Industry Trend Analysis - Legislation Shift Won't Affect Sector's Growth - OCT 2015
BMI View: M ining tax and regulatory changes are set to come for Brazil, Chile and Peru , as respective governments look to appease public demands to increase miners' accountability . However , the proposed legislation in each country will not be significant enough to curb the sectors' growth outlook.
Although mining tax and regulatory changes are on the horizon in Brazil, Chile and Peru, the respective countries' mining industries will remain a key contributor to GDP over the coming years. Mining will account for 11.2% and 11.3% of GDP for Peru and Chile, respectively, in 2016. Although mining industry only accounts for 2.6% of GDP, the sector's overall industry value will total USD49.4bn in 2016, compared to USD23.8bn and USD31.2bn in Peru and Chile, respectively. The mining industries in these three states will face moderate tax and regulatory environments over the next few years, due to pressure on governments from local communities and environmental activists to implement stronger mining regulation. However, any modifications will be minor enough not to deter the sector's growth, as weak commodity prices will encourage governments to remain committed to fostering a business-friendly environment.
Royalty Hike Won't Impact Growth
Investment and mining activity in Brazil will not be dampened by the proposed regulatory alterations due to the sector's integral role in the struggling economy. Given Brazil's fragmented legislation system and Petrobras-preoccupied government, voting on this mining bill of law, while still broadly supported, has been delayed; however, we expect it to come into effect by 2016. Legislation proposed in Q213 to increase mining royalties, introduce an auction system for permits, and replace the National Department of Mineral Production with the new National Council for Mineral Policy and the National Mining Agency will not deter major miners' investment or activity. In our view, raising royalties on gross revenues from 2.0% to 4.0% will be insubstantial, given the country's mining industry value of USD49.4bn in 2016 and projected value of USD62.4bn by 2019. Although this doubles the rate of mining revenue taxes, the country's tax remains low compared to the region as a whole. For instance, Mexico implemented new mining royalties in Q114 that range from 7.5%-8.0%. While major miners will not be affected, the revamp of the concession-granting system will place junior miners at a disadvantage, as the change includes a requirement of concession holders to develop claims and auctions to grant concessions. The cost-prohibitive nature of committing to develop claims and bidding against the largest companies will limit junior miners' competitiveness.
|Sector's Importance To Prevent Major Regulatory Changes|
|Select Countries - Mining Industry Value, USDbn|
|e/f= BMI forecast. Source: National Sources, BMI|
Miners Prepared For Chile's Freshwater Shortage
The speculated proposal of a desalination bill in Chile, while a significant investment in expensive equipment, will not significantly affect the country's mining sector, as a few larger firms have already switched to the desalination method. Legislation to require mines over a certain size integrate desalinated water into their operations would be retroactive, as a number of major miners have already adjusted to the freshwater shortage. As an ongoing drought has heightened tension between local communities and mines over dwindling freshwater access in the northern desert region, the industry has taken pre-emptive action. For instance, Anglo American built an USD100mn desalination plant near its Mantoverde copper mine in northern Chile in 2014, and BHP Billiton and Rio Tinto invested USD3.4bn in a water plant for the Escondida copper mine.
|Chile To Be Region's Safe Bet|
|Select Countries - Operational Risk Index|
|Note: See Operational Risk index for more information. f = BMI forecast. Source: BMI|
Pro-Business Government To Insulate Peru's Mining Sector
Despite continued friction between the public and mining corporations, concerning the environmental and social impact of the mining industry, Peru's government will continue to pursue moderate policies for both miners and local communities ( see: ' Peru Regulatory Development - Supportive Po licy Environment To Continue ' , Ju ne 23). Adding to the tension is the rampant unregulated gold mining in Peru's Madre de Dios region, which wreaks havoc on the environment and contributes an estimated 10.0%-20.0% of the country's gold production, which totalled 5.2moz in 2015.While protests against mining have continued, President Ollanta Humala will remain focused on moderate policies, supporting foreign investment as well as remedying social concerns. For instance, the Prior Consultation Law of 2014 requires firms to consult local communities before beginning a new project. Humala's government also improved tax incentives for mining companies and reduced environmental regulations to encourage investment in 2014 after global commodity prices began to fall in 2012.
|Significant Economic Dependence On Commodities|
|Bloomberg Commodity Index (LHS) & Exchange Rate - USD/Sol (RHS)|
|Note: Correct As Of September 29, 2015. Source: Bloomberg|