After several years of debate, the Brazilian Government tabled in Congress on June 18, 2013 a proposal for a new regulatory framework for its mining sector. This much anticipated initiative contains significant changes to the country’s decades-old mining code, including increases in the royalties charged for the exploration of natural resources and a more modern system for the allocation of mineral rights.
The Brazilian President has asked Congress to approve the new legislation with urgency. However, the recent wave of protests in Brazil has impacted Congress’s priorities and no timeframe for approval is certain at the moment.
The current mining code sets royalties in a range from 0.2% to 3%, depending on the type of mineral. The new proposal will raise the ceiling for royalties to 4%, leaving it to the Government to later decide by decree on the specific rate to be charged for each type of mineral.
Further, while royalties are currently calculated on the basis of net revenues, the proposed code would charge royalties on after-tax gross revenues.
Unlike the current royalties’ regime for the oil sector in Brazil, however, the new law does not include windfall payments.
Single Prospecting Contract
Unlike the current regime of split exploration permits and exploitation contracts, the new code stipulates a single contract for both the exploration and exploitation phases of mining projects. Contracts will be valid for a period of up to 40 years, with the possibility of renewal for another 20 years.
Mineral rights will only be granted to corporate entities incorporated according to Brazilian laws and headquartered in Brazil. The proposal also envisions the possibility of additional restrictions on the participation of foreign entities, either individually or in consortium, in mining projects.
Contracts are transferrable with prior consent from the responsible public authority.
New System of Allocation of Mineral Rights
Three different methods are proposed for the allocation of mineral rights:
- Bidding Processes
Bidding Processes are mandatory for areas to be selected by the National Council for Mineral Policy (CNPM), a Government body that would be created under the new code to supervise the mining sector. Bidding instructions must include technical and financial requirements for prospecting contracts, in addition to time limits and minimum investment standards for the exploration phase. Bidding Processes can also set rules regarding participation of foreign entities and local content obligations.
- Public Calls
For an area not previously identified by CNPM, the responsible public authority for that area may issue a Public Call for the allocation of a prospecting contract. Public Calls follow a more simplified procedure than the formal Bidding Process, but may also set specific requirements for the granting of mineral rights.
Finally, Authorizations are available on a first come first serve basis for a limited number of minerals, including minerals with immediate application in the construction industry. Authorizations are issued for shorter periods of up to 10 years, but have no set limits for renewals.
The new mining code includes a “grandfather” clause for exploitation contracts executed under the current regime. However, any transfer of the mineral rights under these contracts would have to be executed according to the parameters of the new law.
Exploration permits granted under the current mining code will have a 60-day deadline for the initiation of research work. Exploitation contracts resulting from these permits will be signed under the terms of the new legislation.
Uncertainty regarding the content of this much-anticipated regulatory proposal has been blamed for the slowdown in investments in the Brazilian mining sector. Once approved, the new mining code should bring a measure of stability to the sector and re-ignite domestic and foreign interest in Brazilian mineral resources.
Despite the increases in Government’s royalties, these proposed changes to Brazil’s mining laws should create a friendlier environment for sophisticated foreign investors. The new system of allocation of mineral rights has the potential to foster more transparency and competition. In particular, the open Bidding Process will generate a demand for higher technical expertise and quality of proposals. Experienced Canadian investors and prospectors are well positioned to benefit from these changes.