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December 13, 2011
Analysts and executives assess new regulatory framework
Specialists from the mining area are worried about the new regulatory framework, the text of which is being finalized for forwarding to Congress.
Analysts and executives assess new regulatory framework

Specialists from the mining area are worried about the new regulatory framework, the text of which is being finalized for forwarding to Congress.
 
The project deals with the financial compensation to be paid for exploring mineral resources (CFEM); royalties payable on the ore, for example, is one of the reasons for concern. The setting up of a regulatory agency to replace the National Department of Mineral Production (DNPM), on the other hand, is being looked on favorably. "This is one of the points the institute has been arguing for for a long time. The structure and organization of the department were outdated and it’s no longer able to respond to the demands made of it", says Marcelo Ribeiro Tunes, director for Mining Affairs at the Brazilian Mining Institute (Ibram).
 
"The current regulatory framework is basically the 1967 Mining Code and in itself it’s not a bad instrument. The best proof of this is the growth in Brazilian mineral production", says Tunes. He advises that between 2001 and 2011 the value of Brazilian mineral production grew by 550%. The forecast for this year is that it will reach US$ 150 billion, excluding oil and gas. "This is clear proof for Ibram that the legislation is not bad."
 
 According to Franklin L. Feder, president of Alcoa Latin America & the Caribbean, the new mining framework brings with it an uncertain scenario. "We need to act cautiously in order to ensure the continuity of commitments already assumed", he says. "The government should take advantage of this moment of discussion to make changes that actually contribute towards the development of the country and increase the competitiveness of the mining sector relative to its global competitors", Feder emphasizes. "It’s absolutely right to bring the regulatory framework in line with this new reality".
 
As far as the Ministry of Mines & Energy (MME) is concerned, the document’s point of reference is the National Mining Plan 2030 and its aim is to rationalize the sector and take greater advantage of it. "With the new proposal we want to avoid mining speculation", stated Claudio Scliar, the MME’s secretary of Geology, Mining and Mineral Transformation. According to Scliar, studies have shown that the 1967 code is outdated and allows large areas to remain unexplored.
 
Substituting the DNPM by a regulatory agency is looked upon favorably, but the project that deals with the CFEM is causing concern. One of the points worrying the sector is the passage through the Senate of the CFEM’s proposal to increase the royalties on ore to as much as 5% of the gross revenues of mining companies. Currently, the amount paid to municipalities varies from 0.2% to 3% on company net revenues. "The framework provides for the increase in CFEM from 2% to 4%, mainly on iron ore, the main Brazilian export and undoubtedly Brazil’s most important mineral. This increase will inhibit new investors", guarantees Stefânia Grezzana, an analyst with Tendências Consultoria [consultancy company] in the area of mining and steel-making. For Ms. Grezzana the stimulus for the change in the framework was the fact that steel mills were enjoying a period of high returns. "Given this positive scenario it seemed obvious to the government to collect higher royalties", she emphasizes.
 
"Ore extraction investments have a long maturity period. From the time the scarcity is established until new mines start operating is a  period of between three and five years", explains Stefânia. According to the analyst it is expected that as from 2013, with the large investments that have been made, the scarcity will be resolved and the price will fall to a very much lower level than the current one.
 
For Tunes, if the government "increases the CFEM it will be necessary to compensate for it by adjusting other taxes". The president of Alcoa adds: "The government should be alert to this, in the sense of not allowing the increase in royalties to be analyzed separately from the mining sector’s overall tax burden". "If there’s an increase in the CFEM, there should be some type of compensation, like a reduction in other taxes in the production chain", he insists.
 
The charging of a special participation on deposits is another aspect being questioned. "The fundamental issue is that the legislation should be carefully calibrated vis-à-vis the other competitor countries. If they’re thinking about increasing the tax burden on highly profitable ore deposits they should likewise think about reducing taxes on temporarily unprofitable mines or those that are marginally profitable, as is the case with bauxite", suggests Feder. Stefânia also disagrees with the decision in the way it has been presented. "The rate is applied to gross revenues, while the participation is on net return. This would affect the major players", the analyst states.