David Mendelawitz managing director of the Cleveland Mining Company speaks to Michael Washburn about the rigours and possibilities of mining operations in Brazil
Let’s start with some of the advantages of operating a mine in Brazil
We’ve gone to Brazil because there are low labour costs, high labour availability, and a high level of skills compared to other jurisdictions that have similar labour costs. Brazil, to me, offers the best mix of developing nations’ costs and developed nations’ capabilities. It’s somewhere in the middle, it’s not Africa, but it’s not Australia. Brazil is a land of opportunity, but you have to know what you’re doing in order to be able to capitalise on the opportunities.
In general, the government of Brazil is very friendly. They don’t have a history of nationalisation in Brazil, at least not in the last couple of decades, and they are not against mining. Many of the South American nations by contrast are against mining. Peru and Argentina are considered pro-mining, yet there are many parts of these countries that are very much anti-mining. In Brazil, you’ve got isolated areas with mining issues, such as places like Belo Horizonte, and up in the Amazon as well, but in general they’re not against it, they just want to do the right thing by the indigenous community, by the environment.
Where we operate is in a very friendly environment in the state of Goias and Bahia and northern Minas Gerais. It’s mainly farmland around there with communities of up to about 100,000 people, but in general there are towns of around 20,000 people.
Please describe a few of the differences you’ve encountered working in Brazil as opposed to Australia
It can be challenging as a foreigner to move things forward in Brazil given the different legal environment, and, to a degree, the different language and work culture. After five years in Brazil developing an understanding of how Brazil works, my summation is that the biggest difficulties are the management and reporting structure required between Australia and Brazil, importation and license lead times.
Reporting issues in the minerals industry stem from the fact that Brazil doesn’t have a history of reporting to JORC (Joint Ore Reserves Committee) or NI43-101 standards and accounting standards are very different from what they are in Australia. As an example, people don’t always accrue expenses the same way we do in Australia, they’re not accruing expenses until they get an invoice. People don’t issue an invoice until they believe they’re going to get paid. You can find, as a management body, it’s very easy to get shocked every couple of months with these surprise invoices. As a junior company, that’s been very difficult to face. You think you’ve got enough money to pay your expenses, but then a big invoice shows up, and it’s one that you should have known about, but the project didn’t record it and you end up with egg on your face.
Additionally, the Latin way can be to tell you what you want to hear as opposed to an Australian, American, or Canadian way of telling you a fact. When you hear that something is going to be delivered in 14 days or in 30 days, you have to learn to ask questions, such as 14 days from when? Or, can you give me a date? It’s a very different culture. This can be a very difficult bridge to cross for the new company entering into Brazil, but they can be overcome.
How have you responded internally to these challenges?
We brought in an ex-Australian CFO who’s our only foreign national working for us in Brazil. He’s spent time in both Australia and in Brazil. It’s critical to have that understanding in your management team. You can’t simply transmit an American or Australian to Brazil without a very strong understanding of how the Brazilians operate.
How crucial is it to master the linguistic and cultural differences?
I went into Brazil knowing most foreign mining companies had gone there and failed. I really needed to work out why. It’s very clear the companies have gone in there with a big balance sheet and said we will deliver this and that, and then of course you get all of those issues of conflicting management, overruns, and importation (discussed below), and two years later the project hasn’t started, has gone over budget, and market support has dropped.
Australia has had a very good stock market, which provides speculative capital for minerals projects. That’s allowed us to develop a lot of expertise with regard to finding minerals, but it doesn’t make us experts in foreign jurisdictions. We have seen an enormous amount of arrogance in Australians and Canadians who presume because they have the money that they can show the locals how it is done.
What some have failed to recognise is that if a Chinese or Russian or Brazilian or American group came to Australia and tried to do things by themselves, they would suffer because there’s a lot to learn in any country, and when you superimpose a Latin culture with a different language and grammatical style as well, there are additional complications. If I were to say “green tea” in Australia, then translate that into Portuguese, the phrase is “chá verde” which is “tea green.” That’s fine if you’re talking about a cup of green tea, but not to have in a contract or in a communiqué between people. It can lead to an enormous amount of confusion. You’ve got a “not” in the wrong position. It’s just another barrier to entry to overcome by having people who can speak both languages and understand both cultures.
But if you get those issues resolved early on, you can deliver a $100million or $100 billion project in a relatively straight line. Just don’t expect to start out on day one and tell Brazilians how they will do it. Just remember, that they have the biggest private mining company in the world, one of the biggest listed mining companies and a range of world-class performers from aviation to agriculture to hydrocarbons.
How responsive and efficient is the government when you need permits and approvals?
Generally not very, the Brazilian bureaucracy is too large, it can be very slow and you can be relying on individuals rather than systems. Generally permits take much longer to be granted than the guidance provided to you say they will be.
We’ve once taken the Mines Department to court over such an issue. We were supposed to have a mining tenement in a month, and it took 20 months, and it was only gazetted [published in the Federal Official Gazette] because we took them to court and the court told the Mines Department to gazette the tenement. The good thing about that situation is that it was a gazetting tenement rather than conversion into a mining lease or the granting of a permit because time was not ticking away on that tenement, because it hadn’t been gazetted, and also it wasn’t our lead project. If we were waiting on that tenement, we’d have been waiting almost two years. It would be very difficult for us as a small listed company to survive.
But that’s one issue, and then going deeper, there is a history of a lot of corruption, though it is very clear that this has been cleaned up somewhat at the moment. We’ve never paid a bribe and we’ve never been asked to pay one. They’re doing an outstanding job of getting rid of corruption but it’s still not completely gone.
Would you support changes to the mining legislation?
The biggest changes I see are the royalties and the length of mining tenure. In general I support the changes, though I don’t know if they’ll come through. If we have a slight increase in the royalties, that’s fine as they’re currently below industry average and have room to move. As for the length of mining leases, I think that’s imperative that they make the changes. They’re looking at a use-it-or-lose-it system. That’s the way the mining system should run. It puts pressure on people.
How much of a problem have local regulations been for your operations?
The process of importation can be very subjective, can be very slow, and can be extremely expensive. If you import an item that is manufactured in Brazil, you can be paying above 100% import duties on that item, and if you make a very small mistake, there is the risk of losing that item when it’s imported. There is the risk of taking years to import simple bits of equipment. If you want to get it done quickly and cost effectively, you have to be registered in the right systems and have the right import agencies on your side, and that’s not something that will happen overnight.
For example, we recently brought in a leach reactor, and the agency importing it made some mistakes, so it took us an extra six months to get it through customs and we almost lost the reactor. Due to their mistakes, the import duty was double what we were originally quoted.
There are tricks of the trade to know. You can import equipment on a temporary basis relatively efficiently, and you’re not allowed to import used equipment.
Let’s address the larger issue of protectionism.
I would like Brazil to open the doors wider. They’re worried about cheap goods flooding in, but in the end, the protectionism is having an adverse effect on their own economy. It pushes up the price of what they make locally. It pushes away some of the multinationals who find they can’t get the equipment as quickly as they’d like.
If you could change or abolish one local law or regulation, which would it be?
The importation duties, you need open borders to a degree, the protectionism is a big problem. The licensing is a bigger problem, but I don’t think it’s a particular law, that’s just the heavy weight of bureaucracy.
Brazil’s tax system has been a source of frustration for many multinational companies doing work there. What has your experience been? Are there other potential complications that foreign companies need to be aware of?
The Brazilian tax system is complicated and it’s onerous. In general the grand total of those taxes is quite acceptable on an international level, it’s just that it’s broken down into lots of small taxes, so we’re constantly paying some form of tax.
Yet another issue is labour laws. In the end, they don’t make a huge amount of difference to our business, because the cost of labour is so much lower than the other jurisdictions we’d enter, but something you have to be very well aware of is the complexities of the labour laws. It’s very common, no matter why a worker is dismissed, for that worker to take you to court, even if they have been dismissed for gross incompetence. Though the courts will look after you if you are genuine. We’ve let go many people who have taken us to court. We’ve always won, but we have to be aware in employing someone there’s a high chance at the end of that person’s employment that you’re going to end up paying for it.
It’s not an issue. It’s a frustration but if you accept that’s the practice and gear up for it, then it’s fine. If you got rid of somebody unjustly, you must pay, but if you got rid of someone for the right reason, then the courts really do look after you. It’s important to have good legal counsel.
Do you rely extensively on local law firms in Brazil? What kind of experience have you had with them?
In terms of lawyers, we do most of our legal work internally as our country manager is a lawyer. That is extremely advantageous for us. We do use them (external counsel) now and again, but most of the legal work we do ourselves. We do also use external law firms, and there are some excellent legal firms in Brazil that we’ve found fantastic to work with, from single-man operations to multinational firms. I think in general we’ve had nothing but good experiences.
Whom have you worked with?
Recently we have worked with Tozzini Freire, on the other side of a transaction. I was very impressed with them and we would like to use them ourselves. We use Degrazia & Barbosa on admin matters, they’re excellent, they turn things around quickly, I’ve been very happy with those guys.
When we used Tozzini, we paid the bill and we found those guys extremely professional, they didn’t gouge, they did the bulk of the transaction, the heavy lifting and they didn’t get the bulk of the money. Why the international firm got paid four times the amount as the local guys, I’m not quite sure, particularly when the local guys did all the work.
What is the ratio of internal versus external legal counsel that you use?
I would say it’s no more than 10% external. I think we’re quite lucky because of having a country manager as a lawyer; from day to day we’re dealing with legal issues before they become an issue. If you stepped in there as an Australian or American operation and didn’t have a lawyer side by side, you’d end up in a lot of trouble. If I didn’t have one, I would have failed. As a junior, you need to have a locally qualified lawyer there side by side.
What’s your vision for the future of your Brazilian operations?
We expect to finish the development of one of our projects in the next couple of weeks. We’re looking at another gold project at the moment, and there’s a high likelihood of moving forward with it, and we’re also very interested in building integrated iron ore/pig iron manufacturing facilities. We would love to build a blast furnace in Brazil in the next few years. We don’t have any plans to leave Brazil or enter into any other country. The IP we’ve gained in the last five years allows us to operate in this market. We’ve worked out how to operate, and have the right team in place, and it’s time to capitalise on that now. It is a land full of opportunity. It’s a country the size of the US, with a couple of hundred million people, underexplored by modern technology but well explored by artisanal miners, highlighting exploration all over the country. It’s taken a lot of discipline to get there, and now we’re inundated with projects.
Cleveland Mining Company
David Mendelawitz has extensive international experience in exploration, mining and commerce. His most recent role prior to founding Cleveland was as Head of Business Improvement at Fortescue Metals Group Ltd., in which he drove projects in iron ore exploration, project construction, mine and infrastructure optimisation and expansion planning. During his 5 ½ years at Fortescue, David was initially the Exploration Manager for Eastern Tenements, overseeing field works which were part of the delineation of 2.8 billion tonnes of iron ore in 1 year. He then became the Registered Manager of Mining during the trial mining operations as part of the $140 million feasibility study conducted over the project. David has a track-record for success both as a geologist and in the corporate aspects of large minerals projects .Mr Mendelawitz has extensive experience in the underground and open pit mining and exploration across Australia, Papua New Guinea and the USA. Mr Mendelawitz was a founding director of venture capital and business advisory firm M Capital.