June 29, 2012

 

Brazil likely to cancel mine rights in 'strategic' areas

 

 

High-level Brazilian government and mining industry officials told Reuters that the country is considering cancelling some mineral rights in areas considered "strategic" and paying mining companies for prospecting work done on those claims.

 

If enacted, the plan could limit exploration rights and raise prospecting costs for companies with mining operations in the country, such as Brazil's Vale SA and MMX Mineração e Metalicos SA, Great Britain's Anglo American Plc and Australia's BHP Billiton.

 

Metals and minerals being considered as "strategic" include potash, rare-earth metals and phosphates, the sources said. Large iron-ore deposits that have not yet been leased may also be set aside as strategic and held for special auctions.

 

Brazil is the world's largest exporter of iron ore, the main ingredient in steel, a major producer of bauxite, the main ingredient in aluminium, and a growing producer of nickel and copper, key industrial metals.

 

The sources said the proposals are part of discussions regarding a new Brazilian mining code, which the government of President Dilma Rousseff expects to present to Brazil's Congress in the coming weeks or months.

 

Under the expected legislation, which is part of governmental efforts to boost revenue and increase state control over energy and natural resources, Brazil will sell some mineral rights to the highest bidder under rules similar to its petroleum-rights auction system. In anticipation of the new legislation, Brazil's Mining Ministry and National Mineral Production Department (DNPM) have stopped issuing new mineral rights and exploration licenses, the sources said.

 

"We've stopped everything. You can't permit what's going on, things that don't exist in any other country," a senior executive-branch official said. He did not want to be identified because he is involved in drafting the legislation.

 

Some industry executives say that efforts to expropriate mineral rights, even with compensation, will never happen under Brazil's constitution, which makes it nearly impossible for a government to take away a person or company's "acquired rights."

 

"Governments have tried to do something like this for years and they have never been able to get past the industry or the constitution," said Helio Diniz, managing director of Potassio do Brasil, a Belo Horizonte-based junior miner prospecting for potash deposits in Brazil's Amazon region.

 

"The last time they got close to something like this was in the 1930s with some gold mines," he said. "Not only is the legal basis weak, the government doesn't have the money to develop or pay for the resources. I tell you right now, it won't happen."

 

Despite Diniz's confidence, many in Brazil's mining industry are concerned that the government is preparing a nationalist intervention in the economy.

 

The move would be catastrophic for mining exploration companies, many of which are Canada-based and could see their claims cancelled with little by way of restitution, said Jon Hykawy, a Toronto-based mining analyst at Byron Capital Markets.

 

"All you're going to be compensated for is the work you've done," he said. "Getting compensated for your prospecting work is not the same as having the opportunity to exploit the deposit and make money."

 

Hykawy also noted any move to restrict rare earths and other minor metals could lead to more restrictions on mainstream metals, especially those related to steelmaking.

 

Investors are unlikely to view Brazil in the same light as Argentina, said Steve Burleton, vice-president of MBAC Fertiliser Corp, which is listed on Canada's Toronto Stock Exchange and is building a phosphate mine in central Brazil. Argentina took control of oil company YPF this spring in a move that shocked investors.