UPDATE 3-Brazil mine bill would double top royalty rate

Tue Jun 18, 2013 5:44pm EDT
 
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* Bill to require rights to be developed or lost
    * Introduces auction system for some mining prospects
    * Vale CEO says would have "major impact" on companies


    By Jeb Blount
    RIO DE JANEIRO, June 18 (Reuters) - Brazil, a major producer
of iron ore, gold, copper and other metals, unveiled a
long-awaited bill to reform its 46-year-old mining code on
Tuesday, proposing a doubling of the current top royalty rate
and stricter rules for opening new mines.
    Murilo Ferreira, chief executive of Vale SA, the
world's largest iron ore exporter and Brazil's dominant mining
company, said the bill would hit the industry hard. He expects
the government's revenues from royalties to more than double to
4.2 billion reais ($1.93 billion) from 1.7 billion reais.
    Even so, provisions of the bill are less onerous than the
industry feared when the discussion of reforms began nearly four
years ago. The top royalty rate under the proposal of 4 percent,
is only one-third of typical rates charged in some Australian
states and about half of proposals in Mexico and Ecuador.
 
   Vale's preferred stock, the Rio de Janeiro-based company's
most-active shares, rose 2.4 percent in Sao Paulo late Tuesday.
    "The government is showing itself to be more responsive to
industry concerns," said João Neves, an analyst with Eurasia
Group in Washington. 
   Brazil is pushing ahead with changes 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. 
    "It's part of a global trend to increasingly tax the mining
industry," said Wiktor Bielski, base metals analyst at VTB
Capital in London. "Four percent is not punitive, but it doesn't
help for a country that's already facing growing internal
political headwinds to mining."
    Brazil's top two mining states recently imposed their own
regulatory charges on output. Environmental rules and
bureaucracy have slowed licensing and construction of ports,
railways and processing plants needed to commercialize
production.
        
    TEST FOR BUSINESS
    The bill is the latest test of the Brazilian government's
efforts to reduce tensions with investors, many of whom have
criticized President Dilma Rousseff's economic polices as
erratic and her attitude toward business as heavy handed. 
  
    In a surprise, the bill makes no provision for a windfall
profits. 
    Ecuador's proposed 3-to-5 percent royalty plus a 70 percent
windfall tax prompted Canada's Kinross Gold Corp last
week to cancel a gold project in the Andean nation.
    Kinross, which owns the Pracatú gold mine in Brazil, is
monitoring any changes in Brazil, spokesman Louie Diaz said.
    Rousseff 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 government will propose royalties of up to 4 percent
calculated on gross revenue, minus taxes, generated by mining
projects. The government could charge lower rates in some cases,
the mines and energy ministry said. (See factbox 
 )
    MORE UPFRONT CASH
    In the Americas, the trend is shifting to gross
revenue-based taxes, which allow governments to collect money
far sooner than with a profit-based tax, said Liam Fitzgerald, a
partner with PwC Canada's tax practice. 
    "It's really about trying to increase the amount of revenues
they receive, and getting it a lot earlier," he said.
    But mining companies prefer profit-based taxes, which only
kick in after the miner starts making money. Mexico's lower
house of Congress approved a 5 percent gross-revenue royalty, a
measure awaiting a Senate vote.
    The new royalty could also reduce the competitiveness of
Brazilian companies such as Vale because the rules no longer
allow transportation costs to be deducted.
    Vale's main iron ore 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. 
    Initially at least, auctions would only be held in areas
where the geology is well known and the resources are
significant enough to warrant a state interest, Telton Correa, a
mining ministry spokesman, told reporters in Brasilia.
    New concessions for exploration and development will also
require rights holders to carry out a minimum program of
investments over a specific period of time or lose the rights. 
    Congress is expected to vote on the bill by the end of the
year, Mines and Energy Minister Edison Lobão said. While no
changes will be made to existing rights, Lobão warned he will
strictly enforce the terms of existing licenses.