By Affonso Aurino Barros da Cunha
Although no decision has been made yet, the effort to improve efficiency and transparency will likely increase production costs for miners
On June 18, President Dilma Rousseff announced a single Law Project comprising all of the changes to the Brazilian mining legal frame. The market finally had access to the contents of the draft text of the Law Project, which is still to be discussed and voted on in the Brazilian Congress, and therefore subject to possible changes.
4Generally speaking, the Law Project did not bring great surprises, but the private sector received it with mixed relief and caution. On the one hand, the best news is the fact that the government will respect all previous mining tenements and concessions. In addition, what the government had been calling “special participation” in highly profitable projects (which would be subject to higher taxation) was left out of the new rules.
On the other hand, the reason for the caution is the increase of the cap for mining royalties (known as CFEM) to 4%. Even though the rates applicable to several minerals will be defined by Presidential Decree only after the new law is enacted, there is a general sense that all rates will be increased, leading to an increase in production costs. The CFEM amounts to be paid shall be calculated with a basis on the companies’ gross income, after deduction of taxes effectively paid, as levied on the commercialization of the minerals.
As forecast, the Law Project creates the National Council for Mineral Policy (CNPM). It also transforms the DNPM (the government body linked to the Ministry of Mines and Energy that currently supervises mining activities in Brazil) into the National Mining Agency (ANM). It will be incumbent upon the CNPM to propose guidelines and planning for the sector, stimulating exploration and innovation. The ANM will be in charge of regulating, managing and inspecting the sector, creating the rules to be followed and standards to be met, promoting public auctions for the areas with mineral deposits, and imposing penalties.
Furthermore, as part of the sector’s intended modernization, the Law Project alters the mining concession system. If the text is not changed by the Congress, the priority claim principle (the first to claim an area has the right to explore and exploit it), on which the current system is based, will be replaced by different types of public auctions.
The CNPM will specify which areas shall be granted by means of an auction, the other areas then being granted through a simpler procedure named public call (“chamada pública”). Both auctions and public calls shall be conducted by the ANM and cases where one or another will apply are yet to be fully defined, but there is a general sense that areas containing large mineral deposits or minerals considered strategic by the government will be submitted to auctions. Foreign companies may take part in either procedure through their Brazilian subsidiaries.
Auctions shall be triggered by invitations to bid specifying the areas in which they will apply, containing the draft concession contract, and the minimum parameters for a bid to be submitted, including level of local content and guaranties to be placed by bidders. Payment of fees to the government (signature bonus, discovery bonus and participation in the exploitation earnings) may also be stipulated as bidding parameters.
Public calls may be triggered by the ANM through a calling instrument containing the characteristics of the area, a draft of the concession contract, and the parameters for the bids. In addition, any interested party may request the start of a public call in relation to a given available area not set aside by the government for public auctions.
The validity term of concession contracts shall be up to 40 years, renewable for successive periods of 20 years.
According to the Law Project, there shall be only three categories of mining tenements: concessions, authorizations and permissions. Concessions shall embody both exploration and exploitation phases. Authorizations shall refer to minerals used in civil construction, mineral water, decorative stones and minerals used in the production of fertilizers, formalized through adhesion contracts with a renewable validity term of 10 years. The Law Project mentions permissions, which apply only to prospectors’ cooperatives and are defined in an existing law.
In addition to the CFEM and other fees stipulated in the invitations to bid, mining companies shall also have to pay annual inspection fees and occupation fees (calculated with a basis on the area occupied), as well as royalties to the land owners (20% of the amounts paid as CFEM).
Generally speaking, there is a sense that the production cost will increase. While the new system is supposed to be easier to handle and more transparent, the government shows every sign of its intention to be more rigorous in the regulation of the sector, including from the antitrust standpoint. As the Law Project is yet to be voted on, the market will follow the discussions in Congress in an attempt to anticipate the actual impact its final wording will have on the sector.
Barros da Cunha is a partner with Siqueira Castro, a Brazilian law firm that specializes in mining. (www.siqueiracastro.com.br)
Demonstrations Could Delay the Process
Parliament recess does not delay the period for passing the bill—45 days in the House of Representatives followed by 45 days in the Senate—otherwise the agenda of the Congress is locked. However, in view of the demands made in public demonstrations, the president of the Republic will, in due course, withdraw the request for urgency. This may have the effect of throwing cold water on the intentions of the Executive Branch, but could allow a large number of additional proposals to “tailgate” the bill. However, this is mere speculation.
As to what lies ahead, our assessment is that negotiations will be as difficult as in the case of the Forest Code, the Oil Royalties and the Ports Provisional Law because, even though there is a bill, the proposal of the Executive Branch excessively concentrates decision-making in this branch.
The Brazilian Mineral Policy Council (CNPM) centralizes more future decisions than CNPE and is not as democratic as CONAMA or CNRH, for example. We believe the conversion of DNPM into a regulator will not be difficult to approve in Congress, but the reality of this conversion in the short and medium term will be very complicated due to technical and operational problems in relation to the coexistence of two legislations, namely the former law and the new law. It is only now with the pre-salt tenders that the ANP will start to work with two regimes.
Because the mining bill is essentially based on the oil and gas model, the difficulties involved in controlling approximately 80 mineral substances in the continent via tender offers, signature and discovery bonuses, as well as minimum national contents in the projects that will receive exploration authorizations, for example, are immense.
Commencing tenders with the CPRM’s inventory of areas will be a major challenge given suspicions on the part of investors as to why this was not done earlier if nothing in the law prevented the state-owned company from tendering exploration areas. Small- and medium-sized mining companies are apprehensive about the potential outcome of tenders and public invitations to bid. Large mining companies will adapt quickly.
The environmental issue has not been addressed by the bill, which is bound to result in a number of discussions since it proposes a single mining title for research, exploration and closing deposits, whereas environmental laws contemplate 03 licenses (Prior, Implementation and Operation Licenses) with specific valid dates. How will these administrative acts become compatible? Indigenous land, independent open air mining and radioactive materials are outside the scope of the bill, which is likely to lower the pressure involved in the debate. For towns and states, the problem will basically be the taxation of CFEM (Financial Compensation for Exploration of Mineral Resources) since the bill provides that this tax is to be regulated by a presidential decree under the future law, whereas towns and states want to define this issue at once. There is much to come and we can only wait for future developments.