OVERVIEW OF THE MINING INDUSTRY IN BRAZIL
WHAT IS THE MINING INDUSTRY’S NATURE AND IMPORTANCE?
Mineral extraction in Brazil is a primary sector economic activity, i.e., production through the exploitation of natural resources, with the supply of raw materials for the processing industry.
Brazil’s subsoil is an important mineral deposit. Among the various minerals found, niobium, iron ore, tantalum and manganese are worthy of note.
Brazil’s record 10.1% GDP industrial growth in 2010 was influenced by the good performance of the mineral extraction sector.
HOW IS THE MINING SECTOR REGULATED?
Article 20, item IX of Brazil’s Constitution provides that all mineral resources belong to the Union and their exploitation requires a federal permit or concession.
The Mining Code (Decree Law 227, dated February 28, 1967) regulates all mineral extraction activity, and a research authorization or a mining permit is required for this activity to be carried out.
WHAT ARE THE MAIN LAWS GOVERNING THE MINING SECTOR?
There is a wide range of rules and regulations governing the mining sector, among which the Federal Laws listed below are to be noted. In addition to these, the specific laws of each Brazilian state also require compliance.
Federal Law
CONAMA RESOLUTION N.º 344, DATED MARCH 25, 2004.
Sets forth the general guidelines and the minimum requirements for the evaluation of material dredged from Brazilian territorial waters.
FEDERAL DECREE N.º 3.358, DATED FEBRUARY 02, 2000.
Regulates the provisions of Law nº 9.827, dated August 29, 1999, which “introduces a sole paragraph in section 2 of Decree Law nº 227, dated February 28, 1967, as worded by Law nº 9.314, dated November 14, 1996".
FEDERAL LAW N.º 9.055, DATED JUNE 01, 1995.
Regulates the extraction, processing, use, marketing and transport of asbestos and any asbestos containing products, as well as of natural and artificial fibers of any origin used for the same purpose.
CONAMA RESOLUTION N.º 09, DATED FEBRUARY 06, 1990
Sets forth specific regulations for the environmental licensing of class I, III and IX mineral extraction.
CONAMA RESOLUTION N.º 10, DATED DECEMBER 06, 1990.
Sets forth specific regulations for the environmental licensing of class II mineral extraction.
FEDERAL DECREE N.º 98.812, DATED JANUARY 09, 1990.
Regulates Law nº 7.805, dated July 18, 1989.
FEDERAL LAW N.º 7.805, DATED JULY 18, 1989.
Amends Decree Law nº 227, dated February 28, 1967, and creates the prospect mining license regime, with the extinction of the enrolment regime.
FEDERAL DECREE N.º 97.632, APRIL 10, 1989.
Sets forth the provisions for the regulation of section 2, item VIII, of Law n° 6.938, dated August 31, 1981.
FEDERAL LAW N.º 7.677, DATED OCTOBER 21, 1988.
Provides for the creation by the Executive Power of an entity for the promotion of mineral technology development.
FEDERAL DECREE LAW Nº 1.865, DATED FEBRUARY 26, 1981.
Provides for the temporary occupation of real estate for the research and extraction of mineral substances containing nuclear elements.
FEDERAL LAW N.º 6.567, DATED SEPTEMBER 24, 1978.
Sets forth a special regime for the exploitation and use of mineral substances.
FEDERAL DECREE N.º 62.934, DATED JULY 2, 1968.
Approves the Mining Code Regulation.
FEDERAL DECREE Nº 227, DATED FEBRUARY 28, 1967.
Rewords Decree Law number 1.985 (Mines Code) dated January 29, 1940.
WHICH ARE THE MAIN REGULATORY BODIES RESPONSIBLE FOR ENFORCING THE LAWS GOVERNING THE MINING SECTOR?
The main regulatory body is the National Department of Mining Production – DNPM, an agency of the Mines and Power Supply Ministry – MME, which is responsible for enforcing compliance with the law.
Mining Rights
WHO RETAINS THE OWNERSHIP OF THE METALS EXTRACTED FROM THE SUBSOIL?
The ownership of prospected or unprospected ores and other mineral resources is detached from soil ownership. For the purpose of exploitation and use they belong to the Union, however the product of the extraction activity is owned by the concessionaire.
WHAT IS THE PUBLIC INFORMATION AND DATA AVAILABLE TO PRIVATE ENTITIES WISHING TO ENGAGE IN MINING ACTIVITIES?
The Brazilian Mining Institute has partnered with the National Department of Mining Production and published an Investor’s Guide, available on its site (www.ibram.org.br) and which contains miscellaneous information for entities wishing to engage in mining activities in Brazil.
WHAT ARE THE SURFACE RIGHTS WHICH PRIVATE INDIVIDUALS MAY ACQUIRE AND HOW CAN THEY BE ACQUIRED?
The mineral use regimes available to private individuals and entities in Brazil are the following: 1) Extraction concession (e.g., coal mining authorization); 2) Mineral licensing (minerals for use in civil construction, such as clay, sand, gravel, etc.); 3) Prospect mining permit (use of ores not requiring prior discovery and exploration, such as gold, diamond, tin ore etc.).
The use of the ore product requires a prospecting authorization permit from DNPM’s Director General and an extraction concession, granted by the Mines and Power Supply Minister of State.
IS THERE ANY DISTINCTION BETWEEN THE MINING RIGHTS WHICH MAY BE ACQUIRED BY LOCAL PARTIES AND THOSE WHICH MAY BE ACQUIRED BY THIRD PARTIES ABROAD?
There is no distinction, however prospecting for and extracting mineral resources and the use of potential discoveries are subject to the Union’s authorization or concession, must be of national interest, may only be carried out by Brazilian citizens or companies organized under Brazilian Law, headquartered and managed in Brazil, as provided by applicable Law, which will make special provision when such activities are carried out in the frontier zone or indigenous territories.
HOW CAN THE RIGHTS OF ABORIGINOUS AND /OR INDIGENOUS PEOPLES WHO ARE OR HAVE BEEN IN A DISADVANTAGEOUS POSITION AFFECT THE ACQUISITION OR EXERCISE OF MINING RIGHTS?
The exploitation of mineral ore in indigenous land is now prohibited. Indigenous people themselves are barred from extracting the ore. Brazil’s Federal Constitution permits such activities, however requires the enactment of specific laws to regulate such practice. Considering such specific law has never been enacted, nothing can be done, however there is a bill under discussion.
The subject matter is controversial and has divided the indigenous peoples; however Brazil’s government has apparently found a solution to satisfy both the communities in favor of and against exploitation: indigenous peoples will be consulted in advance by the Government and they may bar the exploitation of mineral resources in their lands.
OBLIGATIONS, RIGHTS AND TAXES
WHAT ARE THE OBLIGATIONS AND ROYALTIES AND WHICH TAXES APPLY TO PRIVATE ENTITIES ENGAGED IN MINING ACTIVITIES?
Obligations:
Individuals or bodies corporate that carry out the prospecting, extraction, processing, consumption or benefitting of mineral reserves are required to allow agents acting for the National Department of Mineral Production – DNPM to inspect facilities, equipment and works and must supply information about the following: I – production volume and products’ quality characteristics; II – technical and economic service performance or activity exploitation conditions; III – markets and sale prices; IV – quantity and technical and economic conditions for mineral product consumption.
The permit holder is required to carry out the respective prospecting work, and within the permit’s term of validity or renewal must submit to DNPM’s approval a detailed report on the works, including geological and technological studies quantifying the mineral ore bed and technical and economic extraction feasibility studies, prepared under the technical supervision of a legally qualified individual. The submission of this report may be waived under exceptional circumstances, in the event of a waiver of the authorization provided by the Mining Code, according to the criteria established by an Ordinance issued by DNPM’s Director General.
The Mining Company undertakes to submit the results of its Prospection Report to DNPM, and could be liable to sanctions should it fail to do so.
Royalties:
Brazil’s Administration plans to establish an industrial policy for this sector, including the provision of tax benefits to promote the processing of such minerals.
Currently, the payment of the financial compensation provided by Law, including indemnities payable for the exploitation, will be monthly, directly to the States, Federal District, Municipalities and the Union’s administrative bodies, by the last business day of the month following the taxable event, and restated according to the indexation of the National Treasury Bond (BTN) or any other monetary restatement index that replaces it. Such income may not be used to settle debts and to pay permanently employed personnel. (Law for the Financial Compensation of the Exploitation of Mineral Resources, CFEM (DNPM) - § 1º, art. 20 CF; Section 8, Law nº 7.990/89).
The rate applicable to the Financial Compensation of the Exploitation of Mineral Resources - CFEM is variable according to the extracted ore and is calculated on the basis of net invoicing with the sale of the mineral product. (Law 8001/90)
Principal Taxes:
• Body corporate income tax - IRPJ;
• Tax on financial transactions - IOF, in the case of gold extraction;
• Value Added Tax– ICMS, varies according to each State and the trading operation.
Social Security Contribution:
• Social Integration Program - PIS;
• Social Contribution on Net Profits – CSLL;
• Social Security Funding Contribution – COFINS; and
Labor Charges
• Unemployment and Seniority Fund- FGTS; and
• National Social Security Institute - INSS.
WHAT IS THE BASIS FOR THE CALCULATION OF ROYALTY, TAX AND CONTRIBUTION OFFSETS?
This is variable according to the extracted mineral and the tax or contribution, the main one being the calculation of the mineral product’s net invoicing. Net invoicing should be construed as total sales, excluding transportation and insurance expenses, applicable to and itemized in the product’s sale price, and also excluding taxes on marketing the product.
WHAT ARE THE TAX BENEFITS AND INCENTIVES AVAILABLE TO PRIVATE ENTITIES ENGAGED IN MINING ACTIVITIES?
The Public Tax Incentive Policy accords special treatment to the geographic area and economy sector where the investment is planned. Tax benefits, credits, funding as well as access to State Support Programs and other concessions may be secured by investors, and may be claimed individually or in combination with a series of incentives offered by the federal, state and municipal administrations.
Constitutional Funds are an important incentive tool for the development of the Northeast and the Amazon area, where Regional Development Agencies operate. In the Amazon area, a region that is under the jurisdiction of SUFRAMA, the Manaus Free Trade Zone, which in turn reports to the Presidency, it is possible to import capital goods that have no local equivalent and secure benefits provided by a special tax reduction regime. All Brazilian states, however, have special investment incentive programs in place.
Tax incentives in general represent an exemption or reduction of income and other taxes applicable to profits from the exploitation of the venture in the target area.
BUSINESS STRUCTURE
WHAT ARE THE MAIN BUSINESS STRUCTURES USED BY PRIVATE ENTITIES ENGAGED IN MINING ACTIVITIES?
The main structure adopted by those wishing to engage in mining activities is a limited business company, which allows for a simpler structure, or joint stock companies, which allow for more flexibility, such as securing funds in the capital market.
FUNDING
WHAT ARE THE MAIN SOURCES OF FUNDING AVAILABLE TO PRIVATE ENTITIES ENGAGED IN MINING ACTIVITIES? WHAT IS THE ROLE OF THE LOCAL PUBLIC SECURITY MARKET IN THE FUNDING OF THE MINING INDUSTRY?
The main source of funding available to private entities wishing to engage in mining activities is the BNDES System offered by the Development Bank, the main institution offering long term credit facilities in Brazil. The System’s credit facilities are available to mining corporations, regardless of the origin or control of their capital.
There are also Regional Investment Funds and a handful of regional and state development banks, the latter having a restricted sphere of action.
RESTRICTIONS AND LIMITATIONS
WHAT ARE THE RESTRICTIONS AND LIMITATIONS IMPOSED ON THE IMPORTATION OF MACHINERY AND EQUIPMENT OR THE SERVICES NECESSARY IN THE MINING SPHERE OF ACTIVITIES?
No restrictions apply to the importation of machinery and equipment necessary to engage in mining activities. The criteria established for the importation of machinery and equipment used in such activity is the same, both for foreign and domestic company investors.
Once the importation license is secured for used machinery and equipment, the exchange regime will be identical to the one applicable to the importation of new machinery and equipment. The Customs Policy Board may, at its criteria, reduce or increase by up to 30% (thirty percent) the tax rates applicable to machinery and equipment, with due regard to the peculiarities of the region where they will be used, as well as the industrial concentration of their future location and the degree of wear and tear of the machinery and equipment before the importation takes place.
WHAT ARE THE RESTRICTIONS AND LIMITATIONS IMPOSED ON EMPLOYING LOCAL AND FOREIGN WORKERS IN MINING ACTIVITIES?
The body corporate wishing to permanently or temporarily employ the so-called foreign labor force must apply for a work permit to the General Immigration Department, an agency of the Labor and Employment Ministry. The documents required for granting this permit are listed in and must comply with the provisions of Normative Resolution 74/2007.
The foreign employee will be allowed a ninety (90) day period, as of his entry, to evidence his/her enrollment with the PIS/PASEP programs and membership in the applicable Class Union before the General Immigration Department, whenever his/her activity is regulated and subject to supervision.
Foreigners considered frontier dwellers may perform income generating activities in Brazil, without a Work Permit, but will however require the Federal Police’s authorization.
As far as local workers are concerned, only the rules of the Consolidation of Labor Laws – CLT and in some cases specific laws apply.
WHAT ARE THE RESTRICTIONS AND LIMITATIONS IMPOSED ON THE EXPORTING OR SALE OF METALLIC MINERALS?
There are no restrictions or limitations imposed on the exporting or sale of metallic minerals; however, the National Department of Mineral Production – DNPM is the body responsible for the inspection and enforcement of regulations, and is entitled to follow-up on the exporting and sale of metallic minerals.
WHAT ARE THE RESTRICTIONS AND LIMITATIONS IMPOSED ON THE IMPORTATION OF MINING ACTIVITY FUNDS AND THE USE OF REVENUES FROM THE EXPORT OR SALE OF METALLIC MINERALS?
There are no restrictions or limitations in Brazil on the importation of mining activity funds or the use of revenues from the export or sale of metallic minerals. No restrictions apply to foreign investments.
WHAT ARE THE RESTRICTIONS AND LIMITATIONS IMPOSED ON THE SALE OF MINING CORPORATIONS ASSETS AND ON THE SALE OF SHARES OF A COMPANY HOLDING A MINING CONCESSION?
Sale of Assets
Brazilian law does not provide for any restrictions on the sale of a mining corporation’s assets.
Sale of Shares
According to Brazilian legal provisions and the provisions of the Mining Code (Decree Law nº 227, dated February 22, 1967), an application must be made to the Mines and Power Supply State Minister in order to conclude the assignment and transfer of extraction concession rights. This application must be signed by both the assignor and assignee and filed with the National Department of Mineral Production – DNPM, at the applicable District, to which application the specific documents provided by Law must be attached.
The application will be reviewed and the assignment and transfer of the extraction concession rights will only be registered after the publication in the Union’s Official Gazette of DNPM’s minutes of the meeting at which the prior approval was granted.
The assignee will be required to comply with the requirements provided in Decree nº 85.064/80 when the area is located in the Frontier Zone.
The assignor and assignee and their legal representatives will remain liable for all of the extraction concession’s rights and obligations until such time as the assignment and transfer is approved and registered.
THE ENVIRONMENT, HEALTH AND SAFETY
WHICH ARE THE PRINCIPAL LAWS APPLICABLE TO HEALTH AND ENVIRONMENTAL SAFETY IN THE MINING INDUSTRY FIELD? WHICH ARE THE MAIN REGULATORY BODIES?
Health and Safety
The main laws applicable to workers’ health and safety in the mining industry are the following: Consolidation of Labor Laws – Decree Law nº 5.452/43; Ordinances Regulating Labor Safety, including NR 22 – which deals with Safety and Occupational Health in Mining Activities and sets forth the safety methods which require compliance by companies engaging in underground work in order to provide their employees with satisfactory Safety Conditions and a Healthy Working Environment; Decree nº 6.270/07 – this Decree enacts Convention no 176 and Recommendation nº 183 by the International Labor Organization (ILO) on Health and Safety in Mines; Law nº 8.212/91 – which deals with the organization of Social Security and introduces a Budget Plan for workers in general, including mining company workers; Law nº 8.213/91 – which makes provision for Social Welfare Benefit Plans for workers in general and for mining company workers.
Environmental
Federal Decree Law 227/67 – Mining Code; Federal Law 9.827/99 – introduces a sole paragraph to the Mining Code; Federal Decree 3.858/00; CONAMA Resolution 9/90 – defines specific regulations for granting Mineral Extraction Environmental Licenses; CONAMA Resolution 10/90 – sets forth the specific criteria for the Environmental Licensing of Class III mineral extraction; SMA Resolution 26/93 –regulates the procedures for the environmental licensing of mining ventures; SMA Resolution 66/95; SMA Resolution 3/99 – sets forth the procedures for the environmental licensing of mining activities in the State of São Paulo; and SMA Resolution 4/99 – regulates the procedure for the integrated environmental licensing of mining activities.
WHICH IS THE MAIN ENVIRONMENTAL EVALUATION AND LICENSING PROCESS APLICABLE TO A MINING PROJECT? HOW LONG ON AVERAGE IS IT NORMALLY NECESSARY TO SECURE THE AUTHORIZATIONS?
The main regulations dealing with a mining Project licensing process are the following: CONAMA Resolution nº 9, dated December 6, 1990, which sets forth the specific regulations for the environmental licensing of class I, III to IX mining extraction; and CONAMA Resolution nº 10, dated December 6, 1990, which sets forth the specific regulations for the environmental licensing of class II mining extraction.
The timeframe for securing such authorizations varies from region to region, according to the mining activity’s location, since in addition to compliance with the National Mining Department’s requirements, it will be necessary to comply with each State’s specific regulations.
WHAT IS THE CLOSING AND RECOVERY PROCESS FOR A MINING PROJECT? IN ADDITION TO COMPLIANCE WITH LIABILITIES AND WARRANTIES, WHAT ARE THE OTHER REQUIRED GUARANTEES?
Closing and Recovery of Mining Projects
The closing and recovery of a mining Project requires strict compliance with legal provisions. The Director General of the National Mineral Production Department – DNPM issued Ordinance nº 237, dated October 18, 2001, amended by Ordinance nº 12, dated January 22, 2002, which introduced the so-called Mining Regulations (NRMs). NRM nº 20 regulated administrative and operational procedures in the event of a mine’s closedown (definitive suspension of mining activities), suspension (temporary suspension) and resuming of mining operations, further providing that such events require prior notice to and authorization from DNPM. The miner is required to submit an application justifying the procedure to which the miscellaneous documents detailing the Mine Closing or Mining Suspension Plan must be attached.
The closing plan must be periodically updated, as applicable, and available for inspection at the mine.
Article 225, paragraph two of Brazil’s Constitution provides for liability for the recovery of environmental damages caused by mining activities.
The Closing Plan required by DNPM sets forth that the mine’s activity suspension and closing stages are considered from the time of the development of its implementation project, thus allowing for its constant update and flexibilization, provided the solution for the recovery of the area degraded by mining, as approved in advance by the applicable environmental agency and set forth in the EIA/RIMA which generated the mine’s environmental license, is not altered.
It must be noted that Section 55, sole paragraph of Law n° 9.605/98 defines the failure to recover the mined area as provided by the applicable environmental agency as a crime and administrative violation, subject to fine.
Necessary Warranties
Brazil does not currently have in place any legal policies or tools imposing guarantees for compliance with the provisions of the mine’s closing plan.
INTERNATIONAL TREATIES
WHAT ARE THE INTERNATIONAL TREATIES APPLICABLE TO THE MINING INDUSTRY OR TO A MINING INVESTMENT?
Among the existing treaties, the following are worthy of note: PDC42/03 approves the wording of the Terms of Reference and Rules of Procedure of the International Nickel Study Group (INSG); PDC 43/03, the main goals of which are to offer a forum for regular intergovernmental inquiries on the trading of metals, carry out studies about the worldwide situation and propose solutions for any problems or difficulties faced by the signatory countries; Assunção Treaty, which deals with the establishment of a common market among the Republic of Argentina, the Federative Republic of Brazil, the Republic of Paraguay and the Oriental Republic of Uruguay, and was ratified in 1991, and in which the Member States agree to suppress the liens and other restrictions enforced upon their reciprocal trading activities, including the trading of mineral kingdom products, which are extracted, gathered or picked in their territories or Exclusive Economic Zones or from their Territorial Waters.