Ecuador offers some of the world’s top opportunities underground
In the turbulent second half of 2011, a lower price of oil sounded an alert for Ecuador. Fears of a double-dip recession triggered memories of 2008, when the South American OPEC member suffered from the fall in oil prices, fewer remittances from overseas and shrinking export markets. Against that backdrop, there is no better time than the present to finally bring to fruition the country’s vast mining potential. What could be more beneficial for an oil exporter than 36.9 million ounces of gold, that most sacred of safe haven metals, worth some $68bn in September 2011?
Actually having working mines to monetise the resource, that’s what. Currently only Canada’s Dynasty Minerals is pouring gold (ignoring the small, often illegal mines that endanger both their workers and the environment). The self-styled socialist government of President Rafael Correa has been pledging to develop major open-pit mines since taking office in 2007. But a moratorium on large-scale mining in 2008 stymied development, as did problems in defining priorities for foreign direct investment and contract terms. Diplomatic issues ranging from treatment of a Brazilian construction company to the expulsion of the US ambassador and the rescinding of bilateral investment treaties and international arbitration mechanisms further clouded the outlook.
But the idling of the country’s huge potential has been anything but satisfactory. After a four-year learning process, the government has become serious about kick-starting mining in a way compatible with corporate and market needs. By 2015, the government wants to make large-scale mining a reality – an ambitious but attainable goal. Analytica, which was appointed to the World Finance 100 last year thanks to the company’s keen research and understanding of its home market, believes that Ecuador has finally turned the corner to unlocking its mineral wealth. This offers potentially huge benefits to investors, from whom Analytica has already seen keen interest.
The new regulatory environment demands higher taxes than other major mining countries, given that the constitution mandates that “at least 50 percent” of earnings be taxed in some form. This however includes the 15 percent distribution of profits to workers mandatory for all companies in the country, which has been applied without major issues in other industries including oil. Factoring that out, the taxes – including the soon-to-be 22 percent corporate income tax – become competitive.
The government has also wisely dropped its earlier idea of modelling mining contracts on those recently signed with oil companies in a troubled process that contributed to fears of nationalisations. Mining companies instead face a 70 percent windfall tax if prices go above base prices negotiated in their contracts. In negotiations with the oil companies, however, the government showed leniency and agreed to realistic prices. It may also reduce value-added taxes in mining. Contract negotiations with Ecuacorrientes, International Minerals, Iamgold, and Kinross, are at an advanced stage; all were originally Canadian, but Ecuacorrientes was bought out by the China Railway Construction Corporation (CRCC) and Tongling Nonferrous Metals. There is real interest in the Correa administration to unlock revenue streams from mining against the backdrop of risky oil prices and an election campaign in 2012. Correa has said that he expects companies to advance some $200m in royalties before the mines enter operation in three or four years.
Strong negotiating positions
Other open issues include the exact level of the royalty – Correa wants eight percent, the firms have offered six percent – and the site of arbitration. Ecuador wants its domestic courts to handle controversies, matching a constitutional mandate, but has shown some flexibility with oil supply deals with China on this matter. And unlike the oil industry, Ecuador has no local expertise in major mining, which strengthens the companies’ negotiating position. Analysts are therefore sanguine about Oil Minister Wilson Pastor’s warning that the government might decide to offer their concessions to other companies (with compensation) if the contracts aren’t signed swiftly.
In the medium term, new entrants will be able to benefit from the precedent of firms already present. Chilean state copper giant Codelco has announced its intent to explore four properties, and Analytica has already advised a client on a mining deal in Ecuador.
Beyond its gold, Ecuador estimates reserves of 72.4 million ounces of silver, 8.1 million tons of copper, 28,471 tonnes of lead, and 209,649 tonnes of zinc, among other metals and minerals. To exploit them, the government expects $37bn in investment over the coming 20 years. Only 44 percent of the country’s 272,046 sq km of territory have been explored, so significant additional deposits may yet be discovered.