LATIN AMERICA — Legal reforms put Brazil on mining fast track

Although Brazil is touted as the most geologically diverse and prospective mineral region in Latin America, it has only recently begun to attract the foreign investment necessary to elevate it what government officials hope will be the status of a major producer.

Like many nations seeking to improve their economic station, Brazil is attempting to lure foreign investors by embarking on a program of privatization and legal reform, including changes to its mining and tax codes.

The deregulation and mass privatization of Brazil’s industrial infrastructure, including railways, harbors, telecommunications and electricity, began in 1992 under then-president Itamar Franco. That initiative, designed to ease the country into a free-market economy and control rampant inflation, came to a grinding halt when Franco and 18 members of the legislature quit amid allegations of corruption in 1994.

Subsequently, former finance minister Fernando Henrique Cardoso was elected president on a platform of inflation control and economic reform. His government resumed privatization programs, and set about modernizing the Mining Code, even amending the Brazilian Constitution in 1995 to attract foreign dollars to the sector. His government also created the Brazilian Geological Service.

Introduced in 1967, the country’s Mining Code was seen as antiquated and inefficient by today’s industry standards. One of the major revisions included the elimination of a loophole that allowed mining companies to secure huge tracts of land on speculation without having to pay any sort of maintenance fees. Companies must now pay US26cents or US40cents per hectare, depending on the location of the property.

Amendments were made to those sections of the 1988 constitution deemed discouraging to foreign investment, including a provision that companies from abroad could own no more than 49% of a Brazilian firm.

Aside from retaining its monopoly on the production and sale of uranium, the Brazilian government has thrown the door to Brazil’s mining industry wide open: the country’s tax structure as it relates to mining has been reformed; no distinction is made between Brazilian and foreign-owned companies; foreign companies can hold majority shares in Brazilian firms; and the state-owned Companhia Vale do Rio Doce (CVRD) has been sold as part of the National Privatization program.

The country has already begun to see results. Between 1995 and 1997, exploration expenditures jumped 58%, to US$120 million from US$76 million, and investment in new mining projects rose to US$600 million from US$529 million. More than 100 foreign mining companies have set up shop in Brazil, usually under nationally incorporated subsidiaries, in the last three years.

Companies working in Brazil include Barrick Gold, Echo Bay Mines, Inco, William Resources, Teck and Western Mining.

Although changes in the mining sector are just part of a broader plan of economic reform, Miguel Navarrete Fernandez, general director of the Ministry of Mines and Energy, says the reforms, combined with good infrastructure and diverse geology, will transform Brazil into a major mining nation. “We are improving bureaucracy, law, human resource and technology to become one of the world’s great producers,” he says.

An essential step in the reform of the country’s mining industry was the sale of CVRD, the largest mining company in Latin America by production. In May 1997, a group of companies known simply as Brazil Consortium bought 41.7% of the common shares of CVRD for US$3.4 billion. The consortium comprises Companhia Siderurgica Nacional (Brazil’s leading steelmaker) and several national banks and pension funds. The remaining interest is held by employees and other individual shareholders. The government retains a single share, known as a golden share, which gives it veto power over changes in objectives and names, as well as the closing of major business units.

Fernandez explains that the sale proved that the country’s minerals industry belonged to mining companies, not to the government, as well as the “government’s intention and wish to work together” with those companies.

CVRD produces precious and base metals, bauxite, kaolin, potassium and manganese. It has been the largest gold producer in Latin America since 1993, churning out 18 tonnes in 1995.

The company has spent about $450 million on exploration since 1981. It has 106 tonnes of gold reserves, 529 million tonnes of copper reserves and 3.3 billion tonnes of iron ore. CVRD operates five gold mines, including: Igarape Bahia, in Para state; Fazenda Brasileiro, in Bahia state; and Caete, Almas and Itabira, in Minas Gerais state. The company is aiming to increase annual gold production to 31 tonnes by the turn of the century.

According to Fernandez, the privatization of CVRD is proof that the Brazilian government is serious about putting Brazil’s mining industry in “the right place,” and junior companies working in the country seem to agree. Daniel Titcomb, president of New Hampshire-based Brazilian Resources (BZIN-C), says “Everything on the exploration front is roaring.

“Brazil is showing the proof of their commitment by continuing to deregulate, privatize, and reform legislation. They’re doing a good job of marketing themselves.” Titcomb credits the country’s new attitude toward its mining industry for Brazilian’s success in securing Placer Dome as a senior partner on the Sabara gold project.

Situated in the Iron Quadrangle region of Minas Gerais state, the deposit, hosted in a banded iron formation, contains a resource of 7.2 million tonnes grading 2.7 grams gold per tonne. “We have several majors looking at our other properties,” he adds. Brazilian, which has been operating in Brazil since 1992, holds 50,000 acres of ground prospective for gold in the massive sulphide formations of Mato Grosso state, as well as a 70% interest in the open-pit, heap-leach Santa Maria gold mine in Amapa state. Reserves there stand at 1.9 million tonnes grading 2.44 grams gold.

According to Eike Batista, president of TVX Gold (TVX-T), Brazil’s geological potential will enable it to rank among the world’s top-five gold producers within the next decade. “There are some big copper-gold porphyries in the Amazon basin,” he says, adding that the region, which is little explored and was the locus of a major gold rush by small-scale miners in the country in the mid- to late-1980s, is the most prospective in Brazil. TVX, which has been exploring in the country since 1981, has two exploration projects in the Amazon Basin, Gurupi and Volta Grande — both of which have been joint-ventured to majors as a result of the recent legal and tax reforms.

The 185,000-ha Gurupi project, situated in Maranhao state, covers a shear zone measuring 20 km long by 2 km wide. Gold is contained in metavolcanic and metasedimentary rocks in two mineralized trends cut by shear zones, quartz stockworks and veins. Measured and indicated resources there stand at 2.4 million oz. gold.

Battle Mountain Gold (BMG-N) is earning a 50% interest in Volta Grande, situated in Para state. Drilling on the 15,100-ha property has returned between 0.6 and 6 grams over widths ranging from 4 to 36 metres. A diamond drill program is scheduled to begin shortly.

TVX also owns the Crixas gold mine, in Goias state, a joint venture with Minorco (MNRC-Q) and the Brasilia gold mine, in Minas Gerais state, a joint venture with Rio Tinto (RTP-N). Crixas is expected to produce 124,000 oz.

gold in 1997, whereas Brasilia, the country’s second-largest gold producer, is expected to churn out 175,000 oz.

Titcomb agrees with Batista that Brazil will likely become a significant gold producer. “The Precambrian geological potential is equal to or greater than what Canada has,” he says, adding that the greenstone formations in the Guyana shield would be recognized by any Canadian or U.S geologist.

It appears that South African geologists also recognize the potential of that region, as Anglo American is reported to have made a major discovery there. Batista says the major, which is keeping details
of its find under wraps, has delineated a proven resource of 2 million oz. “It looks like it’s going to become a project,” he says.

Despite all the noise being made about Brazil’s growing stature as a producer, both Batista and Titcomb concede that the gold price will have to recover before a bona fide exploration boom develops.

Fernandez, however, puts a positive spin on the sluggish price of gold and its affect on activity in the country. “If you suffer now, it shows you are a strong company,” he says. “The time to make a deal is now.”