Onwards And Upwards For Brazil

There is no getting over the downturn in Brazil's mining industry. Rising inflation, falling GDP, a weakening currency, infrastructure challenges, a major resource scandal; you name it, Brazil has experienced it.

Its fortunes are best seen through the lens of national mega-miner miner, Vale, which accounts for around 70% of the total revenues in Brazil's mining sector. In the three months to the end of March Vale recorded a net loss of US$3.1 billion. This was a turnaround from the net profit of $2.5 billion it posted in the same period a year earlier.

The price Vale received for its iron ore fell precipitously over this time - something the government cannot be held culpable for. What the state can be judged on is inflation though. During this period, Vale's interest payments and debt in US dollar terms increased substantially, contributing heavily to the loss.

While the currency depreciation in Brazil has presented opportunities in terms of merger and acquisitions (M&A), it has also dented the balance sheet of its biggest miner who holds instruments in other currencies. Despite this, Vale is still pushing forward with its iron ore development projects and spent $739 million on its 90Mt/y S11D iron ore project in the March quarter.

This example is not wholly representative. Brazil leads the stakes in niobium production and has a huge global influence on the tantalum, bauxite, iron ore and manganese spaces, but much of its copper, nickel and gold resources are still awaiting development.

Unlocking the code

An issue that would go a long way to bringing in investors to these potential developments is some certainty over the mining code.

The government first raised the possibility of revising the current mining code, which in itself is a piece of legislation from 1967 that has been amended as the years have passed, back in 2009.

Then the country was starting to surf on the waves of a commodities boom. Vale, which can be read as Brazilian iron ore producers in this context, was making money hand over fist, supplying China with massive amounts of iron ore and setting the foundations for a number of huge projects, which would satisfy what appeared to be an enormous, unquenchable appetite for the steel raw material.

Four years later a bill of law was tabled. At this point, iron ore prices were still close to their recent highs and the increased tax burdens the new code was asking for were unwanted, but potentially workable.

Unfortunately - some may read fortunately -, as has been seen throughout the Brazilian legislative space in the past few years, the ruling party deliberated over this code amid some resistance from the miners. Then, with an upcoming election in 2014, talk of making the bill law, was put on the back burner.

This continual pondering does nothing for an investment community intending to put money into long-term assets, which have tens of years of life in them.

"Having a bill of law pending for two years creates a scenario that raises legal insecurity, especially for mining projects, which are long term investments," Pedro Garcia, partner at Rio-based law firm Veirano, told Mining Journal. "Investors need security on what the rules are."

These thoughts were echoed by Pieter Van Dijk, head of mining, Brazil, for accounting firm KPMG.

"Failure to approve a new regulatory framework has created a lot of uncertainty in the mining industry and has greatly discouraged investments in prospection and development. It has also had an impact on mergers and acquisitions, because many questions remain unanswered," he told Mining Journal.

There has been lots of recent talk about an updated code being readied though.

Garcia, who is representing the interests of some mining associations in talks over a revised mining code, said a special commission has recently been formed within Brazil's congress to move the new code through the state system.

A meeting of the commission to give the first parliamentary sign off - it would need several approvals at governmental and parliamentary-level before coming into law - was supposed to take place in May, however for some unknown reason this never occurred.

In June, Garcia said the president of the commission had recently been giving guidance that the code would pass the "first gate" of government in two months' time.

If the commission president's word can be taken as red, the law could start moving through congress before getting final sign off.

Even with this guide, it is hard to gauge exactly how much time the full process could take.

"It will depend on the political interest. Given the labour party is in quite bad shape in terms of public confidence and surveys, if they feel the mining code would be a good [political] move, it could move fast, in say six to eight months.

"But, if it is more of a macroeconomic measure that would not affect public confidence in Brazil as much it could be at least 12-18 months," he said.

This is where the recent Petrobras scandal may actually help the mining sector's push for new reforms.

Yes, it will lead to foreign companies carrying out further...