MAC: Mines and Communities

Royalty debates revisit Latin American states

Published by MAC on 2011-08-30
Source: Reuters

Three Latin American states are the envy of most other country in terms of the potential value of the major minerals that lie beneath their soil - particularly copper, iron ore and gold.

Among developing nations, arguably only DR Congo, Indonesia and Mongolia can compete with Brazil, Chile and Peru in reaping financial benefits for citizens from the exploitation of their mineral treasure troves.

However, there doesn't seem to be a consensus among South American governments as to how to meet this challenge. (Nor, for that matter, is there one among African nations).

Brazil's government says it wants "flexibility" in fixing royalties rates, and isn't decided on how or when they will be applied.

Chile is still "negotiating" with mining companies over its own "voluntary" tax system. And Peru's new government has yet to draw up any new legislation.

Meanwhile, Ecuador's president Rafael Correa seems quite clear: the industry will have to pay a royalty rate of 8%.

In reality, debates around royalties are more complex than commonly understood. Their benefits will vary widely, according to the point at which they are exercised in the production process or at the point of sale.

What may well be more important are other taxes imposed on the exploitation of a country's mineral resources, and the nature of concessions granted when a contract is initially signed.

Not to mention the burning issue of how profits gained by taxation are to be distributed at a provincial or local level.

[Comment by Nostromo Research, 28 August 2011].

Brazil considering mining royalty flexibility

By Sabrina Lorenzi


23 August 2011

RIO DE JANEIRO - Brazil's government is considering a proposal that would make it easier to raise or lower mining royalties depending on economic conditions and minerals prices, government sources familiar with the issue told Reuters on Monday.

The move would come as part of a broad overhaul in Brazil's mining sector that would revamp the licensing process and boost state income from mining companies such as top world iron producer Vale that are posting record profits.

"We could say, for example, that iron ore royalties should rise from 2 percent to 4 percent of net revenue, but after a year we could reach the conclusion that the 4 percent should in fact be 6 percent or 3 percent, depending on the economic situation," said one source, who asked not to be identified.

Under current regulations, changes to mining royalties have to be approved by Congress. The new mechanism would let the government change the rates without legislative approval in order to boost them in times of high prices but cut them during economic downturns to ensure competitiveness.

The proposal includes creation of a new mining commission similar to a state energy commission known as the CNPE, which makes key policy recommendations related to oil, natural gas and electricity.

Mines and Energy Minister Edison Lobao, when asked about the issue said, "that could be."

The government of President Dilma Rousseff this year plans to propose legislation that would change the terms of the current concession system, create a new mining regulatory agency, and hike royalties.

Rousseff plans to send three separate bills to Congress relating to mining -- the royalty increase, the creation of a new mining regulatory agency, and a new system for mining concessions.

The new royalty rates would vary between a minimum of 0.5 percent and a maximum of 8 to 10 percent of company revenue, depending on the mineral in question, the sources said.

Iron ore royalties would increase to 4 percent from 2 percent under the proposal, the sources said, in line with what Lobao has already indicated.

Average royalty rates for different minerals is currently 2 percent, which government leaders point out is considerably lower than other countries such as Australia.

Mining industry leaders insist that an increase in royalties would make Brazilian mines uncompetitive because the country's overall tax burden is considerably higher than other places. They say an increase should be accompanied by reductions in other taxes.

Brazil's government is seeking greater control over the country's natural resources, which form the backbone of its exports. Last year, the country's Congress approved an oil sector law that created new rules for companies seeking to invest in the country's huge offshore crude discoveries.

(Writing by Brian Ellsworth; Editing by David Gregorio)

Ecuador wants 8 pct in mining royalties - Correa


3 August 2011

QUITO  - Ecuador's President Rafael Correa said on Wednesday his government wants potential mining investors currently negotiating operating contracts to pay 8 percent in mining royalties.

OPEC member Ecuador has a nascent mining industry, but it halted industrial mining activity in April 2008 to enact a new law for the sector and ensure more revenue for state coffers.

Correa's government is in talks with U.S. and Canadian companies to obtain higher royalties from future mining investments in the Andean country.

(Reporting by Alexandra Valencia; Writing by Eduardo Garcia; Editing by Daniel Wallis, Gary Hill)

Peru, miners in pact to change royalties-sources

By Teresa Cespedes and Patricia Velez


16 August 2011

LIMA - Peru's mining firms have agreed to pay higher royalties in an overhaul of the current system, sources on both sides of negotiations between companies and leftist President Ollanta Humala's government said on Tuesday.

Under the new system, companies would pay royalties based on their operating profits instead of their sales. The new system would be similar to one used in Chile.

The new royalties rates still need to be defined, but they would likely be higher than the current rates of 1-3 percent charged on sales, a mining source said.

A government source said the agreement had been reached.

"There is agreement that they (royalties) be charged on operating profits instead of sales, with the aim of not hurting the competitiveness of the sector," the government source said.

During his campaign, Humala promised to introduce a tax on the windfall profits of miners to raise funds for social programs in a country where a third of the people live in poverty.

The new royalties' structure would likely apply a sliding scale to miner's operating profits, the source representing miners said.

In Chile, the world's No. 1 copper producer, miners agreed to a new royalty contribution of between 4 and 9 percent of operating profits to fund reconstruction after a deadly earthquake in 2010.

"The important thing is that there was consensus that the royalty should not be applied to sales, because that creates a distortion and makes it hard to turn a profit on new projects or expansions," a source representing miners said.

The sources said meetings would continue this week with the goal of agreeing on precise tax rates as soon as possible, to avoid uncertainty for investors.

Even companies that signed tax stability agreements with the government in the 1990s have agreed to pay more in royalties, the mining source said. Many of those agreements are scheduled to expire in the next few years.

Mining accounts for 60 percent of Peru's exports. The country is the world's No. 2 producer of copper and silver and the sixth most important gold producer.

Large international mining firms including Xstrata, BHP Billiton, Anglo American, Barrick Gold, and Grupo Mexico's Southern Copper operate in Peru.

"This system is expected to generate a kind of partnership between the state and investors in the sense that when prices are soaring both sides will have more resources, but when prices fall neither side gains," the mining source said. (Reporting by Teresa Cespedes and Patricia Velez; editing by Terry Wade and Carol Bishopric)

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