Mining in the Americas

Transcription

1 Mining in the Americas

2 Contents Colombia 2 Mexico 6 Chile 10 Brazil 14 United States 18 Peru 22 Argentina 26 Canada 30 PwC Mining Centre of Excellence 33 The Fraser Institute Annual Survey of Mining Companies: was sent to approximately 5,000 exploration, development, and other mining-related companies around the world. Conducted from October 4 to December 23, 2011, represents 802 responses. The survey has become a valuable guide to miners around the world for political and policy risk. It provides miners with the considered advice of 800 miners from around the world. Fred McMahon Vice President Research, International, and co-author of the Fraser Institute Annual Survey of Mining companies The Fraser Institute ii Mining in the Americas

3 Welcome to mining in the Americas Strong demand for precious and base metals has driven growth, expansion, and exploration for minerals and metals in North and South American mining industries. It s an exciting and opportune time for investment in the mining sector. Mining companies will have to address several opportunities and challenges including resource nationalism, rising costs, access to capital and the sociopolitical environment. In this publication, we provide an overview of the business environment, market opportunities, environmental indicators, and local economies in Argentina, Brazil, Canada, Chile, Colombia, Mexico, Peru, and the United States of America. We worked with the Fraser Institute, which provided results from its annual survey of mining companies about policy risk, as well as the research and consulting firm Eurasia Group to provide an assessment of political risk for the countries in this publication. Each country profile consists of: an overall industry outlook including main economic indicators and mining resource potential, insight on what certain laws and regulations to be aware of when navigating the legal and tax environment, a review of various mining factors, mainly related to infrastructure, workforce, energy, and sustainability, and a discussion of the importance of community and environment engagement and investment in a corporate responsibility approach I hope you enjoy reading the publication and I encourage you to reach out to the mining leader in your territory to find out more about mining in the Americas. John Gravelle Partner, Mining Industry Leader for the Americas, PwC Mining in the Americas 1

4 Colombia Industry outlook Colombia is the largest producer and exporter of coal in Latin America. The country has been producing gold for centuries and also produces other commodities such as coal, nickel and copper. Exploration has grown tremendously in recent years (2001 to 2010) areas with mining titles boomed from 2.8 million acres to 21 million acres. Between April and June 2011, flows of foreign direct investment in Colombia reached US$3.4 billion, of which US$2.4 billion was related to the mining and energy sector: $US2.8 billion from oil and US$911 million from mines and quarries. 1 Some of the major investors and producers in mining in Colombia are Cerrejon, Drummond, Glencore and Cerro Matoso. The Colombian mining industry accounted for US$4.8 million 2 or 4.9% of the GDP growth and represented 23.7% of the country s exports. 3 Non-metallic minerals represent 24.4% of the value of mining gross domestic product (GDP), growing 6.1% annually over the past 10 years. Considering that Colombia does not have a solid institution that promotes and supports the mining industry, one of the main challenges it s facing is with regard to the creation of the National Agency for Minerals (ANM) that will start in The agency will have major functions such as recruitment, evaluation and technical studies, performing audits and collections, transforming the geological services to enhance and improve exploration and ensuring the creation of sustainable mining practices. The formation of the ANM is intended to increase the mining sector s growth rate to 9.5% from 3.3% and increase its share of GDP. This would generate US$12 billion in royalties by Navigating the legal and tax environment Put into effect in 2001, Colombia s Mining Code encourages sustainable exploration and mining, inherently enhancing productivity and competitiveness. The code governs the ownership of mining titles and establishes that the same rights are granted to national and foreign investors. The set of rules that deals with mining concessions and contracts in Colombia allows great flexibility in terms of transferability of mining properties; the owners have total independence and autonomy to develop the project as they see fit. The role of the Government is only to ensure that the terms of agreement (including payment of royalties and environmental protection) are being complied with. 4 Colombia has taken decisive actions in recent years to attract foreign investment through new laws that make the regulatory landscape more efficient and attractive to investors. 1. Dane, MundoMinero magazine 2. Fuente: Boletín Estadístico de Minas y Energía. Sector minero Fuente: Mining In Colombia. Exploring the Last Andean Frontier. Engineering & Mining Journal.Diciembre Fuente: Mining In Colombia. Exploring the Last Andean Frontier. Engineering & Mining Journal.Diciembre Mining in the Americas

5 The country is preparing itself in every way by improving human capital, infrastructure, competitiveness, and macroeconomic management. Claudia Jiménez, Head of Industry Group Gran Escala Mining factors Infrastructure Colombia s mining industry is facing major challenges related to infrastructure. The current roads and railways are not sufficient to import the needed machinery for mining and exploring, or to transport goods to market. However, several projects are being developed to improve the infrastructure. Recruiting and retaining a skilled workforce Due to the current mining boom, there are not enough skilled labourers to keep up with the existing mining requirements. To further compound the problem, there are a limited number of mining programs offered by universities that can adequately train people fast enough to meet the rising demand of labour. Illegal mines Increasingly there are a number of mines operating without government permission. The lack of regulatory protocol is a considerable human and environmental risk for the immediate surrounding areas. Illegal mining is sustained with unskilled labour, and therefore does not face the same labour shortages that legal mining operations face. In the long term, if illegal mining grows, it will continue to negatively impact legal mining operations. Community and the environment Mining companies must attain sustainable development in a local, regional and national context. Colombia s governmental authorities expect to obtain a more balanced development within regions enjoying the positive impacts including local employment, vendor and supplier entrepreneurship, infrastructure and technical skills education, among others. Approximately 30% of Colombia s territory is inhabited by strict ethnic groups. Constitutionally these groups are given preferences and have to be respected and treated according to their particular traditions. International investors looking to operate near these residential sites need to be aware of their customs. Fraser Institute survey results Uncertainty protected areas Trade barriers Taxation regime Socioeconomic agreements Skills Security situation Regulatory uncertainty Regulatory duplication Legal system Labor challenges Infrastructure Growing lessening uncertainty Geological database Environmental regulations Disputed land claims Corruption Political stability 0% 20% 40% 60% 80% 100% Mild deterrent Strong deterrent Would not invest Mining in the Americas 3

6 Colombia Political overview President Juan Manuel Santos ( ) remains in a politically strong position. His approval ratings have consistently remained at or above 65% and he has retained control of a large coalition in congress. Colombia s economy has remained steady, with growth projections likely to reach 4 4.5% in The Santos administration has seen a small decline in the unemployment rate, the successful passage of reforms that will save and equitably distribute royalties earned from oil and mining production, and the maintenance of smooth relations with Colombia s neighbors. Still, significant security and infrastructure challenges remain for the government. While the government has made substantial progress in recent years in its battle against the Revolutionary Armed Forces of Colombia (FARC), the FARC still retains ability to undertake attacks and kidnappings. Furthermore, the FARC s demise could create a vacuum that emerging criminal groups can exploit. Over the past year, the rise of criminal bands comprised of drug trafficking organizations and former right-wing paramilitaries have emerged as a serious problem. This increases pressure on the armed forces to exert more territorial control and consolidate government influence in areas formerly dominated by the FARC. Additionally, heavy rains have badly damaged Colombia s weak infrastructure and caused the displacement of millions of people. The government has been slow to get new infrastructure projects off the ground, but should be able to make some progress this year. Mining sector outlook Colombia s institutional capacity has not kept up with the pace of investment in the mining sectors and the government was confronted with a number of mining accidents, scandals over the permitting process, and clashes over environmental regulations in The government is now restructuring the bureaucracy responsible for oversight of the mining sector, and expects the new institutions to be in full operation by mid The government created a new National Mining Agency (ANM) at the end of 2011, appointed a Vice minister of Mining at the Ministry of Mines and Energy, revamped the geological services agency, and created a national environmental licensing authority responsible for analyzing the environmental aspects of mining permits. The government is also soliciting bids for a company to help create a monitoring system to supervise Colombia s mines in operation. The new bureaucratic restructuring should help to alleviate some of the hurdles and mixed messages investors and companies were receiving with respect to their operations in the mining sector. Increased oil and mining production and the fact that royalties and dividends on such production account for at least a third of government revenues means that the government will be paying more attention to the sector s development. This should help to reduce some of the uncertainty in the sector, especially with respect to environmental licensing and safety regulations. 4 Mining in the Americas

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8 Mexico Industry outlook Mexico is an important player in worldwide mining. The mining industry continues to thrive with an annual production of US$13.9 billion, contributing to 1.6% of the country s gross domestic product (GDP). It generates 290,000 direct jobs and 1.5 million indirect jobs. 1 The leading minerals found in Mexico are gold, silver, bismuth and fluorite. In 2010, the production of the main metals in Mexico broke all previous records, with the exception of copper. After falling to second place as a silver producer and staying there for five years, Mexico regained the top position in 2010, ahead of Peru. The jump was due mainly to constant growth in the production of Minera Fresnillo (the world s largest producer of silver), the startup of operations at Peñasquito a subsidiary of Goldcorp, and sustained growth at mines belonging to Industrias Peñoles, Alamos Gold, Coeur d Alene Mines, Endeavour Silver, New Gold, Capstone Mining, Minefinders, and Great Panther Silver. Mexico is ranked second in fluorite production behind China, and eleventh in gold with predictions of being one of the top five producers worldwide in the next few years. 2 The future of mining in Mexico is linked to domestic and foreign investment. From 2011 to 2012 there was US$9.3 billion invested in mining and US$21 billion from 2007 to 2012, most of which will be used to start up and expand projects. Although mining is driven by foreign investors, there are a number of Mexican mining companies investing in the industry including Grupo Mexico, Fresnillo Plc and Frisco Group. Mexico is in first place in Latin America and fourth place worldwide in attracting mining exploration investment, exceeded only by Canada, Australia and the US. 3 In 2010, exploration investment amounted to US$641 million, 70% of which was from foreign companies and 30% from domestic companies. Navigating the tax environment There are no specific tax rules to support the development of Mexican mining companies. Mining companies can have an immediate deduction of fixed assets (if certain requirements are met), including up to 87% of mining machinery and equipment. They are also obligated to pay to employees 10% of adjusted tax profit each year. Mining companies can pay dividends without withholding as long as they have income subject to full tax rates, which will drop over the next few years 30% in 2012, 29% by 2013 and 28% starting in The Flat Tax law implemented on January 1, 2008 replaced the Asset Tax law. The Flat Tax applies to both Mexican residents and foreign residents with permanent establishments in Mexico. The Flat Tax applies to the extent the computation yields an amount which is higher than the Income Tax for the year. A tax rate of 17.5% applies to income computed on a cash-flow basis. Mining companies must pay the Mexican government for the right to use mining concessions. The Mexican government grants only one type of concession, which covers both exploration and production. In 2011, the Department of Economy granted about 500 mining concessions which were granted for 50 years and extendable for another 50 years. 1. Mundo Minero, October 17, Mundo Minero, October 17, Metals Economics Group. 6 Mining in the Americas

9 Mining factors Although the Mexican industry is well known for its top-rate ore deposits, quality labour, technical innovation and development, there are negative aspects in relation to matters such as modern labour laws, legal certainty regarding land ownership and high crime rates. Energy costs Mining requires intensive consumption of electricity which is expensive is Mexico. Security One of the greatest concerns is Mexico s high crime rate. The mining sector has joined groups of citizens and businesses that are demanding coordinated actions from the different government sectors to stop the crime wave that has hit much of Mexico. Companies seek to protect their workers and mining operations from organized crime, but the measures taken have proven insufficient. Sustainability Mining is facing an enormous challenge: the industry can only continue to grow if projects focus on the safety of its workers, environment and the communities (respect of culture and customs) in which mine sites operate. CAMIMEX, the Mexican Chamber of Mines, has launched a program for selfregulation with regards to environmental and community labour issues. However, the commitment to achieve sustainability remains a substantial challenge. Negative environmental impacts as a result of mining companies lacking technical operations, has been a point of contention for many organizations and agencies, opposing the development of the sector. Education The Mexican mining industry is continuing its efforts to promote and recruit young people through the Education Trust for students and professors involved in Earth Science higher studies. In recent years, the mining sector has faced a number of problems hiring professionals that will support and promote the expansion of the mining industry. Labour Mining workers unions are strong in Mexico and frequently demand better benefits and/ or salary increases. The Mexican mining industry has suffered from a lack of labour reforms that are critical to the progress of Mexico. Illegal work stoppages have been frequent and have caused uncertainty and unemployment. Environment The mining sector is one of the most regulated industries by the environmental authorities and complies with strict international standards and regulations. The Ministry of the Environment has issued certificates to make sure the mining industry s efforts continue to protect the environment. To date, 69 mining operations have been issued a Clean Industry certificate and 18 more are in the process of being certified. Safety and health in the work environment The mining industry has a permanent commitment to train its personnel and take the necessary actions to ensure their safety. The Labor Department reported that 54 work centres have incorporated the Safety and Health Self-Management Program; 19 of which enrolled voluntarily in 2010 and 7 which received top-level recognition. References: The information in this report has been obtained from recent publications from the Mining Mexican Chamber except where noted. Fraser Institute survey results Uncertainty protected areas Trade barriers Taxation regime Socioeconomic agreements Skills Security situation Regulatory uncertainty Regulatory duplication Legal system Labor challenges Infrastructure Growing lessening uncertainty Geological database Environmental regulations Disputed land claims Corruption Political stability 0% 20% 40% 60% 80% 100% Mild deterrent Strong deterrent Would not invest Mining in the Americas 7

10 Mexico Political overview The opposition candidate Pena Nieto of the PRI is favored to win the presidential election on 1 July 2012, although the outcome will be closer than what current polls are forecasting. A surprise victory by leftist candidate Andres Manuel Lopez Obrador is highly unlikely but the business community should remain aware of his progress. Given the electoral calendar, 2012 will be characterized by policy and reform paralysis prior to the new president assuming office on 1 December. If Pena Nieto is elected, Mexico could face a more promising reform outlook by the end of Labor reform, which would make hiring and firing workers somewhat more flexible, and fiscal reform to ramp up tax collections and lower the costs of social security are both likely. Energy and telecom reforms, however, do not share the same outlook. Meanwhile, the outlook for security is largely unchanged with violence remaining high, although there are some signs of tentative stabilization. While the election will bring a flurry of finger-pointing and promises to back out of the current security strategy, a major tactical shift by the PRI is unlikely. The security strategy will continue to rely on a heavy military presence, close cooperation with the US, a growing role of the federal police, and a push to adopt the 2008 judicial reform more quickly and effectively. Mining sector outlook Mexico s mining sector is currently one of the most open sectors in the nation, having undergone a significant liberalization more than 25 years ago. Mining companies pay fees for land access, as well as normal corporate taxes, but do not pay royalties on production. The relatively small size of the sector in relation to the nation s GDP has largely kept it off the political radar of most politicians. Indeed, the prevalence of hydrocarbons production has prioritized oil over minerals in the nation s political discourse. Although the Miners Union is known for sometimes organizing strikes against mining companies, this union has been much less effective in leveraging its strike capacity against employers in recent years. Higher level court rulings, including the Supreme Court of Mexico, have decided against the union, signaling that its leaders capacity to use trumped-up claims against employers will not be supported in court. It is expected that under either a PRI or PAN presidency, the current mining regime would remain. Given the sector s small contribution to the economy, it is unlikely that a royalty regime will be installed, though fiscal reforms could raise effective corporate tax rates through the elimination of loopholes and deductions. A PRD presidency, however, would alter this calculus, as the president would likely introduce royalties on production in addition to raising corporate tax rates. 8 Mining in the Americas

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12 Chile Industry outlook The mining industry in Chile is one of the main industries that supports much of the economic and social development of the country. Chilean mining industry represented 19.2% of the gross domestic product (GDP) in 2010 an increase of 24% compared to the previous year. 1 This increase was due to rising metal prices. Mining exports accounted for 65% of the country s total exports, which reached US$67.9 billion Freight on Board (FOB) in Alone, shipments of copper reached a total of US$40.3 billion (FOB), 45% more than the previous year due to record copper prices. Chile s mining industry consists primarily of open pit, hard-rock mining, and is divided into two large sectors: metals (copper, iron, zinc, gold, silver, molybdenum, etc.) and non-metallic (nitrates, iodine, lithium, boron, potassium, etc.). Most of the largescale mines are located in the desert area in the northern part of the country and the Andean Cordillera. Chile has the largest underground mine, El Teniente, which belongs to Codelco. 3 According to the Chilean Copper Commission (COCHILCO), Chile has mining investment valued at US$66.9 billion (US$44.2 billion will be implemented in the period). 4 Of that, US$54.3 billion will be invested in copper mining, US$9.8 billion in gold and silver mining, and US$2.2 billion in iron and industrial minerals mining. 5 Foreign investment has been fundamental for the growth of the mining industry in Chile. In addition to the direct effects like the development of mining projects, foreign capital inflows has caused indirect effects such as increased export capacity, incorporation of advanced technology, the creation of new jobs, and the demand for local goods and services. According to the Foreign Investment Committee, in 2010 foreign investment for the mining industry reached US$833 million or 38.3% of the total foreign investment received in the country. Copper production has grown by almost 50% to 5.4 million tons in 2010 from 3.5 million tons in the 1990s as a result of increased investments. Gold production has fluctuated in the last decade, ranging between 50,000 kg (in 2000) and 38,416 kg (in 2010). It s forecasted that when Barrick Gold s Pascua Lama and Cerro Casale projects, Kinross s Lobo-Marte project and Goldcorp s El Morro project go into commercial operation, the production of gold will reach at least 90 tons per year and will make Chile one of the 10 largest gold producers in the world. Due to the quality and size of mining deposits, large multinational mining companies dominate the mining sector in Chile (Anglo American, Barrick Gold, BHP Billiton, Newmont Rio Tinto, Xstrata, etc.) There are, however, numerous Chileanowned companies, the largest being Antofagasta and Codelco. Chile has the following agreements to provide equal treatment in crossborder commerce: Free Trade Agreements (FTAs) with Canada, Mexico, United States of America, Central America, the European Community, Australia, South Korea and China Economic Complementation Agreements with Mercosur (Argentina, Brazil, Ecuador, Peru and Venezuela) Bilateral Agreements with Colombia, Ecuador, Peru and Venezuela Trade agreements have allowed copper cathodes to enter these countries at a 0% tariff. China is the exception with copper concentrate at a 0% tariff, and copper cathodes and blister with a 2% tariff. 1. Data of national accounts provided of the Central Bank (at current prices). 2. According to the Central Bank. 3. Chile s National Copper Corporation Codelco. 4. Report Inversión en la Minería Chilena Cartera de Proyectos July Report Inversión en la Minería Chilena Cartera de Proyectos July Mining in the Americas

13 Navigating the legal and tax environment Mining companies in Chile are subject to the general income taxation regime which consists of the First Category tax (Corporate Tax) at a current rate of 20% and further additional withholding tax at a 35% rate with a tax credit for the First Category tax paid. Since 2006, mining companies are subject to Specific Mining Tax which is a mining tax that is deductible for income tax purposes. The Specific Mining Tax applies to the taxable operational mining income (TOMI) which equals taxable income calculated for income tax purposes subject to specified adjustments. The rate depends on the operating margin and varies from a marginal rate of 4% up to 14%. Local mining investors may also negotiate an agreement similar to a foreign investment contract under which the Chilean government grants them a tax invariability of the specific mining tax rate for 12 years. Interest payments abroad are normally subject to a 35% withholding tax rate. This rate can decrease to 15% if the lender is resident or domiciled in a country who has signed a Double Tax Treaty with Chile. If the loan is granted by a Foreign Bank or Financial Institution, interest payments will be subject to a reduced 4% withholding tax rate. Currently Chile has 24 Double Tax Treaties in effect. Mining factors More than half the operating costs for Chilean mining companies are related to workforce, maintenance and general services and energy. Energy and water Chilean mining companies are conscious about high energy costs and a scarcity of water resources. Today, many companies are investing and setting up alliances with research centres or foreign companies that have experience with renewable energy. Particularly, solar energy is playing an important role as it exploits the natural resources of the geographical location where the majority of the mining companies are operating in Chile. Some companies have initiated the construction of solar plants to provide the energy needed for their operations. Infrastructure Chile s geographical landscape contains over 4,000 km of coast with port terminals located relatively close to the mineral deposits. Although major ports remain in state hands, the autonomous companies that took control of the port complexes have opened the facilities to investors via concessions to meet the growing demands of a booming economy. In recent years there s been a significant increase in the level of public investment in the development of ports and roads to improve the level of infrastructure. However, there s still a need to increase the current level of investments in order to satisfy the expansion of the Chilean mining industry over the next few years. Workforce Compensation represents the largest cost, mainly due to the level of specialization needed and the lack of professional and technical staff available. This becomes more important considering the forecasted investment in mining projects over the next 10 years which would result in 23,000 new positions. 6 Although the local academic market has identified this necessity and is offering undergraduate, graduate and technical programs, students lack interest to become part of the mining workforce, due to geographic mobility, labour activities and the necessity for specialization Over US$50 billion for the period, Instituto de Ingenieros de Minas de Chile (IIMCh). 7. Estrechez Cíclica del Mercado Laboral en la Minería Chilena del Cobre: Diagnóstico y Propuestas, Comisión chilena del cobre. Mining in the Americas 11

14 Chile Community and the environment Chilean regulations require project developers to perform an environmental impact assessment (EIA) for the future design of mining operations. This process includes an in-depth review of the potential environmental impact of the project and social participation from different project stakeholders. The last few years have shown deep concern among the local and international community regarding the development of industrial projects in Chile. Companies, in the early stages of project development, must include local communities, national-level opinion leaders and international stakeholders in their stakeholder engagement process and social management plans. Doing so will help to create trust-based relationships that are essential to a successful implementation of any project. International standards for responsible investment (e.g. Greenhouse Gas Protocol standards and ISO standards) help provide guidelines beyond national regulations and support project developers in their engagement with stakeholders. Fraser Institute survey results Uncertainty protected areas Trade barriers Taxation regime Socioeconomic agreements Skills Security situation Regulatory uncertainty Regulatory duplication Legal system Labor challenges Infrastructure Growing lessening uncertainty Geological database Environmental regulations Disputed land claims Corruption Political stability 0% 20% 40% 60% 80% 100% Mild deterrent Strong deterrent Would not invest 12 Mining in the Americas

15 Political overview Despite robust economic growth of 6.3% and low levels of unemployment, President Sebastian Pinera remains deeply unpopular, with approval ratings of just 33% in December according to local pollster Adimark. He will face an uphill battle to restore his credibility and advance his agenda during the remainder of his four-year term. Moreover, the President s center-right Coalition for Change lacks a majority in congress and is also grappling with internal disputes, which the opposition Concertacion will look to capitalize upon in the run-up to local elections in October 2012 and presidential elections in Legislative gridlock will thus remain the state of play in the foreseeable future as both major coalitions look ahead to election season. An unusual wave of social unrest focused on education reform culminated in a political crisis in 2011, which emboldened other social groups including labor unions to make their own demands. Mounting social spending pressures will require greater revenues to maintain Chile s fiscal balance. Pinera plans to present a tax reform proposal in March, which will likely extend temporary corporate tax hikes (from 17% to 20%) but avoid more structural reform. Otherwise, Pinera s legislative agenda will likely be limited to microeconomic reforms deepening Chile s capital markets, supporting innovation, and improving regulation. Mining sector outlook While the outlook for Chile s mining sector continues to be positive, President Sebastian Pinera s political weakness could undermine his ability to play a decisive role in resolving labor disputes and advancing key energy projects. Several upcoming contract negotiations, including Codelco s Andina mine, could prompt further labor unrest in 2012, as could ongoing threats from contract workers, particularly in a context of higher global copper prices. A legal dispute between Codelco and Anglo-American should help to smooth relations between Pinera and Codelco s union, as well as play to Chileans nationalistic sentiments towards the mining sector. But Codelco s move to acquire 49% of Anglo-American s local assets should not be viewed as a sign that the state will play a more aggressive role in the sector. Energy security remains a significant concern for the mining sector given that Chile s mostly-imported energy results in costly electricity prices, and Pinera has consistently backtracked on controversial energy projects. Pinera s nuclear energy ambitions were foiled after Japan s Fukushima disaster, given its similar seismic profile, and the government may have to once again resort to energy rationing measures in 2012 in order to confront an ongoing drought. The government gave initial approval to the giant HidroAysen hydroelectric project, but fierce opposition from environmentalists will likely prohibit Pinera from advancing the project, at least until the lame duck session of his term, given his lack of political leverage. Failure to double the country s energy capacity (currently 15.5GW) over the next ten years would ensure that costs remain high, and could constrain the growth of the mining sector. Mining in the Americas 13

16 Brazil Industry outlook Brazil has substantial mineral deposits and is one of largest mineral producers and exporters in the world. The mining industry in Brazil contributes about 4% to the country s annual gross domestic product (GDP) 1, which is around US$100 billion. According to The Brazilian Mining Association, the main products exported and imported in 2011 were iron ore, niobium, gold, copper, silicon, bauxite, manganese ore and kaolin. Exports of iron ore, mainly to China, remain the largest source of growth for the export sector. With investments in iron ore of US$45 billion for 2011 to 2015, Brazil will continue to expand its exports to meet Asian demand. 2 In 2011, the Brazilian mineral production reached a new record of US$50 billion, which represented a 28% increase compared to US$39 billion in In the next three years, it s expected that Brazilian mineral production will increase at an estimated rate of 10% to 15% per annum, in large part due to the demand from emerging markets. Between 2011 and 2015, Brazilian mining companies expect to invest US$68.5 billion in the mining sector. This represents an increase of 10.5% compared to These investments apply to a number of minerals iron ore representing 63% of the total. Despite significant investments in production and extraction, Brazil has relatively less mineral exploration. In 2009 and 2010 alone, the country received only 3% of the world s total private investment in exploration. The main mining companies with operations in Brazil are Vale, Anglo American, BHP Billiton, MMX and several other gold mining companies including Yamana, Kinross, Aura Minerals Inc., Golden Star Resources, Colossus and Aurora Gold. During the last three years there s been a steady increase in the number of Canadian mining companies operating in Brazil. 4 Navigating the legal and tax environment There has been a national debate involving the new mining code. The current mining code hasn t changed since The Brazilian government has been working to modernize select mining regulations (it does not have a forecast completion date). The new basic mining code guidelines discussed by the government and disclosed to the pubic cover the following main items: The creation of the National Council of Mineral Policy and Regulatory Agency; Changes in the rules related to granting mineral titles ensuring better monitoring, supervision, and management by the managing agency; The introduction of a limitation period to grant 35-year mining concessions; Changes in the financial compensation for the exploration of mineral resources (CFEM) (mining royalties) with the objective to increase the existing rates. The new mining code aims to attract new players, improve monitoring and raise mining royalties. As a result, the new code will increase the cost of operations for mining companies in Brazil. 1. Ministry of Mines and Energy. 2. The Brazilian Mining Association. 3. Brazilian Mining Institute, IBRAM. 4. Junior Mine Mining in the Americas

17 In 2011, there were 65 companies listed on the Toronto Stock Exchange that have Brazilian properties. Tax regulations The main taxes applied to mining companies are as follows: Financial compensation for the exploration of mineral resources (CFEM) Corporate income tax (IRPJ) Social contribution on net income (CSLL) Contribution for the social integration program (PIS) and contribution for social security financing (COFINS) Value-added tax on sales and services (VAT or ICMS) Contribution for intervention in the economic domain (CIDE) Withholding income tax (IRRF) Tax on financial transactions (IOF) Mining factors Energy Brazil has the sixth largest economy in the world. It also has the fifth largest population, but is still a small energy consumer when compared to the developed economies. According to ANEEL (the Brazilian National Agency for Utilities), 80% of the Brazilian power production comes from hydroelectric plants. Labour In 2011, a total of 165,000 workers were employed by the mining industry in Brazil. Studies undertaken by the National Secretariat of Geology, Mining and Mineral Transformation of the Ministry of Mines and Energy showed an employment ratio of 1:13 in the mining industry for each position created in the mining industry, another 13 jobs were created. Therefore, the mineral sector employs about 2.1 million workers, apart from the jobs generated during exploration, prospecting and planning stages, and the people working in the garimpos (mining for gold and other minerals). Infrastructure Mineral production will increase as investment in infrastructure and logistics is made. Mining companies are developing projects in remote locations that require substantial investment in infrastructure such as railways and roads, as well as hospitals, schools and other basic services. Another investment required is to build and expand ports as the existing ports are over capacity. Community and environment Increased attention has been placed on environmental and community engagement by the Brazilian mining industry. Major mining companies in Brazil are at the forefront of the industry s investment in this field. Recognition of the importance of community and environmental investment is a key part of their corporate responsibility approach to satisfy public opinion and stakeholder s interest. Despite criticisms surrounding a lack of sustainable environmental practices, Brazilian mining standards are increasingly regarded as matching those of Australia and Canada. Equipment and service suppliers invest significant time and energy in working with local communities to train and developing employees skills, as well as developing more environmentally sustainable technologies such as low-impact emission filters and energy-efficient engines. Fraser Institute survey results Uncertainty protected areas Trade barriers Taxation regime Socioeconomic agreements Skills Security situation Regulatory uncertainty Regulatory duplication Legal system Labor challenges Infrastructure Growing lessening uncertainty Geological database Environmental regulations Disputed land claims Corruption Political stability 0% 20% 40% 60% 80% 100% Mild deterrent Strong deterrent Would not invest Mining in the Americas 15

18 Brazil Political overview President Dilma Rousseff has entered her second year in office politically strong, enjoying 72% approval ratings according to a 5 December 2011 poll by CNI/Ibope. Despite her uneasy relationship with allied parties in congress, who make up overwhelming majorities in both chambers, Rousseff maintains enough political capital to advance her reform agenda while resisting pressure from legislators to increase spending. If her popularity were to suffer, however, she would be more vulnerable to such pressures. Her government s primary concern in 2012 will be executing its strategy to reduce Brazil s perennially high interest rates without materially compromising economic growth. Commitment within government to meeting the primary fiscal surplus target of 3.1% of GDP, viewed as the key component to allowing the central bank to cut rates further, is strong. That said, authorities will struggle to meet the target given earlier decisions to increase the minimum wage and give tax breaks to industry. This will also increase pressure on the government to find means to boost revenues. Going forward, her government will keep as tight a rein on spending as possible to facilitate the central bank s rate-cutting cycle. Overall, Rousseff will continue to approach macroeconomic policy with the same pragmatism demonstrated during her first 12 months in office. The main risks will be more sector-specific than macroeconomic because of the government s focus on industrial policy. Mining sector outlook The Rousseff administration will send its final proposals for a long-awaited mining reform this year, possibly by late February. Broadly speaking, the reform will increase state control over the sector and raise taxes on export minerals, including iron ore, bauxite and gold, but the government will be careful not to overburden the sector with taxes and regulation as its primary objective is to increase investment in mining and mining-related sectors. In this sense, the government s industrial policy objectives probably represent as meaningful a risk to mining companies as potential tax hikes, but both will be limited by the government s desire to boost investment. The proposal will likely be divided into three separate pieces of legislation. The first bill (industrial policy-focused) will introduce tighter investment requirements for concession holders, create concession contracts (currently there are none) and introduce rules for strategic deposits, including a bidding process and minimum national content requirements for developing the deposits. The second would create a regulatory agency for the sector and the third would introduce tax changes. The timing in which the mining reform will be proposed increases the risk that the government will be more aggressive in raising taxes on the sector. In a context in which the government is struggling to meet ambitious fiscal targets while metals prices remain high, the odds of the government proposing more aggressive tax increases or of legislators raising rates as the bills move through congress rise. Due to the crowded 2012 legislative calendar and municipal elections in October, final approval is only likely in late Mining in the Americas

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20 United States Industry outlook The mining industry in the United States contributes approximately 2.33% or $344 billion to the country s annual gross domestic product (GDP). 1 The leading mineral resources found in the US include coal, copper, gold, iron ore, lead, molybdenum, silver, uranium, zinc and rare earths. The 2010 production rankings from Gold InfoMine rank the United States second in coal production behind China, third in gold production behind China and Australia, and fourth in copper production behind Chile, Peru and China. The United States ranks eighth in silver production. Three of the world s largest producers of minerals, specifically gold, coal and copper, are headquartered in the US: Newmont Mining, Peabody Energy and Freeport-McMoRan. There are also several other active operating mines in the US owned by foreign companies. There is a positive outlook for revenue and production growth in the US for the mining industry, primarily due to demand from emerging economies. There has been an increased demand from emerging economies for coal. 2 The use of coal in power generation has driven demand upward in China and other Asian countries. This, in turn has driven up prices and production in the US. The future of copper mining is also linked to the demand from emerging economies. For the foreseeable future, production is expected to increase in the United States. The production of copper has been a significant industry in the US for more than a century with significant mines located in Arizona, Utah, New Mexico, Nevada, and Montana. Copper is used in building and construction, most commonly in copper wiring, plumbing, heating and cooling systems, and telecommunications. The country s biggest copper miner, Freeport-McMoRan, has extensive expansion plans under way at its Morenci mine in Arizona and is also planning to reopen its Chino copper mine in New Mexico, which will add to US copper production from 2014 onwards. 3 Navigating the tax environment The US federal income tax structure supports the development of the US mining industry. The structure permits a percentage depletion deduction for US mines, and certain foreign mines if taxed in the US, in determining federal taxable income. The percentage depletion deduction can result in deductions in excess of the cost of US mining property. The federal statutory rate is 35% but mining companies (as well as other industries) are permitted a 9% production activity deduction that can effectively lower the federal income tax rate by 3.15%. Furthermore, there is no federal mining royalty for mining most minerals, other than coal on federal-owned land. Mining companies are subject to state income tax which varies by state. For example, Nevada and Wyoming have no corporate income tax. Many states have a severance or production tax for minerals extracted within the state that varies by state. Certain states have income tax credits or sales and use tax exemptions for mining operations. 1. BMI United States Mining Report Coal Mining Market Research Report, NAICS, September, BMI United States Mining Report Mining in the Americas

21 In general, foreign investors are allowed the same incentives as US investors in the mining industry. However, foreign investors should be aware of certain Foreign Investment in Real Property Tax Act (FIRPTA) considerations that may be applicable. Additionally, certain restrictions apply to interest on intercompany debt. For example, the interest rate applied must consider the arm s length standard of transfer pricing, which means that interest on debt between related parties should be charged at a rate that would apply if the debt were outstanding between two unrelated parties. Also, the US imposes thin capitalization rules, which may restrict the deductibility of interest on foreign related party debt if the US affiliated group s debtto-equity ratio exceeds 1.5:1. There is no expectation for change to the mining tax regulations in the near term. However, comprehensive US tax reform may be back on the US Congressional agenda after the presidential election in November Mining factors Energy Because of the high processing needs of mining, much capital is spent on building various processing facilities such as smelters and refineries. Energy costs to run these facilities are a growing issue that mining companies face in the United States. Under the American Recovery and Reinvestment Act of 2009, the United States government set up a grant program called Payments for Specified Energy Property in Lieu of Tax Credits. This program makes government grants available to mining companies (and other companies) that place in service specified energy property. Eligibility for this program was set to expire at the end of 2011, although various legislative bills and discussions are going on to extend this program. As of December 1, 2011, the US Treasury has paid $9.8 billion to 4,376 grant applicants. Many mines have received either grant dollars for their electrical generation projects or indirect sources of electricity for such projects. Workforce The US economy experienced a downturn when the financial crisis occurred in Unemployment topped 10% in late 2009/ early 2010 and recently fell to 8.5% in December 2011, according to the United States Department of Labor. Although there are mining jobs available, many of the jobs require equipment skills or other technical abilities that make it difficult for companies to fill all the positions. In addition, many of these employment opportunities exist in areas where populations are small, increasing the difficulty of filling positions from the labour pool available. Infrastructure Another factor facing mining companies is the location of reserves. New natural resource reserves identified for development often exist in remote unpopulated areas of the country. Since these locations have no infrastructure (roads, ports, power supply, water supply, hospitals, or schools), mining companies face the challenge of developing this infrastructure. There are numerous US federal, state, regional and local government support programs available to companies, often in the form of grants, to build community infrastructure. Mining companies also contribute significantly to the cost of supporting community projects that improve the quality of life for miners and their families. An example is they provide educational training opportunities for the specialized jobs that the mining community demands. Mining in the Americas 19

22 United States Community and the environment The mining sector has been part of a larger national debate involving the energy sector as a whole that weighs the prospect of new jobs against concern about environmental damage. This debate is escalating between the environmentalists who want to prevent damage to communities, and state and local governments that need to expand their tax base and create jobs for their constituents. A potential open-pit iron ore mine in Wisconsin has attracted attention lately, as historically the state has had a reputation for being relatively hostile to mining interests. 4 Recently, the state Republicans introduced a bill that would streamline the mine permitting process and loosen restrictions on a mine s ability to dump waste and draw down groundwater. Critics reacted to this proposed bill by saying that it would equate to a rollback of Wisconsin s environmental regulations. Another challenge facing the mining industry in the United States is whether the economics of mine development outweigh housing development. 5 In Florence, Arizona, such a fight is currently developing. Residential development groups want to build a master-planned community with 25,000 to 30,000 homes. A few miles away, a mining company wants to develop a copper mine. In this case, the Arizona state governor supports the mining project because it promises jobs and state excise-tax revenue over the next two decades. Town officials, however, believe that the longerterm benefits of property taxes derived from residential and commercial development outweigh the economic benefits of a mine. Fraser Institute survey results Uncertainty protected areas Trade barriers Taxation regime Socioeconomic agreements Skills Security situation Regulatory uncertainty Regulatory duplication Legal system Labor challenges Infrastructure Growing lessening uncertainty Geological database Environmental regulations Disputed land claims Corruption Political stability 0% 20% 40% 60% 80% 100% Mild deterrent Strong deterrent Would not invest 4. The Wall Street Journal, December 15, The Wall Street Journal, December 2, Mining in the Americas