Ecuador a Reformed Mining Jurisdiction?


If you mention Ecuador in mining circles, you will get some raised eyebrows and mumbled cuss words from Canadian mining executives.   This is because of Ecuador's reaction in 2013 that looked like resource nationalism which resulted in a moratorium on mining activity and a hefty tax on profits. Ecuador's infamous windfall profits tax and a series of other unfavorable provisions made almost any mining project unprofitable

The windfall profits tax was a 70-per-cent levy on excess profits, the terms of which, such as what are excess profits, had previously been subject to negotiation between company and government, leading to an uncertain business environment.

However, lessons were learned and Ecuador hopes to position itself as the up-and-coming mining investment destination in Latin America.  The Ecuadorian government hired consultants Wood Mackenzie to provide recommendations and the country is adopting them quickly.

Ecuador, which depends on crude oil for half its national budget, is seeking to drum up more foreign investment after the recent crude price slump slashed government revenue. The government in 2015 separated the mining ministry from its oil ministry and announced plans to promote 36 projects to produce gold, copper and molybdenum estimated to be worth US$200bn.

It started in 2013 when Kinross Gold (TSX: K) walked away from the negotiating table after two years of fruitless talks with the Ecuadorian government over the investment conditions for the Fruta del Norte (FDN) project, one of Latin America's biggest undeveloped gold deposits.

It also didn't help that shortly before, IAMGOLD (TSX: IMG) had sold its Loma Larga project and left the country, and shortly afterwards, International Minerals sold its Río Blanco gold project and also said goodbye.

Kinross’ decision telegraphed to investors that negotiations with Ecuador were difficult and indicated to the country that its mining framework was not working. In exasperation and desperation, Kinross sold the construction-ready Fruta del Norte in 2014 for US$240 million, close to a quarter of what it paid to acquire the project in 2008.  

Kinross bet on FDN and lost. The same year that Lundin Gold (TSX: LUG) bought the project, Ecuador embarked on a mission to make its mining framework more competitive and attractive.

Lundin obtained approval for the FDN environmental impact study in October 2016 and in December signed an exploitation agreement and an investment protection contract with the government. Construction of the 340,000 ounces per year mine has begun.

Lenin Moreno, who took office as President in May 2017, wants to attract US$4.6 billion in investment over his term in office for large-scale mining projects from companies including Lundin Gold, EcuaGold Mining, INV Metals, EcuaCorriente, Cornerstone Capital Resources (TSX-V: CGP), BHP Billiton and China Explorcobres.  The investments hope to quadruple employment in the mining industry through 2022, according to Wood Mackenzie.

Two Chinese-owned mines are due for startup in the near term; the large-scale Mirador copper mine, controlled by the CRRC-Tongguan consortium, and the smaller Río Blanco, now operated by Junefield Mineral Resources.

There is a resurgence in exploration with several junior mining companies increasing activity in the country.  Ecuador is looking to create a mining venture exchange. The plan is to link trading in junior mining stocks on the Toronto and Quito exchanges as part of a bid to finance US$488 million in exploration, the mining ministry said.

"We're democratizing the industry. Local investors will be able to invest in mining, which is becoming a prosperous sector," says deputy industrial mining secretary Henry Troya. "We're building a sustainable industry."

Other countries have gone down this road; Peru's pioneering Lima venture exchange managed to list a dozen exploration companies at its height, including Karmin Exploration (TSX-V: KAR), Duran Ventures (TSX-V: DRV) and Red Eagle Mining (TSX-V: R). Santiago followed its example with its own venture exchange in 2014.  However, with scant data on these exchanges, the scale of participation from Peruvian and Chilean retail investors is yet to be proved.

Ecuador has started to awarding exploration concessions after a hiatus of some six years, mines minister Javier Cordova told Mining Journal.  Ecuador has overhauled its mining concessions registry and 237 concessions have been awarded to date to local and international mining companies, according to the ministry.

The ministry aims to boost mining exploration investment to US$600 million by the end of the year according to the newspaper El Telégrafo, citing Troya's presentation at a mining conference in Quito.  At least 27 companies have set up offices in Ecuador this year, including BHP Billiton, Newmont Mining, Fortescue Metals Group, Hancock Prospecting and Newcrest Mining.

The ministry is tracking mining exploration projects including Codelco-Enami JV Llurimagua and Cornerstone's Cascabel. Ecuador's mining chamber is further pushing the government to change both a tax on windfall profits and a capital gains tax to make the industry more competitive.

Improvements to the tax code that were implement in 2016 include: windfall tax cannot apply until after four years have passed since investment payback and an equal base price applied for all projects.  These are some reforms and there is plenty of way to go.   

With big pushes, often come big push backs, the question remains whether Ecuador can commit to mining reform and development without a backlash from its residents, it has happened in the past.    

Mining is cyclical and investors need to make hay while the sun shines. Timing is everything and it appears senior Canadian mining companies are missing out on a period of economic optimism in the Ecuadorian mining industry after bearing the brunt of an unreceptive local climate in the past. Ecuador has made significant reforms and be sure there will be a lot of exploration news coming out of this region.  

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