By Renato Rostás  

Some of the most important countries in global mining production are moving forward with talks to secure a larger share of the commodity price escalation seen during the Covid-19 pandemic, mostly to fund their own social programs - but companies and industry groups fear this could compromise future investments.

South American mining giants Chile, Peru and Brazil seek to increase mining royalties, eyeing this price uptrend. While members of the Chilean and Brazilian lower houses of Congress have already greenlit this change, Peruvian authorities began discussing the move after the election of a left-leaning government in July.

The necessity for higher state revenues arose amid public deficits, demands for improved national services and social inequality on the continent. The Covid-19 crisis aggravated this environment, adding health problems and a need for economic relief to the mix.

Global metal prices rocketed from 2020 lows, due mostly to insufficient supply and logistic woes. After producers had to halt operations to prevent the virus from spreading, demand recovered at a much faster pace than expected, leaving a shortage in international markets.

Prices, however, have since corrected from multi-year highs.

Chile is the world’s largest copper-producing country, followed by Peru. And Peru is among the top three global zinc producers. Brazil is the second-largest iron ore producer and among the top 10 nickel producers globally.

Chile creates price ranges for royalties
The Chilean lower house of Congress approved a bill in May that introduces different layers of mining tax, depending on copper prices. The proposed law has yet to be voted on in the Senate, and since June, a mining committee has invited more than 70 stakeholders to debate the matter.

One of the interested parties, the Chilean Center for Copper and Mining Studies (Cesco), handed its own mining royalty plan to senators in late August. Through its proposal, effective taxation would surpass 45% on operating margins if copper prices were to stay within a $2.50-5.00 per lb range.

Under the bill approved by the lower house, taxes on sales would increase in cases where prices climbed by $0.50 per lb. With copper prices at $2 per lb or less, the effective rate would be 3%, reaching 5.4% at $2.50 per lb, 10.33% at $3 per lb and up to 32.2% at $5 per lb - all on sales, not profits.

For national mining association Sonami, such a move could put around a quarter of Chilean copper output at risk of being economically unfeasible by halting close to half of its mines, its president, Diego Hernández, told Fastmarkets on May 5.

“It is important to note that the proposed outline [by Cesco] more than doubles, in [some] cases even triples, the earnings associated with specific taxes related to the mining activity,” Cesco said on August 31.

The three-month price of copper on the London Metal Exchange (LME) closed at $9,090 per tonne ($4.12 per lb) on October 5, a year-to-date rise of 17.18% from $7,757 per tonne on December 31, 2020 – but down by 15.21% from the all-time high of $10,720 per tonne on May 10 this year.

Copper prices on the LME were still 96.48% higher than a 2020 low of $4,626.50 per tonne on March 23.

Interest in imposing higher taxes on the mining industry arose, in part, as a response to social unrest in Chile that exploded into protests and strikes in 2019. Demonstrators demanded better public services and attention to the overall cost of living in the country.

Generating more revenue from the mining industry, a major part of Chile’s Gross Domestic Product (GDP), and redirecting it to the development of the country is something workers’ unions approve of.

Felipe Román Briones, president of mining union federation FMC told Fastmarkets on May 19 it was an “elegant” way of securing more resources for Chile from its mining industry.

Brazilian Congress surprisingly introduces higher mining taxes
In Brazil, the federal government negotiated comprehensive tax reform with Congress, but ultimately settled on a proposal to cut personal and corporate taxes, while reintroducing tributes on dividends, which have been tax exempt since 1995.

 The lower house of Congress approved the reform measures in early September, while introducing a mining royalty rise that some market participants saw as unrelated to the proposed law. It has yet to pass the Senate.

The Financial Compensation for Exploration of Mineral Resources or Cfem in Portuguese, the official name for mining royalties in the country - would be increased to 5.5% from 4% previously.

Ibram, the Brazilian mining institute, believes the change represents a risk to the industry. The association argued that a cyclical business such as mining can be subject to rapid swings in prices – for good and bad – and that such price fluctuations are provoked by seaborne markets, not the companies themselves.

Fastmarkets’ index for iron ore 62% Fe fines, cfr Qingdao hit an all-time high of $237.57 per tonne on May 12 this year, a 48.05% year-to-date increase from $160.47 per tonne on December 31, 2020. But steel output restrictions in China pressured it downward - to $116.71 per tonne on October 6.

Despite that recent fall, the index was still up by 45.20% on October 6 from a 2020 low of $80.38 per tonne on February 3.

 Additionally, three-month nickel prices on the LME were at $17,810 per tonne on October 5, a 7.24% year-to-date jump from $16,607 per tonne on December 31, 2020 – but decreasing by 12.59% from an 88-month high of $20,375 per tonne on September 10.

From the lowest level in 2020, $11,142 per tonne on March 23, LME three-month nickel was still up by 59.85%.
With the highest primary public deficit ever - calculated before public debt interest - of 703 billion Reais ($128.68 billion), an economy struggling to grow and unemployment nearing 14%, the federal government was seeking higher revenues to fund social programs and national Covid-19 economic relief efforts.

Cfem revenues had already increased in 2021 before the higher royalty proposal. ANM, the Brazilian mining agency, said tax collection from the industry amounted to 6.6 billion Reais in January-August 2021, up from 6 billion Reais in all of 2020.
“They want to lick the bowl clean,” Fernando Scaff, a partner at law firm Silveira Athias and a legal specialist for the mining and oil industries in Brazil, told Fastmarkets on August 4.

Peru to discuss mining royalties as leftist president rises to power
Discussions in Peru are still developing about changing taxes on mineral resources. Recently elected left-wing president, Pedro Castillo, emerged victorious with the promise of higher revenues from the mining industry as part of his platform - in May, he said copper tax should be closer to 75%.

After the general election results were confirmed in July, more than a month after the ballot count, Castillo called for a “new way of mining” in the country, but said he had no intentions of “nationalizing” mineral resources.

His minister of finance, Pedro Francke, stated in interviews with local media after taking office, that the government had plans to promote private mining investments but added that “social profitability” was key.

“You need to take into account environmental and community matters as well,” he told newspaper El Comercio on August 8. “Many times [those communities] feel they were left out or not adequately treated by large mining projects.”

Rising mining output and strong commodity prices have been key to Peruvian GDP growth and tax collection in 2021.

According to private mining association SNMPE, tax revenues from mining were estimated to reach 12 billion soles ($2.89 billion) this year, almost triple the 4 billion soles in 2020 and a record high for the country.

“The current tax regime for the Peruvian mining industry is considered adequate by national and international experts… and is also equitable, because it allows the subsistence of medium- and large-sized companies with different cost structures,” SNMPE executive director Pablo de la Flor said.

The LME three-month price of zinc reached $3,024 per tonne on October 5, rising by 10.16% this year from $2,745 per tonne on December 31, 2020, a drop of 3.14% from $3,122 per tonne on September 17 - which was a 39-month high.

 So, the three-month zinc price remains up by 68.66% from the lowest level last year, which was $1,793 per tonne on March 25, 2020.

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