Vale Poised for Tax Boon as Brazil Says Miners May Avoid SPT

Brazilian mining companies including world No. 1 iron-ore producer Vale SA probably will avoid a new type of windfall tax as the government focuses on lifting royalty fees, the mines and energy minister said.

President Dilma Rousseff’s government is completing new mining industry rules and expects to publish them in as early as in 15 days, Edison Lobao said during an April 12 interview in Brasilia. While a decision hasn’t yet been made on a new so-called special participation tax, a levy on sales or profit generated by the country’s most productive operations, the government is leaning against such a measure, he said.

“We are re-examining the special participation tax and we may not include it in the new framework because of domestic and international reasons,” Lobao said, speaking at his office in Brazil’s capital. “We are increasing royalties quite a bit, practically doubling them. We are leaning toward not having a special participation.”

Brazil, the world’s second-largest iron-ore exporter, has been discussing since at least 2008 mining revisions that include higher royalties. The country charges special participation taxes of as much as 40 percent on oil projects. The possibility of such a levy for the mining industry has been hanging over Vale in the past few months, according to Bank of America Corp. Shares rallied April 12 after Lobao’s comments.

“It’s urgent” for Brazil to adopt the code, he said.

Royalty Fees

Vale, down 23 percent in the past year, rose 1.6 percent to

32.93 reais at the close on April 12 after surging as much as

4.8 percent. MMX Mineracao & Metalicos SA, billionaire Eike Batista’s mining company, gained 3.1 percent April 12. Rio Tinto Group, the world’s second-biggest mining company, declined 12 percent in the past year and BHP Billiton Ltd. declined 1.6 percent.

Brazil, which allows mining companies to subtract some royalty calculation costs, will start charging the levy on companies’ gross revenue, Lobao said. The royalty fee will double to 4 percent from 2 percent, he said. Vale’s press office in Rio declined to comment on Lobao’s comments.

’Very Positive’

A special participation tax of 5 percent on Vale’s earnings before items would have a $7.5 billion impact in net present value, Bank of America analysts led by Felipe Hirai wrote in a note to clients dated April 14.

“No special participation tax would be very positive for Vale,” the Sao Paulo-based analysts wrote, reiterating a buy recommendation. “The market has become increasingly concerned on the possibility of an SPT, but we still think the risk of a high SPT is low.”

The government expects to re-open mining concessions in “a few days” to remove a freeze imposed while the rule revisions were reviewed, Lobao said.

Mining operations are different than oil and establishing a special participation tax “doesn’t make sense,” Vale’s Chief Executive Officer Murilo Ferreira said Feb. 28 in an analysts’ conference call.

Nation’s Respect

Lobao said Batista deserves the nation’s respect even as investors dump shares in his interlinked natural resources and logistics companies.

The minister said it’s feasible for state-run Petroleo Brasileiro SA to use the port Batista’s LLX Logistica SA is building in Rio de Janeiro state. He declined to comment on whether the billionaire will get direct government assistance for his companies that have lost as much as 90 percent in the past 12 months after missing production targets and piling on debt.

‘Big Brazilian’

“We can’t forget that until a little while ago he was considered the sixth-most successful businessman in the world,” Lobao said. “As such, he’s important for Brazil’s economic landscape.”

Batista, 56, became Brazil’s richest man by selling shares in oil, mining, electricity, shipbuilding and port companies at a time a commodities boom was accelerating growth in Latin America’s largest economy.

This year, he dropped off the world’s top 100 richest people list after output at his first oil field was a fraction of original estimates. His estimated wealth slumped to $7.3 billion April 12 from as much as $34.5 billion in March 2012, according to the Bloomberg Billionaire Index.

OGX Petroleo e Gas Participacoes SA, the oil company Batista controls, rents equipment from his shipbuilding unit and plans to use the LLX port to support its offshore operations, throwing the viability of his group of companies into doubt.

“As a big Brazilian businessman, he deserves the nation’s esteem,” Lobao said.