Just one year after taking office, Brazilian President Michel Temer has put in place an impressive reform agenda for the mining industry, following years - some would say decades - of procrastination. The reforms that create a new mining agency and change the rules for land auctions and environmental permitting have been greeted positively by investors. Those pertaining to increased royalties have, probably naturally, met with opposition from operators, particularly in the face of stubbornly low prices and uncertain markets for Brazil's main mining product iron ore.

The reform package for the mining industry is one of a series of measures Temer is pushing forward in an effort to boost an economy that is struggling to emerge from a long and deep recession. Energy, infrastructure, labor and pension reforms are also underway, all in an attempt to attract investment and increase government coffers. "There is a clear commitment from Temer's administration in modernizing the energy, mining and infrastructure sectors in Brazil to boost investments," says Joaquim Muniz, a partner at the Rio de Janeiro-based Trench Rossi Watanabe law firm.

President Temer is pushing for a wide-reaching agenda of reforms to kickstart the economy. Credit: AFP

Still, economic recovery is likely to be onerous as the massive Lava Jato corruption scandal that has convulsed the country for the last three years has not fully run its course. Temer himself was charged with corruption by the prosecutor-general Rodrigo Janot in May but the lower house of congress voted not to put him on trial. Then in September, Brazil's federal police announced it found evidence that Temer and high-ranking members of his party were part of a "criminal organization" that diverted public resources. The group is accused of corruption, money laundering and bid rigging.  It is still too soon to predict the outcome of this lawsuit, according to Muniz. Still, the president's approval rating is dismal.

The increasing uncertainty of Temer's tenure could put the reform agenda at risk and will postpone the recovery, according to BBVA, which cites "exceptionally high levels" of political uncertainty as its principal reason for revising down GDP growth forecasts to 0.6% in 2017 and 1.5% in 2018, in both cases 0.3% below previous forecasts. In July, the IMF forecast GDP growth in Brazil for this year at 0.3%, with an expansion of 1.3% in 2018. In particular, the pension reform widely cited as a key element in rehabilitating the nation's finances is highly unpopular and has stalled in congress.

Nonetheless, for now Temer's reforms for the mining industry are moving forward. The senate joint committee responsible for evaluating the royalty aspect of the three provisional measures to reform the country's current mining code has approved a work schedule including public hearings between September 13 and October 13. All going well, the final report should be ready for October 17-24 period, with implementation in November.

"The recent provisional measures  introduced by the government can be seen as positive in the sense of progressing with the necessary changes on legislation after the discussions on the bills of law in the congress have been dragging for years, leading to huge uncertainty in the sector," says Muniz.

The hope is that reforms will help attract billions of dollars in venture capital to Brazil's mining sector by creating a more investor-friendly environment. However, the measures still need to be approved by congress or they will lose effectiveness in 60 days (extendable for an additional 60 days). "The approval of the provisional measures by the congress is essential to ensure that the reform will boost the investments in the sector in the medium and long term, granting the required legal certainty to the regulatory framework governing the mining industry," says Muniz.

Still, it remains to be seen when the changes will be implemented and whether they will be enough to inspire a noticeable increase in investment activity. Recent project reactivations and M&A are hopeful signs that optimism is returning; however, these likely have as much to do with the tentative recovery of metals markets that has taken place over the course of 2017 as with any improvement in the operating environment within Brazil.

Cover photo: Ore transport at the Minas-Rio iron ore mine. Credit: Anglo American

Figure: Brazil GDP


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