Brazil mine bill proposes doubling top royalty to 4 percent

RIO DE JANEIRO Tue Jun 18, 2013 2:45pm EDT

An overview of Ferro Carajas mine, the world's largest iron ore mine, operated by Brazil's Companhia Vale do Rio Doce, in the Carajas National Forest in Parauapebas, Para State, May 29, 2012. REUTERS/Lunae Parracho

An overview of Ferro Carajas mine, the world's largest iron ore mine, operated by Brazil's Companhia Vale do Rio Doce, in the Carajas National Forest in Parauapebas, Para State, May 29, 2012.

Credit: Reuters/Lunae Parracho

RIO DE JANEIRO (Reuters) - Brazil, the world's second-largest producer of iron ore, unveiled a long-awaited bill to reform the country's 46-year-old mining code on Tuesday, proposing royalties of up to 4 percent, double the current rate.

Murilo Ferreira, chief executive of Vale SA (VALE5.SA), the world's largest iron ore exporter, said the bill would hit miners hard. He estimated the government's total take from royalties would rise to $4.2 billion reais ($1.93 billion) from $1.7 billion reais.

Even so, provisions of the bill are less onerous than the mining industry had feared when the discussion of reforms began nearly four years ago. The top rate under the proposal is only one-third of basic royalties charged in Australia, for example.

Brazil is getting ready to enact the reforms 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.

Vale's preferred shares, the Rio de Janeiro-based company's most-active class of stock, rose 1.8 percent in early afternoon trading in Sao Paulo.

The legislation will test the 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 "heavy handed." [ID:nL2N0DW2F2] [ID:nL1E9C42DK]

Rousseff, in a televised statement announcing the bill, 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 bill proposes royalties of 0.5 percent to 4 percent calculated on the basis of the gross income, minus taxes, generated by mining projects. After the bill becomes law, the government will set the actual rate for each project by presidential decree according to the mineral involved and the location, Brazil's mines and energy ministry said. Each decree is subject to congressional review.

Currently, royalties are determined on the basis of net income. The change could place a heavier burden on mining companies such as Vale, which could no longer deduct the cost of transportation.

Such costs are particularly significant because Vale's 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. It envisions an auction system for some mining rights with concessions of 40 years, renewable for 20.

Congress will likely debate and vote on the bill by the end of the year, Mines and Energy Minister Edison Lob√£o said. He said Brazil would start to strictly enforce all clauses in existing mining rights immediately, ending previous leniency.

The government believes that too many mining rights are being left undeveloped. Some companies and families have accumulated rights to large areas but have done little or nothing to actually mine their claims holding them to prevent them from falling into the hands of rivals or waiting for some large future payout.

While royalties of up to 4 percent could be charged under the bills provisions, they will be set at levels between 0.5 percent and 4 percent buy a future presidential decree, a statement from the mines and energy ministry said.

Some products or regions could have different royalties than others.

The bill would maintain current royalty divisions among jurisdictions, with 65 percent for municipalities affected by mining, 23 percent for producing states and 12 percent for the federal government.

($1 = 2.17 Brazilian reais)

(Additional reporting by Leonardo Goy and Peter Murphy in Brasilia; Writing by Caroline Stauffer and Jeb Blount; Editing by Gerald E. McCormick, Sofina Mirza-Reid and Maureen Bavdek)

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