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 (BestGrowthStock) – 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)

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