Industry Trend Analysis - Quick View: Raising Royalties Without A New Mining Code To Pose Downside Risks In Brazil - JAN 2018


The Latest: On November 28 2017, Brazil's Senate passed legislation to create a new mining regulatory agency for the sector with the intention of accelerating the permitting process. However, legislators kept out the new tax on mining projects proposed to fund agency activities. During the previous week, the Brazilian Congress approved an increase in iron ore royalties to 3.5% from 2.0% and on gold to 2.0% from 1.5%; royalties on potassium, however, were lowered to 0.2% from 3.0%. The royalties will apply to gross revenue rather than net sales. Congress failed to vote on the third segment of President Temer's mining reforms issued by decree in July, which would have streamlined the mining code.

Implications: The passage of higher iron ore royalties without a more efficient mining code to offset costs poses downside risks to the country's key mineral sector. Notably, a 3.5% rate for iron ore is towards the higher end of the 2-4% range, dependent on global prices, initially proposed by Temer's administration. Given our bearish outlook for iron ore prices, this could dent Brazil's iron ore production as higher-cost assets are taken offline. A clearer and simpler mining code would have offset some of the higher costs caused by the tax increases. The extent to which the National Mining Agency (ANM), the new regulatory body, is able to improve efficiency will alleviate some additional costs from higher royalties, however the details on how ANM procedure will differ from the current framework remains unclear.

What ' s Next: President Temer will have 15 days upon the arrival of the final legislation to sign or veto the bill. As the decrees originated from his administration, his approval appears likely. Nonetheless, the lack of a broader mining code overhaul could weigh on investor sentiment over the coming months, posing a downside risk to project development. Looking longer term, our view for the changes to bolster the outlook for the mining industry over a five year period remains in place, as clearer and more efficient rules from the ANM will improve the industry's regulatory framework.

Higher Royalties To Threaten Recovery
Brazil Iron Ore Exports - Value (USDmn) & Volume (mnt)
Source: Trade Map

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