may be discussed by legislators the same way.”
In a sign of armistice with mining companies, the minister also no longer is adamant, as he was three weeks ago, on auctioning areas with reserves which already have filed requests for mining licenses — with concluded research and granted environmental licenses — and were depending only on Mr. Lobão’s signature to start operation. At least 120 mines are in this situation, which affects companies including Vale, AngloGold and Bahia Mineração.
Earlier this month, Mr. Lobão had said these reserves didn’t have any secured right and were liable to get into the auctioning system which will be created with the new code, generating a backlash from mining companies. Now, Mr. Lobão adopted a more cautious standing, without anticipating conclusions. “We have a tradition of strict enforcement of law and contracts. We wish to compensate these people for their efforts, without losing sight of what the new law sets. It’s possible that they get the mining authorization. We are studying this to solve the matter,” the minister said.
Under the new code, mineral-area concessions will be handed over to auction winners for a period of 30 years, which can be extended for another 20 years. Today, companies exploring reserves may extract ore as long as they last, without time limit.
In the mining package, as the minister has said several times, there are three different projects — or MPs: One updates the regulatory framework and creates the National Council of Mineral Policy, which will define areas to be auctioned; the other deals specifically with royalties; the third transforms the National Mineral Production Department (DNPM) in a regulatory agency for the industry.
To Mr. Lobão, the government didn’t handle the issue behind closed doors. He recalled that there were meetings with state governments, associations of municipalities and corporate trade groups. “No one can claim not to have been heard,” he said.

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