Brazilian opportunities for ASX-listed companies

15 December 2020

If there’s a country worth paying attention to right now for investors in ASX-listed resources companies, it has got to be Brazil. This gigantic Latin American country is about 9% bigger than Australia in terms of its land area, and, of course, it is much more populous, with Brazil’s 212 million leaving Australia’s mere 25 million way behind. Like Australia, it is also very rich in natural resources. The country’s geology features an abundance of gold, silver, copper, bauxite, iron ore, coal, manganese, nickel, zinc, platinum and diamonds. The big difference is that there’s a lot of underexplored acreage compared to Australia. Also, Brazil’s stock exchange, now called ‘B3’, does not have a history of listing mineral explorers like ASX. For many years now Australian companies have been working to develop this country’s resources potential and under the present administration of President Jair Bolsonaro, Brazil has been particularly helpful to their efforts.

As many investors will know, Brazil is the world’s second-largest producer of iron ore. The difficulties Brazil has right now in keeping its mines operational given the COVID-19 challenges is the main reason why the price of iron ore is booming – China keeps importing iron ore to fuel strong growth in its steel production, but supply hasn’t kept pace because of Brazil’s issue. Iron ore, however, is not the only sector where Brazil is an important supplier. The country is also the world’s fourth biggest producer of bauxite and it ranks as the world’s tenth largest producer of gold.

A pro-mining government

The election of President Bolsonaro in October 2018 marked an important turning point in Brazil’s economic development. Over the years, since the return to democracy in 1985, Brazil has swung between left and right. The governments of Presidents Luiz Inácio Lula da Silva and Dilma Rousseff between 2003 and 2016 were mildly leftist in orientation although the economy continued to grow before the recession of 2015/16, which ranks as the worst in the country’s history. The economy stabilised under the more-or-less interim Presidency of Michel Temer from 2016 to 2018, but Brazil was ready for more radical change in 2018. Jair Bolsonaro, with his centre-right and populist message, was what the country was ready for. He won with a decisive 55% of the vote. Since taking office at the start of 2019 Bolsonaro has implemented a strongly pro-market and pro-mining agenda.

Foreign investors have responded favourably. In the Fraser Institute’s 2019 Survey of Mining Companies, issued in early 2020, Brazil’s score in the Investment Attractiveness Index jumped from 58.6 points to 63.4. Currently, only Chile is regarded as more attractive in Latin America when it comes to mining policy. Under Bolsonaro’s Mines and Energy Minister, Bento Albuquerque, the country is moving to simplify Brazil’s mineral prospecting process as well as open up indigenous reserves to mining. The effective corporate tax is in Brazil is 34%, but like Australia there is no double-taxation.

Multiple ASX-listed companies operate in Brazil

ASX is the primary exchange for number of companies working on Brazil-based projects. Aguia Resources (ASX: AGR) is developing phosphate projects in Rio Grande do Sul. BBX Minerals (ASX: BBX) has gold projects in Amazonas. Big River Gold (ASX: BRV) is developing the Borborema Gold Project in Rio Grande do Norte. Centaurus Metals (ASX: CTM) is working on the Jaguar Nickel Sulphide Project in Para. Jervois Mining (ASX: JRV), best known for its US cobalt project, recently acquired the São Miguel Paulista nickel and cobalt refinery in the state of São Paulo. Karoon Energy (KAR) is now a major player in the offshore Brazilian oil industry, which has enjoyed massive development in recent decades. Meteoric Resources (ASX: MEI) is working on the Juruena Gold Project in Mato Grosso. Oz Minerals (ASX: OZL) operates the Anjas gold-copper mine in Para and owns the CentroGold gold project in Maranhao. And Tombador Iron (ASX: TI1) is developing an iron ore project in Bahia. We wrote about Karoon Energy on 3 August, Centaurus Metals on 15 October, Oz Minerals on 19 October and BBX Minerals on 19 November, all in Stocks Down Under.

The key issues for ASX companies working in Brazil related to public perceptions of how ethically they are operating in Brazil. This is a country historically known for corruption at a high level. There are concerns internationally that Brazil’s forests are being forced to give way to mining projects, so companies with Brazilian projects need to be at pains to show they are environmentally friendly.

Also, Brazil has a centuries-long history of artisanal mining where so-called ‘garimpeiros’ flood in to new areas of discovery. A good example was the Bom Futuro tin field in Rondonia, which in the late 1980s and early 1990s briefly made Brazil a significant supplier of tin almost solely from artisanal sources. Companies today operating on areas with garimpeiros in place need to tread carefully lest they be perceived to be trampling on the little guys who are just trying to make a living. And, of course, Brazil’s First Nations also need to be taken into account in many mining projects.

The country of the future…and the present

A more pressing issue for companies operating in Brazil right now is COVID-19. So far there have been 6.7 million infections since the Pandemic began. That’s 3.1% of the population – not as bad as the 4.4% in the US, but not great either. Worse yet, new infections are running at something like 41,000 a day. So, it looks like COVID-19 will be around in Brazil for a while yet and investors need to be cautious about companies whose development operations may be hindered by efforts to control the spread of infection.

There’s a joke that Brazilians like to tell about their country when the economy isn’t doing so well: Brazil is the country of the future…and always will be. Ask people at companies like Karoon and Centaurus right now and they’ll tell you it’s the country of the present as well.

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