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Analysis: New Brazil laws seen significantly impacting Minas Gerais mines output

London — New state and Brazilian federal government legislation restricting the use of tailing dams may have a significant and permanent impact on iron ore production in the southeastern state of Minas Gerais, the country's biggest producer, with both market and political implications, state government and iron ore market sources say.

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The new laws - which will also impact production of other mineral types - are likely to push the bulk of Brazil's mining activity further north, including to the Carajas mineral province in Para state, where new iron ore, nickel and copper production capacity is ramping up at more modern installations than have typically been used in Minas Gerais, considered the birthplace of Brazil's commercial mining industry.

The Minas Gerais state government last week issued a deadline for all companies operating upstream tailings dams in the state - the type that burst at Vale's Corrego do Feijao mine on January 25, leading to more than 150 deaths - to present proposals for completely decommissioning these dams within two-three years, a spokesman at state environmental secretariat Semad told S&P Global Platts.

This week Brazil's recently-revamped federal mining agency, ANM, issued legal directives ordering all Brazilian mining companies with tailings dams to immediately undertake detailed checking and draw up emergency action plans for these dams. In the case of upstream tailings dams the ANM has introduced a legally-binding obligation of daily inspections with compulsory reporting of the findings, effective February 11, according to notices published in Brazil's official gazette.

Upstream tailings dams are considered old-fashioned and dangerous because tailings themselves are used to build up the dam's embankment walls.

Neither ANM, Semad, nor the Brazilian mining institute Ibram, an industry group, were able to give an exact evaluation of how the new measures would impact mining activity levels nor levels of revenues, royalty payment or employment in the areas affected.

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"The measures are very recent," a Semad press officer told S&P Global Platts Wednesday. "We are assessing the impact."

Some 50 upstream dams of a total of around 100 dams in use in Minas Gerais state by mining and other sectors will have to be decommissioned and this will necessarily impact mine production levels, he said.

"I believe that iron ore production in Minas Gerais will fall a lot further," said one analyst source in Brazil. "It's not possible yet to know if the state and federal governments will be able to stand the fall in revenues for much time."

POLITICAL INTERESTS SEEN AT PLAY

Other observers have spoken of political interests concerning the slow deliberations on fining and production decisions following the dam burst at Vale-BHP's Samarco joint mining and pelletizing venture in Minas Gerais in 2015 as well as in the new round of production prohibitions, which stretched last week to a temporary halt in operations at Vale's port and pelletizing operations at Tubarao, in Espirito Santo state.

"Whether and how quickly Vale will be able to resume operations at Brucutu is essentially a political decision and as a consequence, difficult to predict," Barclays analyst Ian Littlewood said last Friday.

The ANM directives published in the official gazette Tuesday list more than 110 companies or operations which need to comply with the new rules on tailings dams. In addition to Vale, these include iron ore producers ArcelorMittal Brasil, Mineracao Usiminas, Gerdau Acominas, Vetorial Mineracao and CSN Mineracao, also bauxite producer Mineracao Rio do Norte, niobium producer Niobras Mineracao, vanadium producer Vanadio de Maracas and fertilizer and coal producers.

Brazil is the world's second biggest iron ore producing country, with recent production levels of well over 400 million mt/year, with most for export markets and more than 60% of this coming from Minas Gerais. While Vale has for several years been shifting its production emphasis further north, where its cash costs are cheaper, ore grades higher and its operations are generally more modern and automated, there are however political and economic considerations that could make a rapid switch tricky, as mining is the main revenue provider in parts of Minas Gerais. In Brumadinho, where the recent accident occurred, mining accounts for 60% of the municipal tax revenues.

Vale said following the Corrego do Feijao dam burst that it was continuing with local royalties payments.

Since the January 25 incident, Vale has halted production in Minas Gerais state in the Paraopeba mining area, where around 40 million mt/year iron ore production capacity is expected to be lost for up to three years, and also at the 30 million mt/year Brucutu mine, where Semad issued an order preventing output, and moreover, suspending the company's operational license at the site, allegedly due to dam issues.

Analysts at ANZ bank said Wednesday that while it is difficult to quantify the losses, they "conservatively estimate" a supply shortage of 43 million mt this year on the global iron ore market as a result of the production disruptions in Brazil.

"This should keep prices above USD80/t to incentivise production and rationalise demand," they said.

-- Diana Kinch, newsdesk@spglobal.com

-- Edited by Richard Rubin, newsdesk@spglobal.com