China imported 405 million tons of iron ore so far this year, an increase of 30% from 2008. Much of this iron ore came from Brazil—specifically from Brazil’s gargantuan iron miner Vale SA (NYSE:VALE). Vale has ridden the commodity-to-China wave and has made a tremendous amount of money in the process. Its year-to-date stock price is up 120% (compared to the S&P roughly 20% rise) and its market capitalization today is roughly US$140 billion.
Things may soon change, however. Brazilian legislators are considering the implementation of a new royalty payment system in the mining sector. This royalty could increase fees that mining companies like Vale pay to the Brazilian government, especially those that simply export ore and do not “add value in Brazil.”
Miguel Nery, Head of Brazil’s National Production of Mineral Production (DNPM), stated that the plans are in motion to send the new royalty laws to Brazil’s Congress, along with other, wide-ranging changes to Brazilian mining laws. “It hasn’t been decided yet, but the royalty rate will likely be higher for mining companies that do not add value to the raw material in Brazil,” said Nery, who argued that he does not believe that the laws will in any way slow down new investments in the mining sector. Brazilian mining companies, meanwhile, chafe that new royalty payments will make certain new projects less financially viable.
Vale, the world’s largest iron ore mining company, has been especially singled out. The pressure could force Vale to take larger stakes in Brazil’s steel companies. Last week, Vale’s CEO met with Brazil's President Luiz Inacio Lula da Silva following strong government criticism that the company was not doing enough to advance the country's steel industry. Lula insists that Vale should not simply export raw materials but should also develop higher value-added products. To its credit, Vale has made minority investments in the Brazilian steel industry. But the company insists it wants remain a minority shareholder in most of its projects in order to avoid competing with its clients.