By Liliam Yoshikawa and Flavia Möller David de Araujo

(Machado, Meyer, Sendacz e Opice Advogados)

The proposal ideas for a New Regulatory Framework, in replacement to the current Mining Code (Decree-Law No. 227/1967), have been often discussed in and by the specialized media. At the beginning of this year, indeed, the publication of MME Ordinance No. 121/2011, which ratified the 2030 National Mining Plan of the Ministry of Mines and Energy ("PNM 2030") took place aiming to be used as guidance to the policies and rules for the development of the mining sector in Brazil for the next 20 years.

Among other actions, PNM 2030 officially introduced the proposal to create the National Mining Agency (replacing the current National Department of Mineral Production - DNPM) and the National Council for Mineral Policy. The new entities would promote the rational use of the mineral resources in Brazil and the supply of mineral resources to remote and difficult access areas. The PNM 2030 indicates the idea for consolidation of the regulatory framework for the sector, and the creation of a differentiated policy for the royalties as well as adds certain adjustments to the current mining rights granting regimen. Pursuant to the official released statements, the New Mining Regulatory Framework would mainly involve three bills of law. Two have already been presented to the President of the Republic and are about to be forwarded to the National Congress. These would encompass the New Mining Code and the controversial royalties′ policy of the sector - the so-called Financial Contribution for Mineral Exploitation - CFEM. The third bill comprises the creation of the National Mining Agency and is still under discussion in light of the jurisdictional transitional rules, in addition to legal and administrative matters pertaining to the transfer of employees from the current DNPM to the new agency.

In June of this year, the Câmara dos Deputados (the Brazilian House of Representatives) presented the Bill of Law No. 463 ("PL 463"), which established the official kick off of the discussions pursuant to the Brazilian New Mining Regulatory Framework. Among the suggested and intended changes, the published text comprises the modernization of the normative parameters of the current Mining Law. In this sense, it is possible to see that an effort was made in order to adapt to the socio-environmental and technological context and to current economic needs, including matters such as sustainability. Changes are suggested with a view to incorporating practices into the Brazilian legal framework which are already adopted by the international mining market, which foster investment in the sector and minimize the legal uncertainty, triggered mostly by the diversity of normative sources and de-centralized control structure.

An example of this is the change in the current permit for mining exploration and prospecting activities - Autorização de Pesquisa, which is currently granted by the DNPM for the applicant to perform geological exploration works (such as the definition of the resources and the evaluation and determination of the production feasibility) in a certain area, during a certain amount of time (currently, from one to three years). The permit for mining exploration and prospecting activities currently complies with the chronological order principle and the priority right in the granting of the mining concession. In accordance with the current text of PL 463 it shall be replaced by a regimen for the granting of authorization or concession depending on the nature of the mineral and its strategic and economic relevance to the country, preceded, each one, by its own public bidding. To some extent, such change represents a rupture of the current notion that the one who performs the research work shall have preference, if not exclusivity, as regards to the ownership of the mining concession. Although such measure was proposed for purposes of eliminating certain prerogatives attributable to those that benefit from the slowness of the current system which allows for the almost lifelong holding of certain research titles, if approved without the necessary adjustments, it may trigger an adverse effect to that intended. By eliminating the abovementioned prerogatives, the result could be that the research authorization is unreliable from the investors′ point of view. This could even foster the undue commerce of these titles by the researcher, once the guarantee of a return in the initial investment would no longer exist. Presently, the right to request a mining concession is exclusively granted to the one conducting the research (the so-called security of tenure); there is not the possibility of acquisition by a third party not part of the initial prospecting activities.

As an exception to the aforementioned, PL 463 authorizes the entities of the direct administration and the autonomous governmental agencies of the federative entities (Federal Government, States, Federal District and Municipalities) to perform the extraction of mineral substances used immediately in the civil construction industry (which would be subsequently established in an Ordinance of the Ministry of Mines and Energy). The extracted mineral substances are required to be for the exclusive use in public works performed directly by the aforementioned persons (and their sale is prohibited), and the prevailing mining rights in the areas where the works are to be performed need to be observed. The published text also sets out that the mineral deposits, whose use would be considered strategic or with increased economic potential, would be subject to the mining concession regimen, pursuant to competitive public bidding procedures. Although the media recently disclosed that the maximum terms attributable to the mining concessions would be 20 years, it should be said that the text presented by the referred bill still mentions a minimum of 20 and a maximum of 50 years, in much the same way as the current legislation.

With a view to eliminating exclusivity, the text of the referred bill of law suggests the creation of the "mining exploitation authorization" concept, limiting the term for exploitation of the mineral deposits to a five to ten year range, which would not fulfill the strategic relevance or economic potential requirements. Presently, mining concessions do not have a validity term. The distinction between the use of the suggested mining exploitation authorization and the mining concession rests in the application of the latter as regards mineral deposits of strategic importance or with an increased economic potential, while as to the first, residual jurisdiction would apply. It is important to mention that the criteria for definition of the elements which will characterize the mineral deposits with strategic importance from those submitted to the mining exploitation authorization were not presented, such that, currently, we cannot anticipate the possible impact of this change. As regards the CFEM (established by Law No. 8,001, dated March 1990), PL 463 brings significant propositions.

For example, payment of a so-called "special participation" of a minimum of twenty percent by the mineral producer, in the event of big production volumes or ample profitability in the exploitation of mineral resources, is anticipated. The text of PL 463 did not bring parameters for establishment of what should be deemed "large production volume" or "ample profitability". It is also important to remember that "large production volume” does not necessarily mean profitability. Another proposed change, related to the so-called "special participation," mentions that it would be applied over the gross mineral production revenue, minus the investments in exploration, operational costs, depreciation and the CFEM itself. Note that it does not mention, in further detail, how exactly such deductions shall take place, which could result in the perpetuity of the legal uncertainty found at the time of payment and collection of the CFEM. The published text of the bill of law also proposes modification of the distribution of such collection among the public entities that benefit from the CFEM, with thirty percent assigned to the Ministry of Mines and Energy, of which at least seventy percent would finance studies and services in geology and geo-physics applied to mineral prospecting. It also guarantees ten percent to the Ministry of the Environment, for the development of studies and projects related to preservation of the environment and recovery of environmental damages caused by activities of the mining industry. Another thirty percent would be for the States and Federal District, pursuant to division criteria of the Participation Fund of the States and Federal District (the so-called "Fundo de Participação dos Estados e do Distrito Federal" or simply FPE) and thirty percent would be for the Municipalities, pursuant to division criteria of the Participation Fund of the Municipalities (the so-called "Fundo de Participação dos Municípios" or simply FPM). Changes as regards the relationship between the companies that explore mineral assets and the surface-right owners who hold the ownership of the soil on which such activities are developed are also anticipated.

Changes as regards the relationship between the companies that explore mineral assets and the surface-right owners who hold the ownership of the soil on which such activities are developed are also anticipated. In the context of the current regulation, the exploration companies owe the equivalent of fifty percent of the amount paid as CFEM to surface-right owners, whereas if the current wording of PL 463 is approved, this percentage would be adjusted to twenty-five percent.

It must be stressed that recently two new bills of law pursuant to CFEM have been presented by the Brazilian Senate (Bills of Law No. 01 and 283). Both of them propose a raise to CFEM rates in light of the increase of the demand of minerals, such as iron ore. One must bear in mind that other more sensible aspects related to the CFEM thematic and to the specific regulations restricting mining rights as a means of guaranteeing financing were not yet covered by the released and published bills. Examples of such would be the creation of more flexible criteria for calculation of the CFEM instead of simply increasing the current rates, or ruling regarding the existing restriction to encumbrance mining rights of prospecting phase projects. The lack of other sensible aspects could be a somewhat positive indication that these subjects are being further discussed in light of their possible impact on the sector.

Liliam Yoshikawa (This email address is being protected from spambots. You need JavaScript enabled to view it.) is Partner in the Infrastructure and Project Finance practice of Machado, Meyer, Sendacz e Opice Advogados, in São Paulo.

Flavia Möller David de Araujo (This email address is being protected from spambots. You need JavaScript enabled to view it.) is with Machado Meyer in São Paulo.

(Revista Reuters / October 2011/ Págs. 12-13)

(Notícia na Íntegra)