Who's Who Legal brings together Carlos Vilhena at Pinheiro Neto Advogados and Patricia Núñez at Núñez Muñoz & Cía Ltda Abogados to discuss issues facing mining lawyers and their clients in the industry today.
Have there been any significant legislative or regulatory changes in your jurisdiction recently?
Carlos Vilhena: Important regulatory changes were introduced recently, the most relevant being the amendment to the Royalties Law.
The royalty calculation base went from net revenue from sales, to gross revenue. Deductions of transportation and insurance costs are no longer permitted. This marks a significant increase for large-volume ore operations, such as iron ore and copper.
In addition, rates were modified – in the main, they increased. For example, the iron ore rate went from 2 per cent to 3.5 per cent; gold, 1 per cent to 2 per cent; and diamonds, 0.2 per cent to 2 per cent.
The distribution of royalty proceeds was also altered. The majority still goes to the municipalities where mining occurs, but the proportion decreased from 65 per cent to 60 per cent. Municipalities affected by mining-related infrastructure, such as railways, pipelines, ports and dams, now receive 15 per cent. The remainder is shared among mining states, mining and environmental authorities, and innovation and technology research.
Unfortunately, the new law does not prescribe how and where states and municipalities are to invest royalty proceeds. A big step would have been to peg the income to investment in public education and healthcare, for example.
Patricia Núñez: Chile has been going through a process of change in its laws. We recently amended our tax, energy and labour laws, and foreign investment regulations (resulting in the termination of the foreign investment stability regime granted by the law). Further changes have been announced to our environmental, banking and social securities laws. In the mining field, on 3 October, the government delivered a bill to Congress that aimed to amend the Mine Closure Act in areas such as: calculation of the useful life of a mine; guarantee of fulfilment of closure operations; and the government agency's term to assess updates on the closure plan.
There are several reasons for such regulatory changes, including the current level of development of the country, and international commitments undertaken by Chile as member of the OECD and international treaties.
How have changing commodity prices impacted the market? To what extent is the mining industry showing signs of recovery?
Carlos Vilhena: Commodity price changes can affect the mining industry in many different ways. The availability of funds for exploration projects; investment decisions for the development of new operations or the expansion of existing ones; and job creation can all be impacted by the fluctuation of commodity prices.
We have seen the influence prices have had on different markets, and Brazil is no different.
Having said that, there are signs of recovery. Large investment in the expansion of existing operations, and the development of new ones in iron ore, phosphate, zinc, copper and gold, have recently been implemented or announced.
Although more activity can currently be detected, we are yet to see a strong return of junior companies.
Patricia Núñez: The mining industry accounts for 10 per cent of Chilean GDP. As the world's leading producer of copper, Chile holds 22 per cent of the world's reserves; it is also the second largest producer of lithium, holding 51 per cent of the world's reserves. Chile also ranks as the eighth most attractive jurisdiction for mining investment, according to a report from the Fraser Institute. Therefore, considering the relevance of the mining industry in Chile, changes in commodity prices do affect the national market. Fortunately, the mining industry has shown signs of recovery and it is expected that activity will grow 6 per cent on last year.
What are the key challenges currently facing mining lawyers and their clients?
Carlos Vilhena: In my view, obtaining a social licence remains one of the top challenges to the mining industry and its lawyers.
Ways of relating with the community, and the ways in which they react and take a stand, are evolving very rapidly. For example, new forms of communication – especially through social media and modern applications, such as Facebook, Twitter and WhatsApp – have brought significant changes in how information (whether real or fake) is disseminated.
These new tools have introduced tremendous differences in how communities can be mobilised, working in favour of or against a particular mining project or operation.
The mining industry – which has historically been hindered by poor communication – now faces an incredibly challenging environment in which to get its message across.
Patricia Núñez: There are several key challenges for the Chilean mining industry that also affect the legal market, including, among others:
- the lack of big projects, compared with previously, as well as the development of smaller projects with technical and geological complexities;
- the technological and economical challenges that arise from the ageing of certain deposits, in some cases combined with exploitation at greater depth and the transportation of minerals over longer distances;
- communities that have become more demanding;
- the need to invest more in the workforce, particularly mining professionals; and
- the challenges of the digital era.
To this, we must also add the pressure to reduce costs, including legal costs. In fact, these days, companies are taking much of their legal work in-house. Therefore, mining lawyers will need to better understand the complexities of the mining industry, which are always evolving, and to create new and innovative ways to assist their clients.
How do your clients view their environmental responsibilities? What steps must the mining industry take to reduce these impacts?
Carlos Vilhena: Clients are very conscious of their environmental responsibilities. Most have very high standards, and are prepared to adopt all necessary measures to deal with the environmental impacts arising from their mining operations.
What I believe the mining industry in Brazil wants is better clarity of the rules and consistent application of these rules at the environmental permitting stage and throughout operations.
In addition to this, stronger, better-equipped and more resourceful permitting authorities would give the mining industry better legal security.
These elements – clear and stable rules, consistent application of the law and trustworthy permitting authorities – would certainly benefit not only the mining industry, but also the country as a whole.
Patricia Núñez: Mining companies understand that if they do not hold high environmental standards in their activities, it is unlikely that they will be successful in business. In fact, environmental awareness among communities and the government have increased the demands upon the mining industry – and the industry is always under scrutiny. For instance, in Chile the approval of a mining environmental study takes, on average, 31 months, which can be explained due to – among other things – the number of permits that a mining project needs to obtain before approval.
The increasing number of permits, the restrictions imposed on mining activity by the authorities, and the sustained increase of community-led demands provide a framework within which mining companies fulfil most of their obligations, particularly the environmental ones. In this regard, the mining industry has also shown its ability to develop new technical
solutions in order to diminish its impact on the environment.
How do you expect the mining market in your jurisdiction to develop over the next five years?
Carlos Vilhena: Brazil is a large mining country with a vast mineral potential. Great parts of the country's territory are yet to be properly prospected and explored
A new federal government will take office in Brazil on 1 January 2019. Hopes are for a less interventionist and much more business-friendly government than previously.
Brazilians have high expectations. We all long for more sensible economic policies; important structural changes in the pension and tax systems; maintenance of low inflation rates; reduction of interest; a balanced exchange rate; and a drastic reduction in public spending and the budget deficit.
Aside from the economy, the country eagerly seeks greater efficiency; less government intervention; privatisations; significant reduction of bureaucracy; and a strong fight against corruption.
If the country is able to achieve these goals, there will be greater interest among investors in our exploration and mining sectors.
Patricia Núñez: The mining industry is particularly sensitive to political and economic changes in the world. In this regard, the current trade war between the USA and China has affected the recovery of commodities prices. On the other hand, China has become the main consumer of the world's mining resources and metals – hence, any changes in the Chinese economy affect mining markets. Therefore, the question of how the mining market will develop in Chile over the next five years is linked to future shifts in the world's political and economic conditions – thus, it is hard to assess. However, it is expected that, at least in the next couple of years, mining commodities prices should increase due to the current global expansion. This is in consideration of the fact that the US is running large fiscal deficits, China is pursuing flexible fiscal and credit policies, and Europe continues on its recovery path.