Brazilian Mining's New Frontier
Mining at the heart of Brazil’s ‘Neo-Industrialization’ drive
Brazil is at the precipice of a transformative period for the mining industry, with US$50 billion in total capex investment predicted for the 2023-2027 period, according to data from IBRAM. These investments are spread across the diverse minerals that make up Brazil’s geological wealth. Greenfield projects in the country include a new polymetallic operation, lithium projects, and a major new phosphate project in development in the Amazon. In total, companies have announced over 100 projects in more than 85 municipalities across Brazil. Each of these projects creates lasting employment and wealth for their local regions and the country at large, with positive ramifications far beyond the (significant) tax contributions. Brazil’s mining industry has the capacity to be a critical driver of the country’s sustainable economic development.
According to the International Energy Agency, the demand for minerals used by the energy sector will increase considerably over the next two decades: 40% for copper and rare earth elements; 60-70% for nickel and cobalt; and about 90% for nickel. Brazil holds immense wealth in these high demand minerals but has yet to truly take advantage of them. “If you take a group of commodities that includes nickel, graphite, manganese, and rare earths, Brazil holds about one-fifth of the global resource base of each, but has less than 10% of the worldwide share of production and, in some cases, less than 1%,” said Rohitesh Dhawan, CEO of the International Council on Mining and Metals (ICMM). “Production of these minerals is much less than the actual resources and reserves of the country, and that is before accounting for the fact that the amount of exploration in Brazil is insufficient relative to its potential.”
As downstream consumers, such as car manufacturers, increasingly seek minerals produced in a sustainable manner, countries with the capacity to produce low-carbon metals are advantaged. With 77% of Brazil’s energy produced from renewable sources, and a cheap cost of power at two cents per kilowatt hour compared to 30 cents per kilowatt elsewhere, the country has a competitive advantage in low-carbon production.
Geopolitically, Brazil is also in a favorable position to navigate the competition between East and West for critical minerals. 2023 has witnessed the continuation of a race to secure critical minerals supply in a moment of fragile geopolitics, with critical minerals widely viewed as vital to national security. “Brazil is one of the few countries with good relations between the West and the East, allowing it to work with many different countries,” Dhawan emphasized.
According to the World Bank, in 2021, foreign trade made up nearly 40% of Brazil’s GDP, with China, the US, and the EU the country’s largest trading partners. Brazil’s position as an exporter is solid; the country has had a positive annual trade balance since 2014. Essential to Brazil’s strength as an exporter is its powerhouse of a mining industry. The country’s vast size and geological diversity demand that mineral exploration and production should be a driver of the sustainable development of the country at large. 75% of the mapping of the country is not at a scale that would allow for mineral exploration and development. To take advantage of the country’s geological diversity, Brazilians need to know what is in the ground and where. Roberto Xavier, executive director of ADIMB, sees this situation improving: "There was a recent study carried out by the Geological Survey of Brazil, showing a positive picture of the country’s geological potential for critical metals. The Geological Survey of Brazil is doing a superb job and every year more geological maps at scales more compatible with mineral exploration have been produced in important mineral provinces."
With such a significant area left unexplored, the country is ripe with opportunity. Recent years have seen a unified approach from industry leaders and government figures, including the creation of Invest Mining, which includes IBRAM, ADIMB, and the Brazilian Development Bank (BNDES), as members. Pedro Paulo Dias, director of market intelligence in the mining and transformative minerals division, said: “We created a network called Invest Mining, which brings together multiple actors to promote both direct financing mechanisms and regulatory improvements, including access to the Brazilian Stock Exchange, to ensure that mining has a greater insertion in the capital and financing market in Brazil.”
Interviewees described Invest Mining as generating a new financing culture in Brazil, where financing for juniors has long been a problem. Increasing the diversity of companies is central to development of the sector, which is dominated by a few major players. “Brazil still has room to improve the domestic access to finance for high-risk, exploration projects,” explained Adriano Drummond Trindade, mining partner at Mattos Filho Advogados. “The São Paulo Stock Exchange (B3) developed a 'venture exchange branch', but we lack the culture regarding investing in exploration and mining companies, as well as a robust ecosystem of mine analysts, economists, geologists, and specialized advisors in general that exists in more traditional jurisdictions for mining investment like Toronto, Perth or London.”
"Brazil has strong geological potential to become a global supplier of strategic minerals. The biggest bottlenecks are in the institutions and bureaucratic structure."
Mariana Nahas, CEO, NMC Sustentabilidade Integrativa
The Brazilian mining industry has an opportunity to strengthen the country’s industrial sector. With Brazil’s large workforce, excellent green energy matrix, and long mining experience, the country could be a powerhouse of industry with mining providing the essential spark. Rather than export commodities, Brazil could develop a local industrial sector that utilizes its green energy matrix to produce products derived from its metals and minerals cost-effectively and sustainably.
President Lula da Silva is pushing for “neo-industrialization”, a policy that involves using the digital and green energy transformations as a launching pad to increase the share that the productive sector makes up of the country’s economy. Flávio Moraes da Mota, head of the extractive and base industries department at the BNDES, said: “We seek to develop mining companies that respect the environment and society, with lower greenhouse gas emissions and higher technology.”
Compared to neighboring mining jurisdictions, the current Brazilian government is well-inclined towards the mining industry, encouraging the sector to support a larger industrialization push. According to Manuel Fernandes, energy and natural resources co-leader for Americas at KPMG: “The government is working towards industrial diversification and the objective of producing value-added products, such as batteries and electric vehicles, in the country, but a clear strategy for attracting investors, manufacturers and OEMs to Brazil is still required.”
Tax reform generates buzz
The only certainties in life may be death and taxes, but in Brazil, the future of the tax regime is by no means certain. On July 6, 2023, the Brazilian Chamber of Deputies approved a constitutional amendment bill with the basics of a tax reform policy that would impact federal, state and municipal indirect taxes. In 2022, the Brazilian mining sector paid R$7 billion in royalties (CFEM) and R$86.2 billion in total taxes, and the mining industry waits avidly for a clear sense of what the reform will mean for the sector.
The approved reform would put in place (a) a dual value added tax regime (VAT) that will replace the state VAT and the Municipal Tax on Services and (b) the Contribution on Goods and Services in place of the federal excise tax on manufactured products and the federal PIS/COFINS contributions.
The reform will not necessarily change the current tax burden for the mining industry, which is stable enough to enable investment, but is nonetheless burdensome when all relevant taxes are considered. “The mining industry already has high tax and royalty points, but the issue is not the federal tax or the reform, but rather the taxes imposed by the states and municipalities,” said Frederico Bedran Oliveira, mining partner at Caputo, Bastos e Serra Advogados. “The Brazilian Mining Royalty (CFEM) was changed when the National Mining Agency was created in 2017, and has since been higher than what it was over the past 10 years. For example, in 2022, the total royalties were approximately R$7 billion – but the major issue remains the taxes created by the states and municipalities.”
The current tax system is burdensome because it includes not only mining royalties – the CFEM – but additionally taxes levied on sales, such as ICMS, PIS and COFINS. Liliam Fernanda Yoshikawa, mining partner at Machado Meyer Advogados, said: “Right now, the main ongoing discussions regarding the Brazilian tax reform and its impacts on mining companies refer to the recent inclusion of a new rule that makes it possible for states to create a contribution on primary and semi-industrialized products that shall serve infrastructure construction works and housing in lieu of contributions to state funds. Should it be approved on a definitive basis, this will further increase the total tax burden for mining companies.”
Article 19, a last-minute addition to the reform that allows states to create their own charges on certain products, has generated concern from IBRAM and other associations. “If the article is not removed, it might represent a risk for many sectors, including mining,” said Adriano Drummond Trindade of Mattos Filho Advogados. “The amendment still needs Senate approval, and I anticipate there will be a lot of political discussion on this matter. It will be a challenge for states to retain Article 19 due to the industry's scrutiny of these proceedings.”
Many industry figures are relatively unconcerned about the potential changes. The tax reform will be imposed at the point of consumption, rather than production, so the impact on the mining industry will be blunted. Some degree of change is certain, but investors should be able to continue to operate in Brazil without issue. William Freire, founding partner of William Freire Advogados, said: “Some specific taxes may increase, but I doubt it will change willingness to invest in the country.”
Image by Sync Produções at Adobestock