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  Investments in the Brazilian Mining Sector; Attractive but Solemn

By Pedro Garcia[1]

It is now common sense among the business community that the increasing demand for prescious and non-prescious metals, specially by Asian countries, will continue to push ore commodity prices up.  In this favorable scenario, Brazil has become a natural target for new exploration initiatives and in fact foreign investments have massively increased in the last couple of years.  In addition, international credit risk rating company Standard & Poor’s granted last week a “BBB-” rating to Brazil, which lead several consulting companies to anticipate that the investments in the sector will further increase this year.  This is the first time Brazil received the so-called "Investment Grade" by a reputable risk analysis company.  Therefore, given that several companies and investment funds are prevented from investing in countries which do not hold an Investment Grade, this news will certainly attract a new range of investors and opportunities to Brazil.

Thus, as it is quite likely that Brazilian mining companies will attract a relevant portion of such new investments, this article intends to provide mining investors and consultants with some of the most relevant legal issues to be considered while entering into new ventures in the Brazilian mining sector.

The first issue to be reviewed by an investor on a mining company or in the acquisition of an existing or imminent mining project refers to the status of the mining rights held by the company under analysis.  The regulatory system of the mining industry in Brazil is quite formalistic and as such should be carefully reviewed.  Every mining right should be duly registered with the National Department of Mineral Production (“DNPM”), which is in charge of granting the required licenses or concessions for the exploration or exploitation of mineral substances (which constitutionally belong to the Federal Union).  Investors should appraise whether the mining rights are (i) applications for Exploration Licenses - which are not transferrable vis-à-vis the DNPM, (ii) Exploration Licenses, which grant the right to the respective holder to explore the site or (iii) Mining Concessions, which are the final stage title for the actual exploitation of the ore deposit.  This is usually quite relevant for companies while reviewing the levels of certainty on the existence and measure of the reserves.

The entire regulatory proceeding - from an Application for an Exploration License to a Mining Concession - should be closely followed by environmental consultants, since the DNPM requires the environmental licenses in most of the stages of the process (albeit exploration does not require an environmental license in most States of the country).

In addition, it is advisable that new investors proceed with a detailed due diligence investigation on the company’s status in connection with payments of the governmental royalty imposed on the sale of the ore by the concessionaires.  This is royalty is called CFEM which stands for Contribuição Financeira sobre a Exploração Mineral and it is charged on net revenues of the ores.  Depending on the level of the debts relating to CFEM, a company may be prevented from transferring the mining rights to a third-party.

Like in most countries, geological interferences and interpolations also play an important role in the analysis of a mining project in Brazil.  This should be closely reviewed by qualified geologists having experience in this type of investigation.

In addition, labor and environmental liabilities should be on the top of any check list, given that Brazilian laws are quite strict with regard to such aspects and a purchaser of an existing project may become jointly liable with the respective seller, depending on the details of the liability.

As to the actual contractual framework to be selected for an investment in the mining sector, investors should specially bear in mind that the DNPM does not yet register typical Option Agreements, which are internationally used for medium to long term investments.  Therefore, alternative corporate routes should be pursued in order to ensure that the investments are duly protected and that the respective mining rights will be transferred to the holder of the option once the contractual conditions are complied with.

To sum up, although the Brazilian mining regulatory proceedings may be deemed well organized and reliable, we are positive that the success of a new investment will be directly affected by a proper review of the details and peculiarities of the various legal aspects which affect the mining rights which surround the project.

Specialist in European Law publications

French Competition Law A unique reference work in English by Louis Vogel President of the University Panthéon-Assas (Paris II) Founding partner, Vogel & Vogel, Paris learn more Up-to-date edition on French competition law, noted for its precise interpretation of legal principles and comprehensive citation of judicial authorities Written by a recognized expert in competition law Clear lay-out for use by practitioners and academics Content: Unfair Competition, Price Transparency and Restrictive Practices, Restrictive Agreements and Abuse of Dominance, Procedure, Merger Control learn more Numerous footnotes containing doctrinal and judicial references Book IV (Competition) of the French Commercial Code in English If you subscribe to the site, an online database that provides full access to the book and the relevant legal texts in English with links to the full text of the cited decisions in French

1st ed. 2008 530 pp learn more

Order form return to :SAS LawLex 76 rue de la Pompe 75116 Paris Tel.: +33 (0) 1 53 67 71 80 Fax : +33 (0) 1 53 67 76 24 Email: nousecrire@law-lex.com French Competition Law Price €* Quantity Total Book 175 Site (annual subscription) 175 Duo (book+site) 245 Postage and packaging per item Europe Rest of the world 15 25 Total to be paid * Price without VAT for sales outside France First Name Last Name Company Address Tel Email For companies resident in EU member states, please quote your VAT number Payment Options Credit card Card account number: Expiry date: Name of cardholder: Signature: Date: Bank Transfer BNP Paribas Paris Kléber, 51 avenue Kléber, 75116 Paris, IBAN: FR76 3000 4008 9200 0102 3661721, in the name of LawLex

THE WHITE BOOK PUBLISHES 17 APRIL 2008

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