A Farewell to Arms Q&A: Phosphate the Great Exploration News
BRAZIL EXPLORATION BRIEFING
Vol 3 • May 2013
A FAREWELL TO ARMS Currency devaluation has been the default monetary policy of many developed countries as they aim to become more competitive in the aftermath of an economic crisis. The Brazilian real has fluctuated in value over the last five years and the government is now focusing on reducing the threat of inflation. The humble tomato took pride of place in the Brazilian media in April. Prices of the staple fruit have more than doubled over the last year as the government’s loose monetary policy and stimulus package have stoked inflation. In response the Brazilian Central Bank raised interest rates by 0.25 basis points to 7.5% on April 18, the first hike in almost two years. The move comes one month after finance minister Guido Mantega announced Brazil’s surrender in a currency war between the United States and emerging economies for the past two years. Brazilian economic policy proved relatively successful in breaking and reversing a steady appreciation of its currency, the real. But what effects will the new direction have on foreign miners operating in the country? Since 2009, the Brazilian real has appre ciated steadily against the US dollar as the United States’ quantitive easing policies flooded markets with new greenbacks. In December 2008 one dollar bought R$2.6. By July 2011 that figure was just R$1.54. International mining firms operating in the Brazil were already experiencing rising costs, with a scarcity of drill rigs and labor pushing up prices. However, with international firms counting their budgets in dollars, the appreciation of the real had a major effect on the bottom line. Well before the real peaked in July 2011, the Brazilian finance minister was crying foul. In September 2010, at a business luncheon in São Paulo, Mantega voiced what many in of his counterparts in emerging markets had recognized but not uttered: quantitative
/mining.leaders
Source: cliffkule
easing was leading to competitive deval uation as numerous countries looked to boost their economies. “We’re in the midst of an international currency war, a general weakening of currency,” he told attendees. “This threatens us because it takes away our competitiveness.” The Brazilian government responded with a loosening of monetary policy and a stimulus of its own. In addition to the steady cutting of Brazil’s historically high base interest rate, the government eased reserve requirements
“It’s even more important today that we have a friendly exchange rate as gold prices are low and we need investors to believe there is value in Brazilian commodities.”
@miningleaders
for major banks, and introduced a number of tax cuts for key industries as well as a $60 billion infrastructure investment scheme. The bank also intervened to buy up dollars and imposed taxes on short-term foreign loans. The policies had a significant impact on the exchange rate, with the real weakening to R$2.14 to the dollar in December 2012, before stabilizing around the R$2 mark in recent months. “The Brazilian government has managed the foreign exchange situation very well,” says John Blake, president and CEO of Luna Gold, “It’s even more important today that we have a friendly exchange rate as gold prices are low and we need investors to believe there is value in Brazilian commodities.” While most gold producers reported rising cash costs per ounce in Brazil over 2010 and 2012, the last 12 months have seen reductions across many projects. At Luna
BRAZIL EXPLORATION BRIEFING Vol 3 • May 2013
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