October 21, 2010 / 3:01 PM / 10 years ago

UPDATE 2-Brazil holds up mining bill, eyes royalty change

* Mining reform bill held for next administration

* Government is seeking “reasonable” royalty rate

* Royalty hike could affect iron ore giant Vale

(Recasts, adds context, detail)

By Raymond Colitt

BRASILIA, Oct 21 (Reuters) - Brazil’s government will likely wait at least until the next administration takes office in 2011 before changing a mining law and discussing a possible royalty hike, a government official told Reuters.

Both moves could potentially deteriorate the investment climate in Brazil’s mining industry.

Increased royalties pose a threat to the bottom line of Vale VALE5.SA(VALE.N), the world’s largest iron ore exporter, and could constrain growth in its iron ore production.

President Luiz Inacio Lula da Silva wants to consult the president-elect on the bill designed to heighten competition in the mining sector after a run-off election on Oct. 31, the senior official said.

“He wants to get the president-elect’s input on this. That means it’s unlikely to be sent this year,” the official said on condition of anonymity because he was not authorized to speak on the subject.

Lula’s chosen candidate and former energy and mines minister, Dilma Rousseff of the ruling Workers’ Party, is considered the favorite to win this month’s election.

The proposal would improve regulatory oversight and reduce the time companies had to develop mines to discourage speculation in mineral properties.

Under the proposed law the government would have more discretion in approving new mineral projects in line with its priority of adding more value domestically rather than exporting raw materials.

Discussions over a possible increase in royalties charged in the mining sector, which would be separate from the mining bill, would resume after the new government takes office on Jan. 1, the official said.

Such a hike could hit the bottom line of Vale, the world’s largest iron ore exporter, as well as other mining and steel companies.

Under one of the current proposals, companies would be charged a lower royalty if they promoted regional or industrial development or conservation projects. Those companies that provided no “value-added” would be charged the “full rate,” the official said, adding that the increase had not yet been defined.

But he insisted the intent was not to impose an excessive burden on companies that already faced high taxes in Brazil.

“Nobody wants to kill off Brazil’s mining industry; we want to find a reasonable rate,” he said.

Currently royalties are set at 2 percent for iron ore and 1 percent for gold over net revenues. Industry leaders have warned that higher royalties and tighter regulatory oversight restrictions could act as a disincentive to fresh investments.

Rousseff said last month she had no plans to hike royalties and that she was not currently discussing the issue.

The government coalition backing her won a strong majority in both houses of Congress in the first-round Oct. 3 election, giving her ample support to have legislative reforms approved.

“At the beginning of a mandate, there’s usually more momentum to approve these sort of reforms,” the government official said.

Editing by Cynthia Osterman and Lisa Shumaker

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