Cash shortage hits firms with mining operations in Brazil

Sweeping economic reforms and anti-inflation measures initiated last month by Brazil’s new president, Fernando Collor de Mello, have sent that country’s capital markets into a tailspin and caused a severe shortage of cash. A spokesman for Inco (TSE), which last November began producing gold at its partly owned Crixas mine in central Brazil, said his company had to suspend temporarily some field operations, and borrow the money required for payroll purposes. That’s because funds held in Brazilian bank accounts were frozen under the government’s recent economic reform policy.

He said all of Inco’s producing mining operations in Brazil are carrying on as usual, however, despite the current state of economic turmoil.

The major cash crunch resulted when the bank accounts of Brazilian citizens and companies were temporarily frozen as part of the Collor government’s new economic reform strategy.

Returning from a recent trip to Brazil, the Inco spokesman complained about having to pay US$40 for a taxi ride that used to cost him about US$20. “People are trading houses, boats and cars just to get money,” he said.

Brazil is in the midst of a monetary squeeze brought on by its government’s austerity plan designed to smother the country’s rampant inflation, estimated at 85% for the month of March.

Last month, about US$110 billion in the bank accounts of citizens and companies were temporarily frozen, taking about 70% of the country’s money out of circulation. The limits imposed on cash withdrawals were so strict that many firms found themselves without cash even to pay wages.

The Inco spokesman said the average selling price for gold in Brazil has plunged to nearly 10% below the recent world price of US$368 as a result of the economic reforms. That’s down from an earlier price level of about US$900 per oz., he said.

On a more positive note, he indicated that Brazil’s new president has gone on record as favoring a more market-oriented economy and that more foreign investment could be permitted in the future because local capital is in short supply.

Another firm with most of its mining operations in Brazil is Consolidated TVX Mining (TSE), which has the largest investment in Latin America of any Canadian- based gold mining company.

A spokesman for TVX said the current economic climate in Brazil is “very confused” as companies try to sort out the impact of Collor’s new fiscal policy.

He said TVX only had access to about 20% of its cash in Brazilian banks and the situation there has become “extremely volatile” due to a severe liquidity squeeze.

In the long term, however, he sees the Brazilian government’s new steps as encouraging and added that “something had to be done to stop Brazil’s spiraling hyperinflation.”