New mining bill in Brazil proposes royalty hike

June 20, 2013

The long-awaited bill to reform Brazil’s mining code was introduced on June 18 and includes proposing royalties of up to 4 percent which is double the current rate, Reuters reported.

While the bill could hit some mining companies hard, especially Vale, the world’s largest iron exporter, the bill is not as damaging as some companies feared it would be.

The top rate under the proposal is only one-third of basic royalties charged in Australia, for example. Brazil is getting ready to enact the reforms at a time when the mining industry is experiencing a sharp slowdown. When the bill was first proposed in 2009, the industry was in one of its most prosperous periods ever.

Murilo Ferreira, chief executive of Vale SA, the world's largest iron ore exporter, said the bill would hit miners hard. He estimated the government's total take from royalties would rise to $4.2 billion reais ($1.93 billion) from $1.7 billion reais.

President Dilma Rousseff’s, in a televised statement announcing the bill, said the government wanted miners to have contractual stability and security and for concession renewals to be contingent on them meeting investment and environmental goals.

The bill proposes royalties of up to 4 percent calculated on the basis of the gross income, minus taxes, generated by mining projects. Under the bill the government has the right to make exceptions to the royalty, charging lower rates on a case-by-case basis.

After the bill becomes law, the government will set the actual rates by presidential decree. Brazil's mines and energy ministry said. Each decree is subject to congressional review, Reuters reported.

Currently, royalties are determined on the basis of net income. The change could place a heavier burden on mining companies such as Vale, which could no longer deduct the cost of transportation.

Such costs are particularly significant because Vale's competitors, including Australia's BHP Billiton Ltd and Rio Tinto Ltd, are closer to China, the main global market for iron ore and other metals.

In addition to iron ore, Brazil is also a major producer of copper, gold, bauxite, nickel and manganese.

The bill also proposes the creation of a new mine regulatory agency and would require holders of mining rights to develop their claims or lose them. It envisions an auction system for some mining rights with concessions of 40 years, renewable for 20. Congress will likely debate and vote on the bill by the end of the year, Mines and Energy Minister Edison Lobão said. He said Brazil would start to strictly enforce all clauses in existing mining rights immediately, ending previous leniency.




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