friday, 27 july of 2018

Acquisition of mining rights in Brazil

Antonio Fernando Guimaraes Pinheiro

Pursuant to the applicable legislation only Brazilian individuais and legal entities are entitled to hold mining rights. Except for mining activities in bordering areas (in which case at least 51 % of the capital stock must be owned by Brazilians) there are no restrictions in relation to the participation of foreign shareholders in mining companies.

The acquisition of mining rights may be made under the normal concession or authorization systems or by acquisition from third parties.

The exploration and exploitation of mineral resources may be performed by authorization or concession from the Federal Govemment through the Ministry of Mines and Energy or the National Department of Mineral Production ("Departamento Nacional de Produção Mineral - DNP M´), by a Brazilian or by company incorporated under the Brazilian laws which has its main office and administration in Brazil, as defined by law.

The systems for exploration and exploitation of mineral resources are classified as follows:

• Authorization System - relates to the mineral exploration stage and precedes the Concession System (mining stage ).

• Concession System - relates to the mmmg stage or industrial use of a deposit considered technically and economically exploitable.

The usual process for acquisition of mining rights starts with the filing of an Application for Exploration Permit ("Pedido de Alvará de Pesquisa") before the DNPM by the interested party (which may be an individual or legal entity) indicating the concemed area, the mineral involved and other information. The application will only be valid in case the area is not subject of a previous request for exploration authorization or a mining concession.

Once the Exploration Permit is granted the interested party must start the exploration of the area within 60 days from the publication of the permit in the Official Federal Gazette if he is the owner of the land or has entered into an agreement with the owner for use of the area, or within 60 days from the filing of a lawsuit to obtain the access to the concemed area.

The exploration must be completed within the stipulated time (from 2 to 4 years depending on the mineral involved) and the interested party must submit to DNPM the Final Exploration Report. If such report is approved the interested party will have one year to apply for the Mining Concession. Such application must be supported by an Economic Development Plan with the details of the proposed mineral exploitation.

ln case DNPM approves the application the exploitation permit will be granted to the interested party in the form of a Mining Authorization or a Mining Concession. The Mining Authorization is granted for a defined period of time whereas the Mining Concession is granted until the exhaustion of the mineral resources.

ln case the grantee of the Mining Authorization or Mining Concession is an individual it must form a legal entity to carry out the mining exploitation. The mineral exploitation is only allowed to legal entities.

As an exception, subject to the prior authorization from DNPM, the extraction of mineral substances in an area specified in an exploration permit is allowed before the Mining Concession is granted. This authorization involves the issuance of a corresponding Permit for Use ("Guia de Utilização"), provided that the access to the area is possible (by virtue of the title of the interested party or by agreement with the landowner) and after the issuance of the pertinent environmental license. The validity term of the Permit for Use may not exceed the validity of the environmental license.

Mining rights can also be acquired, partially or wholly, by means of a transfer and assignment agreement, which must be made in writing. The request for approval of the transfer and assignment agreement covering a Mining Authorization must be subrnitted to DNPM´s General Director, which will evaluate the transferee´s ability to comply with the research work plan, budget and research schedule. The request for approval of the transfer and assignment agreement covering a Mining Concession must be subrnitted to the Ministry ofMines and Energy.

The lease of mining rights is also possible and must be submitted to DNPM for prior authorization and registration.

According to DNPM´ s Ordinance No. 199 of 2006 the mining rights that can be assigned and transferred are: Exploration Permit, Mining Concession and the permission for independent mining ("Permissão de Lavra Garimpeira - PLG"). Thus, the Application for Exploration Permit is not deemed a mining right since it depends on DNPM´ s final decision to grant the Exploration Permit.

Nevertheless, it is not unusual that a party that has submitted an Application for Exploration Permit enters into an assignment and transfer agreement with the party interested in acquiring the potential rnining right. ln such cases it is important that the agreement provides that the request for approval of the transfer of title to the Exploration Permit will be filed with DNPM only upon the granting of such permit. lt is also usual that the payment of the fui! price of the transaction be made only upon the granting ofthe Exploration Permit (an initial payment may be agreed upon by the parties to characterize the actual interest of the interested buyer in the potential mining right).

For the acquisition of an Exploration Pennit, Mining Concession or perrruss10n for independent rnining it is advisable that a due diligence be performed to confinn the status of the rnining right. This will involve the obtainrnent of a certificate issued by DNPM attesting the inexistence of liens associated with the mining right.

ln case the transfer of the concemed mining right is to be made by acquisition of the shares of the owner company by the buyer a complete due diligence must be made covering the financial, corporate, environrnentaI, labor and tax aspects.

A relevant aspect to be considered in the acquisition of a mining right is the status of area where the right is located. According to the Federal Constitution of Brazil the mineral resources existing in the soil are the property of the Federal Govemment, and the right to explore and exploit a specific area is granted to the interested party that has submitted the request first, which party is not necessarily the landowner.

ln case the area is owned by a third party the holder of the rnining right must negotiate with such party the compensation for the occupation of the property and for the damages caused to the property. ln addition, the landowner will be entitled to a participation in the economic results ofthe mining exploitation corresponding to 50% ofthe amount payable by the mining title holder on account of the Financial Compensation for the Exploitation of Mineral Resources ("Compensação Financeira pela Exploração de Recursos Minerais -CFEM´).

The beneficiary of the exploitation concession must present annually to DNPM a report ("Relatório Anual de Lavra -RAL") which shall contain information such as the composition and administration of the legal entity, mining right and production status, environrnental and labor issues, inputs, machinery and equipment, investments, water and energy consumption, sales and taxes paid.

During the exploitation period, the owner of the mining right has to pay monthly to DNPM the "Compensação Financeira pela Exploração de Recursos Minerais -CFEM" (the Financial Compensation for Exploitation of Mineral Resources ), which is a federal royalty that has to be paid as a compensation for the economic use of mineral resources. The CFEM ranges from 0.2% to 4% depending on the mineral involved and is charged on the gross revenue of mineral sales (after deduction oftaxes). ln the case ofiron ore the royalty will range from 2% to 4%). The collected royalties will be distributed among the Municipalities, the States, and the Federal Govemment.

Furthermore, for the mining exploitation the interested party must comply with the required environrnental licensing, for which purpose it must present geological and geophysical studies to DNPM and to the environrnental authorities.

It is worth noting that the Environmental Impact Assessment Study ("EIA") is required for environmental licensing of any mining project and it must be made pursuant to the rules stated in CONAMA´s Resolution No. 001/86 (which is based on Law No. 6.938 of 1981), as amended and complemented by the CONAMA´s Resolutions No. 009 of 1990 and 010 of 1990.

The EIA requirement applies to mining projects involving ali mineral substances. However, in the case of mineral substances for immediate use in civil construction, due to the characteristics of the project, the presentation of the EIA may be waived. ln this event, the mining company shall submit the Environmental Control Report (RCA) pursuant to the guidelines ofthe competent state environmental agency.

Furthermore, the EIA must be consolidated in the Environmental Impact Report ("RIMA") which is to be subrnitted to the relevant state environmental agency for analysis and approval. The RIMA will be made public so that the collective or any other interested party has access to the project and its environmental impacts.

The approval of the EIA/RIMA is a basic requirement for the rnining company to be able to request Environmental Licensing for its rnining project.

ln case the mining exploitation requires the granting of a perrnit for use of water this shall be requested to the concemed authority. ln case of water resources that spread to more than one State or cross the border of Brazil into neighbouring countries the perrnit must be requested to the National Water Authority ("Agência Nacional de Águas - ANA"). If the water resources originate and have their mouth within the territory of the sarne State the permit must be requested to the State Water Authority. The assignment and transfer ofthe permit for use ofwater must be part ofthe transaction involving the sale ofrnining rights.

It is also necessary for the buyer of the rnining right to survey the area to verify if there has been in previous exploration and/or exploitation -whether authorized or not -to safeguard its liability for damages to the property or the environment. Also, in the case of acquisition of rnining projects in operation, the buyer must evaluate the cost for the recovery of the degraded area at the end of the exploitation cycle.

*Antônio Fernando Guimarães Pinheiro is a lawyer and partner at Pinheiro, Mourão, Raso e Araújo Filho Advogados.

latest of hot topics

subscribe |  contact us |  sponsors |  migalhas in portuguese |  migalhas latinoamérica