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The ‘new regulatory framework for mining’

After more than seven years of discussions that have covered the mandates of three presidents and various formats, the federal government has finally published three provisional measures that, if converted into law, will mean important changes for the mining sector. Contrary to the reform supported by the previous government, these changes do not affect the essential characteristics of the current model, above all the right to priority and mining concession system as a rule for the exploration of minerals in the country. Amongst the most important changes for industrial mining activities, of note are the greater detailing of legal systems for the mining research and concession license, the creation of a National Mining Agency (‘Agência Nacional de MineraçãoANM”) and alterations to the regulations governing the application and calculation of ‘Financial Compensation for the Exploration of Mineral Resources’ (‘Compensação Financeira pela Exploração de Recursos Minerais’ – ‘CFEM).

Alterations to the Mining Code

In general, the changes made by Provisional Measure nr. 790 (“PM 790”) to the Mining Code, Decree Law nr. 227/1967, through a detailing of existing instruments and improvement of the concepts it contains, can be seen as procedures. PM 790 maintains the system of direct priority in the research phase and does not establish a maximum deadline for the mining concession. At the conceptual level, PM 790 expands the scope of the Union’s jurisdiction and regulatory activities. The regulation now covers the whole life cycle of the mining activity, from research and mining through to the commercialization of the ore and closure of the mine (including responsibility for the environmental recovery of the impacted areas).

The authorization for research will now be valid for a minimum period of one to two years, and a maximum of three to four years, with the granting of just one extension period being possible. In general, the PM more precisely regulates all the steps covered by the research license, from its request and granting of the report approval processes, as well as the effectiveness of the right of priority and hypotheses of a declaration of availability of the area. The application of regulations appears to seek to avoid research licenses being valid indefinitely due to lack of activity on the part of the interested party or the regulator.  It has also expressly established the procedures and extraordinary hypotheses for extension of the license, as well as provided for the application of a fine for any interested party that fails to present a final report. In relation to this same phase, it has clarified the legal classification of the published price of the annual rate per hectare, thereby establishing as a regulation what had been a consolidated jurisprudential understanding.

Another point of interest is the inclusion, in PM 709, of a competitive procedure for availability of the area, should it be declared, by means of electronic auction. The area will be awarded to the party that offers the highest sum, with any possible failure to pay meaning the loss of the right of priority, the application of an administrative fine, temporary suspension of participation in availability procedures, and a ban on requesting the granting or assignment of research authorization for two years.

For the mining phase, the PM has modernized the set of obligations applicable to the mining concessionaire, including duties to execute a mine closure plan and subjection to the National Dam Safety Policy. In addition, it delegates to future regulation the possibility of the mining company taking advantage of other mineral substances associated with that which is the object of the mining, apparently without the need to pursue the entire mining concession research and requesting process. Depending upon the regulation, this approval could be provided much faster and more smoothly than it does under the present system.

In relation to sanctions, PM 790 includes the possibility of application of a fine for non-compliance with the different requirements established in the Mining Code. In relation to this matter, the fines will be applied by the DNPM, and will vary between R$ 2,000 and R$ 30 million, depending upon the seriousness of the offense and the economic size of the offender and, in the case of a daily fine, limited to R$ 50,000. Debts with the DNPM that are listed in the tax liability roster and have not had their enforceability suspended, will prevent the granting and extension of a mining license and registration of assignment or leasing with the DNPM when the debtor is a party in the business.

The intention of PM 790 to regulate the interface between mining law and environmental aspects should be addressed. Along these lines, the mining company has been made responsible for the environmental recovery of the impacted areas, and the PM has allowed for an extension on the authorization for research due to delays in the environmental licensing at no fault of the title holder, and established the requirement that ongoing evidence be provided of the adoption of the necessary measures for obtaining the environmental license.

New CFEM regime

Confirming everyone’s expectations, Provisional Measure nr. 789 (“PM 789”) alters Laws 7.990/1989 and 8.001/1990, and attempts to provide legal security for the industry, establishing more precise criteria for the application of the CFEM – the royalties in the sector.

Under the previous system, a (1) rate of up to 3% of the CFEM was applied on (2) the sum of the net revenue resulting from (3) the sale of the mineral product. PM 789 alters all three of these concepts, with the provision of a maximum aliquot of 4% (on iron mining), the division of the generating fact into sub-categories, and the expansion of the calculation basis for compensation.

The generating fact previously defined as the ‘sale of the mineral product’ is now divided into four categories, important within which are the first shipment for sale of the mineral asset and the consumer use of the mineral asset. The shipment for sale should be made to a third party, such being defined as an entity that is distinct from the title holder and not part of its business group.

Consequently, the CFEM calculation basis has also been altered. The net invoicing, understood as being “the total sum of the receipts from sales, excluding taxes applicable on the commercialization of the mineral product, and transportation and insurance costs”, has been replaced, for effects relating to the generating facts highlighted above, in relation to sale, by the gross earnings (deducting only the taxes applicable on commercialization) and, in relation to consumption, by calculated revenue, considering the current price or the reference price defined by the ANM after a public hearing has been held.  Now, with the express absence of the right to deduct transport or insurance costs from the calculation basis, it appears to us that any discussion concerning the deduction of domestic transport costs has been dismissed.

Under the terms of PM 789, the charging of the CFEM is subject to a statutory retention period of ten years, and a statute of limitations of five years, the lessor and the taxpayer being held jointly responsible during the effective period of the lease, and the assignor for any possible debt relating to the period prior to the registration of the assignment with the ANM.

The PM also confers detailed prerogatives on the regulating entity to inspect the payment of taxes and, in case of non-payment, to arbitrate the sum owed.

Creation of the ANM

With Provisional Measure nr. 791 (“MP 791”), the DNPM has been replaced by the ANM, which will be a regulatory agency responsible for the regulation and supervision of approval of mineral resources in the country.

Under the terms of PM 791, the ANM will be responsible for regulating, inspecting, collecting, composing and charging any credits arising from the CFEM, the annual sum owed by the title holder of the authorization to conduct research, the inspection rates, and the fines applied by the ANM. Just as is the case with other regulatory agencies, the ANM is responsible for mediating and deciding on disputes involving the agents within the sector.

The ANM is responsible for managing the processing, granting, assignment and termination of mining rights, except for the mining concession, which remains the responsibility of the Ministry of Mines and Energy. It should also be mentioned that the ANM is responsible for requiring interested parties to make minimum investments in mineral research and for fostering competition (respecting the responsibilities of the competition defense organs.

The ANM is to be directed by a full Board, made up of one Director General and four Directors without specific designations. Its directors should fulfill rigid requirements of professional experience and compatible academic training. They will be elected for fixed mandates of five years, which should not run simultaneously, and with numerous impediments concerning prior political, partisan or union activity being observed. Once the mandate has been concluded, a quarantine period of six months should be completed before assuming any activity with an agent in the private sector.

Income for the ANM will come from different sources, especially the Mineral Activities Inspection Fee (“TFAM”). The generating factor for the TFAM, owed by mineral rights title holders, is the regular exercising of the policing power inherent in the inspection of mining activities by the ANM. The TFAM is owed depending upon the phase of the mining process, varying from R$ 500 (by small-scale mining by an individual) to R$ 5,000 (by mining concession). Failure to pay will lead to the charging of a fine of 50% of the sum of the TFAM owed, without affecting updating in line with inflation or interest. Just as occurs with the CFEM, the lessor and the assignor are jointly and severally responsible for payment of the TFAM.

Effective period

PM 789 – except for the new rates that will move into effect on 1-Nov-2017, and the CFEM regulations on consumption of mineral assets that will be applicable as of 1-Jan-2018, PM 789 will move into effect on 1-Aug-2017.

PM 790 – moved into effect on the date of its publication (26-Jul-2017), except that which relates to the provisions for payments due in relation to the authorization for research, fines, the process for declaration of annulment and sanctions due to the title holder’s failure to file its corporate documents.

PM 791 – the TFAM moves into effect on the first day of operation following the date of the publication of PM 791, whilst the other provisions moved into effect on 26-Jul-2017.

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The Infrastructure Team at Felsberg Advogados is available to provide any additional clarifications on this subject. Should you have any questions, please contact: Daniel Engel (danielengel@felsberg.com.br) or Paola Oliveira Lima (paolalima@felsberg.com.br).

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