Minerals boost Brazilian economy

Significant changes in Brazils economic and political structures are taking place at this time as a new administration under Fernando Collor, the first president to be elected by popular vote in 29 years, leads the country into the 1990s.

If successful, these changes could eventually usher Brazil into a new period of continued growth within this decade.

In the short term, businessmen are confronted with a great deal of uncertainty, and are currently holding new investment rates to modest increases or even declines in some sectors. As far as foreign investment is concerned, the foreign investment ledger was negative in 1989. Capital repatriation for 1989 was reported at $800 million and contracts for the remittance of dividends and profits at $2.34 billion. New money invested in the country is estimated by Brazil Watch, a fortnightly publication, at only $500 million.

The negative investment ledger paints a picture of a once attractive investment climate in decline. But while new money from overseas is drying up, the reinvestment of profits in Brazil by major multinationals redresses the balance to some extent.

Fernando Collor has indicated that he is in favor of a market economy. His program includes the privatization of many state companies and an end to the monopoly that certain groups have on vital sectors of the economy. A gradual reduction in trade barriers and a liberalization of exchange rates is expected. The business community is in support and the general public has great expectations.

Irrespective of its economic problems, Brazil has now become the eighth largest economy in the Western world, with a 4% GDP growth in 1989. In 1988, direct mineral production in Brazil represented 3% of GDP, but when one considers the total value of the mineral processing and transformation industry, it is estimated at about 26%. The extractive mineral industry had a growth of 9.9% in 1988, strongly influenced by the positive performance of gold. The expansion of the gross mineral product (GMP) has increased at rates notably higher than the GDP as follows:

Average annual rates of growth (% per annum)

1973/80 1980/88 1973/88

GMP 22.6 6.7 13.9

GDP 7.6 2.6 4.7

In the period 1973/80, the rhythm was more accelerated, reflecting the effect of government geological surveys, as well as other stimuli implemented in the Ten-Year Master Mining Plan in 1965.

In the second sub-period (1980/88), the average rate of increase was reduced to 6.7% per annum, reflecting economic adjustments influenced by the second petroleum shock, by high international interest rates and the consequent deterioration in the balance of payments.

For the 1990s, APROMIN, the Brazilian Association of Mining Professionals, suggests a growth rate of 7-10% per year for the GMP or about $20 billion by 1999. The growth rate for the mineral processing and transformation industry is estimated at 5-8% and could therefore reach about $180 billion by the turn of the century. These amounts would be about 4% and 34%, respectively, in relation to the GDP.

However, to realize this performance, considerably larger investments would be required in exploration, in the order of $500 million per year, or about five times the present level of investment. Opportunities and challenges await the foreign investor since Brazilian companies do not have the sums of risk capital to invest.

Overall, the mining sector has progressed very well in the last five years and is expected to continue to do so in the 1990s.

Brazil is now the worlds third largest producer of iron ore, produces 80% of the worlds niobium, and is a major supplier of aluminum, gold, tin and precious stones. Of the major metals, only copper, lead and zinc have to be imported, but it is expected to be self-sufficient in these metals by the end of the century.

Although much argument in recent years revolved around the dominance of foreign participation in mining, a recent study by the National Research Co. (CNPq) and Revista Brasil Mineral concluded that in 1987, Brazilian private companies controlled 44.5% of production while government companies controlled 37.3% and foreign capital controlled only 18.2%

A new constitution for the Federal Republic of Brazil was promulgated in 1988. Among the changes instituted, the mining sector alone became the target of discrimination.

Mining companies must now be national Brazilian companies. What this means is that companies involved in exploration and mining activities are required to at least have effective control of their voting shares in the hands of persons domiciled and resident in Brazil.

Under Brazilian law, at least one-third of the shares of a company (sociedade anonima) must be voting shares. Therefore, in practical terms, a company is considered a national Brazilian company when the majority of voting shares, that is, more than 17% of total capital, is in the hands of domiciled residents.

In land area, Brazil is the fifth largest country in the world, being larger than the continental U.S., excluding Alaska, larger than Australia, and only slightly smaller than Canada. The shield areas are exposed in more than 40% of the land mass or about 3.5 million square km.

It is only within the last 23 years, since the establishment of the new Mining Code of 1967, whereby prospecting and mining rights were separated from surface rights, that exploration came into its own. Early discoveries in the Amazon included the immense Carajas iron ore deposit discovered by U.S. Steel, the rich bauxite deposit at Trombetas discovered by Alcan and the Onca-Puma nickel deposits discovered by Inco. Other notable deposits include the Salobo copper deposit situated near Carajas, the Pitinga tin deposit in Amazonas, gold deposits at Araci (Bahia), Morro do Ouro (Minas Gerais), Crixas (Goias), and the famous Serra Pelada workings near Carajas discovered by garimpeiros. Nickel deposits were discovered at Barro Alto (Goias), Fortaleza de Minas (Minas Gerais) and Americano do Brasil (Goias). Exploration in Brazil has only barely scratched the surface. It was not until the mid-1970s that the first greenstone belt was recognized. In the Archaean and early Proterozioc are included the Serra dos Carajas iron deposit, the Salobo copper deposit, the Onca Puma nickel deposit, the Crixas and Araci gold deposits as well as many others.

Important deposits of the Mid-Proterozoic age include the Morro do Ouro gold mine and the numerous tin deposits of which the Pitinga-Mapuera is the most famous.

Important deposits within the Upper Proterozoic include the Rondonia tin deposits, the Morro Agudo zinc deposit, the Itataia uranium and phosphate deposit and others.

Field exploration expenditures during the last decade have averaged less than $100 million per year. Even with this small investment, significant discoveries have been made. Although no significant high-grade massive sulphide deposits have been discovered as yet, they most certainly are there and hopefully will be discovered before the turn of the century. Brazil has come a long way in the last 20 years in terms of exploration services, engineering expertise and the manufacture of mining and plant equipment. Today, complete services are offered by contractors not only for exploration drilling, assaying, geochemical and goephysical surveys, but also for mine and mill design. Compared with a few years ago, a much greater range of mining and plant equipment is now manufactured in Brazil. As an example, at the recently completed gold project at Crixas, Goias state, all equipment was manufactured in Brazil.

In order to encourage reinvestment of profits in Brazil, the government subjects dividends remitted abroad to a graduated withholding tax. For remittances of dividends up to 12% of registered capital, the withholding tax is 25%. Supplementary taxes are levied at the following rates based on the foreign registered capital (FRC):

Profit remittances — Based on FRC

Dividends Witholding tax

up to 12% of FRC* 25%

12-15% of FRC 40%

15-25% of FRC 50%

over 25% of FRC 60%

*tax treaty (Brazil-Canada) 15%

Dividends and profits reinvested in Brazil are not subject to these taxes and increase the base for future remittances.

Brazil and Canada signed a bilateral tax treaty in 1985 whereby the withholding tax of 25% was reduced to 15%. The treaty, however, does not reduce taxes on dividends in excess of 12% of FRC.

Brazils potential mineral resources are enormous and large areas have had little or no exploration carried out. The mineral industry is of considerable importance to Brazils economy, but because of current economic uncertainties, there is a severe lack of risk capital, both local and foreign, to carry out exploration activity at the appropriate level. From a paper by TVX Gold Inc., which mines gold in Brazil.