Brazil's Mining Scene
A year of revival for the sector
Brazil found itself in the international spotlight this year, taking on the rotating presidency of the G20 for 2024 and hosting leaders from the world's biggest economies in Rio de Janeiro this November. The summit's motto, 'Building a Just World and a Sustainable Planet', underlines the Lula government's attempts to make green diplomacy the fulcrum of Brazil's foreign policy. There are two central pillars to this policy: custodianship of the Amazon rainforest and the provision of critical minerals for the electrification of supply chains. The mining industry is transforming in Brazil, growing, diversifying and coming under greater scrutiny from over-stretched regulators. Brazil is clearly a mining power, as the world's largest producer of niobium and second largest of iron ore, and home to Vale, which generates over US$40 billion in revenue a year. This year, the mining giant announced the entry of a new leadership team, with Gustavo Pimenta, formerly CFO, now taking the charge of CEO.
Geopolitics at the wheel
According to figures from the Brazilian Mining Association (IBRAM), Brazilian mineral exports reached US$42.98 billion in 2023. Despite these figures, over 50% of the country remains geologically unmapped, and several discoveries in recent years across different commodity classes, from gold to rare earths, point to the country's untapped potential. Brazil's mining sector is still dominated by iron ore production, however, there are developments and projects across a suite of different minerals laying the foundations for the country to become a leading exporter of minerals crucial for the energy transition. IBRAM's figures state that in the first six months of 2024, the mining sector's revenues totaled R$129.5 billion, an 8% increase compared to the first half of 2023, pointing to an upward swing for the industry.
Marcos André Gonçalves, president of the Agência para o Desenvolvimento e Inovação do Setor Mineral Brasileiro (ADIMB), said: "There are several new developments in the mineral exploration scene for rare earth, lithium, and base metals… The energy transition has influenced the mining sector for good, with new exploration investments from Australian, Canadian and American companies."
The mining industry's principal challenge globally is access to capital. The sector is caught in a curious paradox between the increasing demand for critical metals and less financing available to develop long-term, capital-intensive projects. Discussing Brazil's mining finance eco-system, Guillaume Légaré, head of South America for the Toronto Stock Exchange and TSX Venture Exchange, said: "Brazil ranks fifth in Latin America, with 34 companies with 95 mining projects in the country. Given its size, this makes it a relatively under explored jurisdiction represented on our exchanges, underlining its potential. Although there is significant potential for growth in Brazil's mining sector, we need to promote it further to facilitate capital access for local entrepreneurs."
“The increasing demand for minerals essential for renewable energy technologies and electric vehicle batteries creates a unique opportunity for investors to support the green transition. ESG factors are paramount at Appian and are integrated into our investment process.”
Silvio Lima, Head of Corporate Affairs, ESG and Community Engagement, Appian Capital Advisory LLP
Mining leaders have stressed the need for more financing opportunities, and the reluctance from public investors and traditional banks to invest in long-term capital projects. Instead, private equity houses are picking up some of the slack. There are, however, public initiatives to encourage a mining finance eco-system in the country.
In addition to talks about promoting a Rio de Janeiro stock exchange, which will be more open to junior mining companies, Adriano Trindade, partner at Mattos Filho, a leading Brazilian law firm, said: "Currently, the Brazilian Development Bank (BNDES) is structuring a fund aimed at investing in critical minerals, particularly in exploration and development. BNDES will contribute 25% of the fund and is now seeking the remaining 75% from other investors."
The BNDES’ activity in the past year suggests a concentrated effort from the highest levels of government to provide a more robust framework for mining investments. Flávio Moraes da Mota, the head of extractive and base industries department at BNDES, discussed how the bank is collaborating with Vale, raising R$250 million each for a Strategic Minerals Fund: "The goal is to raise an additional R$500 million from other market investors, reaching a total of R$1 billion. Currently, 12 investment proposals have been received, and a new fund manager is expected to be announced in early October, with the fund operational by early 2025."
The BNDES' commitment to the mining industry extends beyond this fund and fits into a more comprehensive strategy by the government to fortify the sector and add value to mined commodities. Moraes da Motta discussed the government's 'New Industry Brazil' policy, aiming to inject over R$300 billion into the Brazilian economy up to 2026, with the purpose of modernization, including the enhancement of manufacturing capabilities for EV makers, including Stellantis, which has announced investment plans of over R$30 billion up to 2030. The mining sector will be crucial to this effort as a home-grown source of raw materials, from lithium to rare earths, maximizing value creation within the country.
For Appian Capital Advisory LLP, a leading private equity player in Brazil's mining industry with US$3.6 billion of assets under management, and whose portfolio includes Atlantic Nickel, Mineração Vale Verde, Graphcoa and Omnigen Energy, the dearth of available capital for mining projects is being tackled head-on. Silvio Lima, head of corporate affairs, ESG and community engagement, said: "The inherent volatility of commodity prices makes securing financing for long-term projects difficult. Additionally, mining projects often have lengthy lifespans. This extended project cycle can deter potential investors seeking quicker returns."
The investment house, however, is bullish about the future of mining in Brazil. Lima continued: "The increasing demand for minerals essential for renewable energy technologies and electric vehicle batteries creates a unique opportunity for investors to support the green transition."
“Many emissions, particularly in industries like mining, come from scope two and scope three emissions, making visibility into the supply chain critical.”
Richard Eyram, Chief Consumer Officer, EcoVadis
Conversations around the energy transition are changing the way the Brazilian mining sector operates, and despite the financing challenges, it could offer a solution to current pecuniary woes. Machado Meyer Advogados, a São Paulo-based legal firm with deep expertise in mining and cross-border investments and mining financing, is seeing the potential for a change in how traditional lenders approach mining investments in light of their importance for any energy transition scenario. Liliam Fernanda Yoshikawa, mining partner at Machado Meyer, said: "Interest in energy transition minerals will remain strong in the coming year. The government is likely to continue efforts to incentivize these projects. Locally, Brazilian banks are beginning to reconsider their stance on investment, recovering from past negative experiences."
Legal challenges for the industry remain, potentially hampering investment down the line. Questions around tax are the most polemic. IBRAM's figures indicate that in the first half of 2024, the mining sector contributed over R$44.7 billion in taxes. Despite these figures, questions over introducing a selective tax could place an extra burden on mining activity. According to Frederico Bedran Oliveira, mining partner at Caputo, Bastos e Serra Advogados, a Brasilia-based legal firm: "The ongoing debate about the selective tax and its impact on exports is a major concern. Legislative discussions around the mining code could disrupt the sector's stability."
Despite this potential headwind, there are more reasons to be optimistic, as the Brazilian authorities recognize the importance of seizing the moment regarding the mining industry and the role it could play globally. The government, which has strongly advocated for the energy industry, sees an overlap with the mining world. According to Oliveira, public-private efforts are multiplying across the extractive sector, in financing arrangements, and also for nuclear energy: "With its significant uranium reserves, Brazil has enormous potential in this sector. In 2022, a legal framework was amended to allow public-private partnerships in uranium mining."
Caputo, Bastos e Serra Advogados has been expanding its energy practice alongside its mining focus to capitalize on and develop the increasing synergies between the two sectors. Oliveira mentioned how mining companies are increasingly engaging renewable energy providers to decarbonize their energy supply and that at the federal level, the government's launch of a National Policy for Energy Transition through the Ministry of Mines and Energy, supports them: "Notable regulatory developments include approving the new regulatory framework for green hydrogen, ongoing discussions about offshore wind energy, and legislative work on the future of low-carbon fuels."
Article header image courtesy of Anglo American