Lula’s campaign guideline predicts charges on profitable ores and scares companies

Guidelines of the government program of the candidate who leads the race for the presidency, Luiz Inácio Lula da Silva (PT), provide for the collection of an additional fee from mining companies that operate in areas of greater profitability, which would be an opportunity for the State to collect more with a sector that, by way of royalties, pays less in Brazil than in countries like Australia.

If Lula eventually wins the elections and decides to follow suggestions from PT mining experts, the additional amount to the royalties already paid by the companies could be levied on mining areas such as Carajás, in Pará.

That could potentially affect profits for Vale, which extracts one of the world’s highest iron-content ores from Carajás and generally earns a premium over the commodity’s market value.

The implementation of such a charge, which faces strong opposition from the mining industry, was even discussed in a reform of the sector that passed through the National Congress during the PT government of Dilma Rousseff.

But it could compromise investments by mining companies and favor Brazil’s main competitors, such as Australia and Canada, assess representatives of the sector and experts heard by Reuters.

The idea, which is still being studied by the PT, without a final decision, would be to implement a “special participation” —in addition to the current CFEM (Financial Compensation for the Exploration of Mineral Resources), also called a royalty— on higher value minerals, whether by its own characteristics or by market demand, according to geologist Claudio Scliar, one of the members of the PT’s National Energy and Mineral Resources Sector, who prepared the document.

The contribution, says Scliar, would be similar in nature to the special participation on oil and gas exploration, which progressively focuses on revenues from fields with large production volumes and came into force in Brazil in 1997.

“One point that is considered very important is that, in the same way that it happens today for oil, in mining there is a special pricing,” Scliar told Reuters.

Thus, in the case of iron ore, cited by the geologist as an example, there would be a new amount to be collected by the Union in addition to the current rate of 3.5% of the CFEM that is levied on revenues from sales in the domestic market and exports.

“There are some mineral deposits with exceptional grades or the international market wants it very much (the mineral). As the mineral asset belongs to the Union, then the Union gains from it, with this extra value of the ore, in certain situations of great profitability” , said Scliar.

Another change proposed by the PT sectoral group, which may affect mining companies, is the amendment of the Kandir Law, of 1997, which exempts the export of non-renewable natural goods belonging to the Union from the ICMS state tax.

STRONG OPPOSITION

The Brazilian Mining Institute (Ibram), which represents mining companies, is “completely against” the proposal for higher costs to the sector, according to the entity’s director of Institutional Relations, Rinaldo Mancin, as this could reduce investor interest.

“Creating a special participation on mining will drive away investments and make our competitors happy, especially the Australians,” said Mancin, referring to the world’s largest producer of iron ore and main supplier to Asian countries.

When contacted, Vale declined to comment on the matter.

The Brazilian Association of Mineral and Mining Research Companies (ABPM) told Reuters, in a statement, that mining has different characteristics from the oil sector and that “an additional charge will remove its competitiveness”.

Tomás de Paula Pessoa, a lawyer specializing in mining law and former director of the National Mining Agency (ANM) makes a similar assessment, saying that the charge can even make operations of certain mining companies unfeasible.

“We are talking about a sector that looks at the world. It looks at global geology and seeks to be in countries that look at regulatory stability, but which also look at the issue of costs,” said Pessoa.

Australia itself, Brazil’s main competitor in iron ore, has already tried to implement a similar idea, but without success, geologist Iran Machado, a retired professor at the Institute of Geosciences at the State University of Campinas (Unicamp), told Reuters.

“One of the reasons for the failure in Australia is that in the case of mining there is a very strong fluctuation in prices, so that a ‘fat cow’ phase can then give rise to a ‘lean cow’ phase. miners claim that it would be impracticable to institute such a charge in mining, while for oil, traditionally a much more profitable industry, this has worked well,” Machado said.

WOULD REVIEW OF THE CFEM BE ALTERNATIVE?

If, on the one hand, experts are opposed to a new charge, on the other hand, they admit that a review of the CFEM would be a plausible alternative.

For Iran Machado, the current rate of 3.5% of royalties on iron ore, for example, is very different from the approximately 7% in force in Australia.

“As we have this gap between 3.5% and 7% for Australia, I think that at least we would have to raise the rate to 4.5%. prevent)”, said Machado.

For lawyer Tomás Pessoa, however, it is not possible to compare only the royalty rates between producing countries, since there are other taxes that are levied along the production chain, which would require, therefore, the comparison between the totals of the tax burdens.

It makes more sense, he says, to change the basis of calculation on which royalty rates are levied, in a way that is fairer to the government and mining companies.

“We can, yes, think of a disruptive model in relation to what is in place. Our problem is that our CFEM is about invoicing, which makes the cost even more excessive and is probably even passed on in the sale. In other countries, royalties are levied on profit. It would be a more equitable way of charging this type of royalties,” Pessoa said, adding that, in case the mining company shows a loss, the government could institute a minimum collection of compensation.