Brazil: Brazilian Mining Sector and its Potential New Regulatory Framework

Last Updated: 16 November 2010

Article by Alexandre R. Chequer , Salim Jorge Saud Neto and Gustavo Flausino Coelho

Originally published November 2010

Keywords: mining, regulation, Mining Code, DNPM, National Mining Agency,

The Brazilian mining sector is currently regulated by Decree-Law no. 227, dated February 28, 1967 (the "Mining Code") and normative rulings issued by the National Department of Mineral Production (Departamento Nacional de Propriedade Minerária – "DNPM"), the entity responsible for monitoring the mining activities in Brazil, subordinated to the Ministry of Mines and Energy ("MME"). The Federal Government, however, is in the process of drafting a bill of law setting forth a new structure for the development of mining activities in the country.

The bill of law, once submitted, would still be subject to discussion and approval by the Senate and House of Representatives, and finally to the sanction of the President of the Republic. This process alone can take years, depending on the priority given to it by the government. While a similar process, the new regulatory framework of the oil industry, is having an expedited review by Congress, the regulation of the mining sector is unlikely to be treated with the same priority unless new discoveries trigger an interest in the sector.

The main goal of the reform being considered is the creation of a National Mining Agency, a regulatory agency to replace DNPM and ensure the exploitation of mineral resources consistent with the national development strategy. The model currently being considered is based on an efficient regulatory system for the mineral industry, attracting investment and removing obstacles that restrict the development of production.

The National Mining Agency, as currently proposed, will be empowered to monitor mining activities, with administrative, financial and decision-making autonomy. Thus, it be able to develop a regulatory culture detached from the Government's immediate priorities. Its five Directors (one of which being the Chairman) are proposed to be appointed for fixed terms by the President, subject to confirmation by the Senate, in the same manner applicable to other Brazilian regulatory agencies.

Nowadays, Brazil has different regimes for the exploration and use of mineral resources (exploration authorization, extraction authorization, permit for artisan mining, licensing and extraction registration), the most relevant of which being the authorization regime. Before starting exploration, the entrepreneur must obtain an Exploration Authorization, which is granted by DNPM after the fulfillment of certain procedures that consist mostly of paperwork. When exploration works are completed, the entrepreneur may file an exploration report with the DNPM and apply for an Extraction Authorization to be granted by the MME. This system is based on the rationale of favoring first applications, which means that the person that first requests an authorization regarding a particular area excludes any other person from developing activities in that area until the expiration of the initial authorization. It is common opinion that this model results in an inefficient market and does not encourage serious investment, since several players apply for areas for speculation purposes only, and conduct only restricted mining projects waiting for an exit opportunity.

The bill of law being considered by the Government provides for the exploration and extraction authorizations. Nonetheless, they differ from the current model: the Exploration Authorization is proposed to have a 1-year term (extendable for additional 4 years) with the requirement of minimum investments, to increase on an yearly basis; and the Extraction Authorization is proposed to be granted with or without a previous exploration phase and does not require the consent of the owner of the property where the mines are located. The Government also considers charging a progressive occupancy fee to creative incentives for the investor to seek the maximum efficiency and profitability from the mines.

The changes to the regulation of exploration and production activities being currently examined by the government may introduce rules and procedures for public bids to stimulate the development of mining projects throughout the country. The public bids methodology and the concession agreement model to be drafted by the National Mining Agency, as relevant and strategic mining areas are expected to be offered in public bids. Under the model being considered, the concession agreements would set forth a minimum working program, local content requirements and other contractual obligations both to benefit the development of the Brazilian market and attract private investment, a formula that has been very successful in the Brazilian oil and gas sector during the last twelve years.

The proposed National Mining Agency would analyze the technical qualification of the mining companies rather than simply examine paperwork when granting mining rights, what specialists believe would bring efficiency to the exploitation, but would also create hurdles to small investors. Under the model being examined, the assignment and transfer of mining rights would also only be valid with a prior approval of the agency, after consultation with Brazilian antitrust authorities.

The maximum time period being considered for the exploitation of mineral resources would be 35 years for the extraction -- with a possible extension for one period of equal length, the details of and requirements for which are not yet defined -- and 5 years for exploration -- with one possible extension for 3 years. These periods are intended for creating incentives to the development of activities, contrary to the current practice of acquiring the rights for future development.

The new framework also considers the creation of an entity to define the strategic policies for mining sector -- the National Council for Mineral Policy (Conselho Nacional de Política MIneral – "CNPM"). The CNPM would serve as a board of advisors to assist the President in connection with the development of the mining sector, while the MME would still be responsible to grant the mining rights. The considered framework also establishes establishes that the currently existing Mineral Resources Exploration Company (Companhia de Pesquisa de Recursos Minerais - CPRM), a public-held company, as an assistant body to the CNPM, with the incumbency of preparing geological and hydrological studies of the areas identified as strategic.

The bill of law being considered is expected to replace the existing Mining Code and update the Brazilian regulatory framework but, so far, certain relevant and controversial issues for the industry are not being considered, such as the exploration of minerals relevant for the nuclear industry, under the monopoly of the Federal Government; mining investments at regions close to international borders; and exploration of mineral resources in indian reserves; among others. Considering the relevance of the mining sector for Brazilian economy, its potential of growth, and the current debate about its regulatory framework, the country may take the opportunity to address all such issues, creating an environment even more favorable to investment or it may conduct a less ambitious reform. The balance of the interests in play and the priority given to it by the government will dictate the contours of the new legislation.

Visit us at Tauil & Chequer

Founded in 2001, Tauil & Chequer Advogados is a full service law firm with approximately 90 lawyers and offices in Rio de Janeiro, São Paulo and Vitória. T&C represents local and international businesses on their domestic and cross-border activities and offers clients the full range of legal services including: corporate and M&A; debt and equity capital markets; banking and finance; employment and benefits; environmental; intellectual property; litigation and dispute resolution; restructuring, bankruptcy and insolvency; tax; and real estate. The firm has a particularly strong and longstanding presence in the energy, oil and gas and infrastructure industries as well as with pension and investment funds. In December 2009, T&C entered into an agreement to operate in association with Mayer Brown LLP and become "Tauil & Chequer Advogados in association with Mayer Brown LLP."

© Copyright 2011. Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. All rights reserved.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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