Author: Norberto Pasquatti
In September of 2017, President Michel Temer issued three Provisional Measures aiming to implement long-awaited reform of the 1967 Brazilian Mining Code (Decree No. 227, of Feb. 28, 1967).
Two of those Provisional Measures were converted into law by Congress:
1. Law No. 13.540, Dec. 18, 2017, changing the formula for calculation of CFEM, the royalty payable to the Federal Government by all mining companies;
2. Law No. 13.575, of Dec. 26, 2017, creating a new agency – the National Mining Agency, to replace the existing and the less authoritative administrative body called DNPM, a mere department subordinated to the Ministry of Mining and Energy.
The third Provisional Measure, which also introduced important overhauling of several outdated provisions of the Mining Code, expired its initial temporary period of validity and failed to obtain congressional approval. That part of the reform will have to wait for a future congressional initiative.
The full implementation of the new Agency will take several months, but it is welcomed by the mining companies, in the hope that it will usher in a more expeditious procedure for concession of mining rights.
The new formula of the CFEM, however, will represent an additional burden for the Mining Companies and is already being questioned in federal court. The new formula eliminates deduction of expenses such as insurance and transport, and it also partitions the CFEM in a different proportion among the Federal Government, States and Cities where mining operations are carried out or that are affected by its transportation.
Thanks to a slight increase in mining activities and improvement in the Brazilian exports of mining substances, the amount of CFEM “royalties” paid to the cities where mining companies operate increased 2.1% in 2017, reaching R$1.83 billion. This result was reached even based on the previous CFEM formula. This was the second consecutive yearly increase.
The increase was influenced by the CFEM paid to the City of Parauapebas, of the State of Pará, where the largest Brazilian mining company, VALE, operates in the extraction of high-grade iron ore. The amount received by the City grew 41% in 2017, and it represented 22% of the CFEM paid in all of Brazil.
As mentioned, overall there was an increased mining production volume in Brazil, as well as the recovery of the iron ore international price [from US$58 in 2016 to US$73 IN 2017].
The City of Mariana, State of Minas Gerais, by contrast, had a drop of 37% in the amount of CFEM receipts. Other cities in that State also had a drop in CFEM collection because they extract low-concentration iron ore and in decreasing volumes. In the case of Mariana, its performance was considerably harmed because of a major ecological disaster (rupture of a dam), and consequent suspension of the mining activities of Samarco, Vale´s subsidiary, then jointly owned with BHP.
The new CFEM formula is based on the mining company gross invoicing, rather than net invoicing. In addition, it increases the percentage used to calculate royalties for certain substances, such as iron.
The new method of calculation, established by Law No. 13.540 may be subject to challenge and so it is expected that many mining companies will file lawsuits in federal courts seeking to reduce the calculation formula.
Regardless of the mentioned statutory changes, the mining sector will continue to play a major role in the Brazilian economy. The mining industry in Brazil generates US$ 25 billion per year, representing 33% of the commercial balance and more than two million jobs.
Critics say that the new CFEM rate of 4% on iron ore will destroy small mining companies and will cause unemployment.
Almeida Advogados’ Legal Team will continue closely following the regulatory scenario of Brazil’s mining activities to assist our clients.