Brazil: Main Aspects Of The Reform Of The Mining Sector

Last Updated: 26 September 2017
Article by Christian Galvão Davies and Isaac Cattan

On July 25, 2017, President Michel Temer issued three Provisional Measures (MPs) to reform the Brazilian mining sector: (i) MP number 789, which changed the Financial Compensation regime by Exploration of Mineral Resources (CFEM); (ii) MP No. 790, which amended provisions of Decree-Law no. 227 of 28 February 1967 (the so-called Mining Code); and (iii) MP No. 791, which replaced the National Mineral Production (DNPM) by the newly formed National Mining Agency (ANM) 1.

The purpose of the reform is to modernize the Brazilian regulatory framework for mining by establishing that mineral research reports and the determination of resources in mineral deposits meet criteria and by increasing the independence and supervisory prerogatives of the regulatory body, including those on compliance by miners with environmental legislation. On the other hand, MPs have the disadvantage of raising the tax burden and other costs applicable to mining activities. Below are some considerations on the main aspects of the Brazilian mining reform.

Mineral utilization regimes

MP No. 790 maintained the regimes established by the Mining Code for the exploration and exploitation of resources minerals. The mining concession is the regime applicable to the operation of most ores in Brazil and is preceded by a research authorization 2.

As a rule, the interested party in the exploitation of mineral resources in Brazil should request ANM research in a given area and for a given period. ANM will deny or enforce requirements authorization if such area is already covered in full or in part by existing mining law. The part you get authorization, develop the research and have approved by ANM its final research report - presented in of the research authorization period and demonstrating to the agency that the economic exploitation of the intended ore in the area of ??interest is feasible - may request a mining concession from the Minister of Mines and Energy. The term research grant was increased from one to two years. The deadline can only be extended once, after demonstrating to the ANM that reasonable research was done in the area in question 3.

Mining concessions and research authorizations may be transferred to third parties, with the consent of the minister of Energy Mines or ANM, respectively. The transfer of mining rights can not be authorized in the if the assignor or the transferee have debts with the ANM enrolled in federal active debt.

The relatively low barriers to the initiation of mineral research are a positive aspect of the regulatory framework for mining, especially considering the substantial costs involved in mineral exploration. In addition, the possibility of transferring mining rights stimulates business in the sector.

Another positive innovation is the possibility of extension of mineral research even after the delivery of the final report to the ANM, which allows the holder of the mining right to deepen his knowledge about the mineral in question.

Electronic auctions

The reform introduced a system to allow the continuation of mining activity in previously occupied by other miners who have lost their rights. The area considered exempt by decision of the ANM or the Minister of Mines and Energy, or for any other hypothesis of loss of the mining title by its former holder, shall become available for research and exploration after electronic auction, in which the winner will be determined by the higher value offer. Such payment is one of ANM's new sources of revenue. Lack of payment of the auction price shall subject the winner to a fine of 50% of the minimum value established by the ANM, as well as to the temporary impediment of that party requesting any mining rights.

Independence of the regulatory body, supervisory prerogatives and penalties

The replacement of DNPM by ANM aims to increase the independence and budget of the regulatory body. The agency will have a collegiate board of directors, consisting of five members with fixed terms. Regulatory proposals will be subject to prior public consultations, which should improve the independence and transparency of the body. MP No. 791 brings a series of sources of resources to the ANM, which seek to resolve the issue of the resource shortage of the body regulator, which affected its efficiency.

ANM may require bi-annual progress reports. All search reports should follow international standards. Failure to submit required reports will subject the miner to penalties.

While these additional disclosure obligations may increase costs for the miner, to discourage people from obtaining research authorizations and subsequently prevent others from conducting mineral research. This has been a frequent problem in the Brazilian mining industry.

ANM will also have a greater degree of oversight over environmental licensing processes prior to concession of mining concessions. The requesting party granting a mining concession shall report to the agency, the every six months, the progress of the environmental licensing and the proof of compliance with the requirements formulated by the competent environmental agency, under penalty of rejection of the concession.

The reform increased penalties for violation of mining legislation. Fines may vary from R $ 2 thousand to R $ 30 million. Additional penalties were included: (i) a daily fine of R $ 100 to R $ 50,000; (ii) temporary suspension, in whole or in part, of mining activities; and (iii) the seizure of minerals, equipment, in addition to the possibility of expiration of the security.

Tax burden, TFAM and other costs

The reform increases the tax burden of CFEM. The tax is calculated on net sales of mining products 4, with taxes on such sales and insurance deductible. If MP No. 789 is converted into law, CFEM will be due on the basis of gross revenue from sales of mineral products, while maintaining the deductibility of taxes imposed on them 5.

MP No. 791 creates the Inspection Fee for Mineral Activities (TFAM). The fee is due mining activities by ANM and shall be paid annually, by April 30, mining under the authorization of research, concession of mining, licensing and mining of garimpeira.

The TFAM values ??applicable to the authorization regimes for research, mining concession and licensing are: (i) R $ 2 thousand per research authorization, between the date of authorization and the delivery of the final research report; (ii) R $ 1 thousand per research authorization, between the delivery of the final report to ANM and the concession of the mining concession; (iii) R $ 5 thousand for each mining concession or mine manifest in force; and (iv) R $ 3 thousand for each license in force. Delays in TFAM payments will be penalized with a 50% penalty on the principal amount due.

The transferee of a given mining right shall be jointly and severally liable for any debts previously of TFAM and CFEM. This should be taken into account in due diligence procedures, related to the acquisition of mining enterprises.

Other costs to which miners are subject will also be increased. Brazilian law determines that property owners in which mining activities are carried out should third party holders of mining rights, but are entitled to receive 50% of the amounts paid under CFEM. With the increase in CFEM, due to the owner of the property will also be increased. Other amounts owed by miners to landowners, not revoked by the mining reform, are: (i) income from land occupation - corresponding to the net income of the property in the extension of the area actually occupied; and (ii) indemnification for damages caused by the mining activities to the respective land.

Environmental aspects

According to the new wording of Articles 7 and 47 of the Mining Code, the closure of mines is an integral part of of the mining activity and the proper execution of a mine closure plan is a condition for the extinction of the mining concession. This includes mitigating, to the maximum extent possible, environmental impacts arising from activities during and after the life of the mine. The performance of mining activities also implies the responsibility of the miner for the environmental recovery of the affected areas.

Footnotes

1Provisional measures must be converted into law by the two houses of the National Congress within 120 days counted from July 25, after which they will lose effectiveness retroactively to the date of their publication.

2 The Mining Code also establishes regimes of: (i) mining permit mining; (ii) monopolization, applicable, by virtue of a special law, to the exploitation of minerals directly or indirectly by the Federal Government; and (iii) licensing, applicable to the exploitation of sand, clay and rocks for immediate use in construction.

3The previous legislation did not specify how many times a search authorization could be renewed, which was the interpretation of the former regulatory body.

4According to Laws No. 7,990, dated December 28, 1989, and No. 8,001, dated March 13, 1990. The amendments to the The tax burden set forth in MP No. 789 should enter into force only on January 1, 2018, if MP is converted into law

5 In addition, CFEM will focus on (i) the consumption of mineral products, based on the calculated revenue, considered as the current price of the mineral good, or its similar, in the local, regional, national or international, as the case may be, or the reference price defined by ANM; (ii) exports to persons legal entities bound or domiciled in countries with favored taxation, based on the calculated income, considered the parameter price defined by the Federal Revenue Service of Brazil; (iii) the value of the hypothesis of a mineral good acquired by public auction; or (iv) the value of the first acquisition of the mineral good, in extraction under the mining permit scheme.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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