Wednesday, 23 January 2013
A BILL to make Ecuador more open to mining investment has been put on the backburner, as President Rafael Correa keeps his anti-mining voting base onside ahead of re-election in the coming months. Cielo Abierto, By Matthew Ogg
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| The flag of Ecuador |
A mining reform prepared by the government was ready in mid-November that could have cleared up several uncertain areas in the current legislation, with the application of maximum royalty rates and a more transparent concession cancellation process.
However, Ecuadorian Mining Chamber president Dr Santiago Yepez said the government did not want to damage its image in any way before the election in February.
“Unfortunately, the mining reform has come in second place within the electoral process but will be back on the table once the elections have passed,” he said.
“I have had two very good meetings with ministers, and both have told me that the government is totally decided on thrusting forward these reforms after the elections.”
Control Risks Americas analyst Katie Micklethwaite said there were a lot of indigenous community organisations opposed to large scale mining in principle who were also part of Correa’s support base.
“I don’t see the reform going through before Correa ‘s very likely victory in February or April, depending on whether he has to go to a run-off,” she said.
“He has a lot of political capital and is able to give it more attention, but I don’t know what he’ll choose to do.”
Advanced royalties a salve for social opposition
Micklethwaite said the country’s high tax regime was a key reason for the “Ecuadorian exodus” of North American companies Iamgold and International Minerals last year.
“The current legislation leaves scope for companies to be taxed before they manage to recuperate their initial profit,” she said.
“With those really high taxes going on when you’ve made your investment but haven’t actually got anything out of the ground yet, I can see why a lot of companies are not particularly keen on this.”
Yepez said these advanced royalties - known in Spanish as iregalias anticipadas - were a good signal to communities that they could benefit from projects.
“This is the main objective that was achieved with Chinese company EcuaCorriente, and what is being negotiated with Kinross Gold,” he said.
“In the case of EcuaCorriente, around a month ago they paid $US40 million in royalties that will go straight to the construction of hospitals, basic infrastructure and schools in the province of Zamora.”
He said this strategy was key when tackling the other key reason why international miners have been leaving Ecuador – social unrest. Micklethwaite was less optimistic.
“It seems likely that that once some of these companies start operations they will be faced with community opposition at the sites, unless they manage community relations extremely well. I’m not really sure if it’s possible to manage them well enough to avoid unrest,” she said.
“It’s mostly based on environmental and land concerns. There are worries that land will be polluted, and that communities will end up being forced off their land as a result.”
For Micklethwaite, the advanced royalties will continue to be a key sticking point in the government’s negotiations with Kinross, whose outcome will affect how other miners approach the jurisdiction.
“They’ve (Kinross) held out on that for over a year now and I don’t think they’re going to back down,” she said.
When asked about whether the exodus could continue, she said it would depend on whether Correa pushed through reforms and whether he could reach a deal with Kinross to start exploring and producing.
“Over a year of negotiations focusing on one or two points, it seems like a company would have to lose patience eventually and decide this wasn’t the right environment for them to operate in.”
Reform details
Yepez said small changes in the law could generate large impacts for mining investment in Ecuador.
“What the mining reform includes is, firstly the regulation of the extraordinary profits tax, so that this starts being paid off after the company has covered their investment costs,” he said.
“Another important issue is the regulation surrounding the cancellation of concessions – at the moment it is very arbitrary.
“The reform will generate a legal process for the cancellation of concessions that respects due process and the possibility of defence for mining concessioners, also giving them the opportunity to correct any errors.”
But for Yepez, like Micklethwaite, the fundamental change in the mining reform is in setting a maximum royalty rate.
“At the moment metallic royalties will be at least 5%, and this brings complications because there’s a minimum royalty but not a maximum.
“After having explored for 14 years or more, once you start to negotiate an exploitation contract you could get a royalty rate of 8-12%, which would make the project unviable.
“To the end of bringing greater certainty to investors, the government’s offer has been to put in place a royalty of no less than 5% and no more than 8%.”
Yepez said there were several miners waiting in the wings for a positive outcome in reforms and Kinross’s negotiation. These companies include INV Metals, June Field, Salazar Resources, Ecometals, Monterra Gold and Cornerstone Capital Resources.
The industry representative was also upbeat about negotiations between state company ENAMI and its Chilean counterpart, Codelco, to develop the Junin project in Ecuador.
*Matthew Ogg is a Santiago-based journalist.
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