Brazil mining code stirs uncertainty

Revisions to Brazil’s mining code may cancel mineral rights that the government deems strategic such as phosphate, potash, and rare earth elements, Reuters reported yesterday, quoting unnamed but “high-level” government and mining industry officials. “Large iron ore deposits that have not yet been leased may also be set aside as strategic and held for special auctions,” the news agency said.

Mining companies will be compensated for any prospecting work that may have been done on their claims. The mining code changes are driven in part by Brazil’s desire to prevent companies from sitting on concessions for years without developing them, Reuters’ sources said.   

The news—which comes on the heels of Bolivia’s nationalization earlier this month of a mine owned by a Glencore subsidiary, and measures taken in Argentina in recent months that have ranged from the nationalization of a foreign oil company to new rules on foreign companies repatriating earnings—have put many mining companies and investors in them on edge. It also follows news reports in April that Indonesia was considering slapping export taxes of 25% on coal and base metals this year and as much as 50% in 2013 ahead of a 2014 ban on shipments of some unprocessed metals.

“I think what happens is that when you have very lucrative conditions in the mining industry internationally, governments in ‘emerging nations’ often attempt to increase resource revenue from the industry in various ways,” says Patricia Mohr, vice-president, economics and commodity market specialist at Scotiabank in Toronto.  “Last year was a year of tremendous profitability in the international mining industry so now governments are trying to increase their share of the industry’s revenue.”

Mohr adds that these developments, however, “come at a rather awkward moment because metal and mineral prices have come under pressure in recent months due to the slowing of global economic growth and financial challenges in the Euro zone and also in the context of slower growth in China.” 

In Brazil’s case, some management in the industry say they can see what the government may be trying to accomplish.  

“We believe what they’re saying is, if you’re not interested in investing in the property, we want to let someone else develop it,” says Steve Burleton, vice president corporate development at MBAC Fertilizer Corp. (MBC-T), which is actively developing three projects in the country.

“We believe that the government’s concern lies with companies that don’t have the financial wherewithal to develop the deposits and are just sitting on them for extended periods, or are just staking claims to protect their competitive advantage. They want to make sure these strategic mineral deposits are developed.”

Of MBAC Fertilizer’s three projects; one is in construction, another is at the feasibility stage, and a third is undergoing a scoping study. “I don’t think this is a case where they’re going to take back claims from companies like ours that have invested in the claims and are advancing projects. We’re investing money, and we’ve shown that we’re currently advancing our projects to an end-goal of development.”  

“The mining business is a significant business in Brazil and I just don’t think it’s in their interest to discourage investment,” he continued.

National Bank Financial analysts Robert Winslow and Andrew Gilbert wrote in a research note that while the expropriation of mineral rights and exploration licences in Brazil “is far from a certainty” because there may be constitutional constraints, they would not be surprised if a new Mining Code “in one way or another helps to protect national interests, especially for fertilizer minerals.” They also note that higher royalties and taxes may also be proposed.

But they also point out that while very early stage fertilizer developers would face higher hurdles, more advanced projects are unlikely to be targeted. As a result, the analysts are maintaining their buy ratings on MBAC Fertilizer and Verde Potash (NPK-V), a company that is developing the Cerrado Verde project in Brazil, a source of potash-rich rock from which the company plans to produce a potash fertilizer product. (Cristiano Velosi, president and chief executive of Verde Potash, could not be reached for comment.)

Winslow and Gilbert have a $5.25 per share target price on MBAC Fertilizer and a $9.25 per share target price on Verde Potash.  At presstime MBAC was trading at $2.52 within a 52-week range of $1.99-$3.30, and NPK shares were at $3.75 apiece within a 52-week range of $3.85-$9.37.

“MBAC Fertilizer’s phase 1 phosphate project is currently under construction, the $260 million project is fully funded, and the company has shown evidence of strong financial backing with Brazil’s development bank, BNDES, and the International Finance Corporation listed among MBAC investors,” they argue. As for Verde Potash, though the company has raised far less financing than MBAC, it recently closed a $28.75 million equity issue that should help management advance the project, they said.


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