Ecuador mineral development hits a few snags

SANTIAGO, CHILE — From barely featuring on the global mining map at the start of this century, Ecuador has moved rapidly to become one of the most dynamic jurisdictions in South America, with two mines due to enter production later this year.

The sector’s flagship venture is Lundin Gold’s (TSX: LUG; US-OTC: FTMNF) US$692-million Fruta del Norte high-grade gold mine development, whose history mirrors the development of the sector as a whole.

After Kinross Gold (TSX: K; NYSE: KGC) dropped the project in the face of impossible tax demands from the government, Lundin snapped it up for US$240 million (or less than a quarter what Kinross had paid eight years earlier). But as oil prices fell and Ecuadorian President Rafael Correa spotted a potential source of foreign investors, the new owners soon reached a deal on much more favourable terms.

With declines reaching the orebody in January, the underground project is now on track to pour its first gold by year-end. FDN could produce 325,000 oz. gold annually at an all-in sustaining cost of US$583 per oz. gold.

Meanwhile, EcuaGold Mining, a joint venture between China’s Junefield Mineral Resources and Hunan Gold, is developing the $78-million Rio Blanco gold-silver mine.

More projects are in development, including the Loma Larga gold deposit, where INV Metals (TSX: INV: US-OTC: ILNLF) recently finished a positive feasibility study, and Chinese-owned Ecuacorriente’s $1.4-billion Mirador copper project.

Speaking in February, Ecuador’s Vice-Minister for Mining Fernando Benalcazar predicted that investment in mining will top $3.8 billion in Ecuador between 2018 and 2021, by which time it will account for 4% of the country’s gross domestic product and help reduce the South American country’s dependence on oil exports. However, Ecuador’s move into mining’s big time is not going smoothly.

Last June, a provincial court in southern Ecuador suspended all activity at EcuaGold’s Rio Blanco project after indigenous communities claimed that they had not been properly consulted on the project — a requirement under Ecuador’s international treaty commitments.

Then a municipality in the north of the country sued the government, although so far unsuccessfully, for handing out mining licences in protected forests.

Most worryingly for miners, industry opponents have added local referendums for mining on ballot papers in upcoming regional elections. The projects affected include INV’s Loma Larga project.

The wave of opposition culminated last November, when Ecuador’s influential indigenous movement organized a week-long march to the capital Quito calling for a ban on mining in the Amazonian rainforest.

This reflects change in Ecuador’s political climate since President Correa left office in 2017, after a decade in power.

During the commodity boom, the maverick, U.S.-trained economist channelled Ecuador’s oil windfall into infrastructure and social projects. But he also clamped down on opposition to his regime — intimidating critics, and suing media outlets.

His former vice-president and now successor Lenin Moreno has taken a different tack, allowing space for dialogue to preserve the country’s rocky democracy.

Given Big Oil’s patchy environmental record in Ecuador, some communities are anxious about the impact of a new capital-intensive, largely foreign-owned extractive industry.

But a decade ago, when indigenous communities raised concerns, President Correa sent in troops firing live rounds. The Moreno administration has been more hands-off.

What this means for Ecuador’s future as a major mining jurisdiction is yet to be seen.

According to Gonzalo Gonzalez of Quito-based law firm Gonzalez, Penaherrera & Asociados, mining has slipped down the list of priorities, as the government focuses on boosting a sluggish economy and restoring public finances, strained by the decline in oil revenues.

Last year Moreno dismissed Correa’s long-time Mining Minister Javier Cordero, seen as a strong advocate by the industry, and then, as part of an austerity drive to seek funding from the International Monetary Fund, demoted mining from a full ministry to a department within the Oil Ministry.

“They are more worried about current spending than future revenues,” the lawyer said.

Moreno’s lighter touch has meant that other branches of the state have attacked a favoured sector.

In January, Ecuador’s General Comptroller denounced serious breaches in the 982-million-tonne Llurimagua copper project, a joint venture between state mining company ENAMI EP and Chilean counterpart Codelco, which could trigger the annulment of the concession.

Without a firmer hand from the centre, Ecuador could risk seeing promised investment in its mining sector bogged down in legal wrangles, Gonzalez warned.

But others are more sanguine. Despite the loss of the ministry, the government has shown other forms of support. Last year, it scrapped a controversial windfall tax, which would have taken up 70% of profits when metal prices soared, and eased regulations allowing companies to carry out prospective drilling without applying for a full environmental license.

“There may no longer be a standalone Mines Ministry, but the government remains committed to the industry, with a strong vice-minister for mines who has quickly earned the respect of the sector, and is well-positioned within the administration,” says John Youle, vice-president for corporate affairs at Lumina Gold.

Meanwhile, some of the mining industry’s legal difficulties will likely represent delays rather than outright cancellations.

A recently appointed Constitutional Court should clarify whether the proposed local referendums on mining are legally binding. The government and industry claim that they are unconstitutional, as the national government has sole responsibility for development of the country’s mineral resources.

Even if they lose that battle, there could be workarounds. The question on INV Metals’ Loma Larga project refers to only part of the site, meaning that at worst, an unfavourable outcome would imply the relocation of the processing plant, the company said recently.

Their optimism appears widely shared, as mining companies continue to advance projects in the country.

The interest in Ecuador among international mining companies is seen in the gathering battle to control Australian exploration firm SolGold (TSX: SOLG; LON: SOLG). The company, led by CEO Nick Mather, has estimated a resource of almost 11 million tonnes copper and 23 million oz. gold at its Alpala project in the north of the country.

Both BHP Group (LON: BHP) and Newcrest Mining (ASX: NCM) have acquired stakes in the company, raising the possibility of a bidding war for the firm. Ahead of that skirmish, SolGold has launched a takeover bid for Cornerstone Capital Resources (TSXV: CGP; US-OTC: CTNXF), which owns 15% of Alpala.

The industry’s recent challenges have not affected Newcrest’s appetite for the country. Already a major shareholder in Lundin Gold, the Australian firm signed option agreements in February for two exploration properties in southeast Ecuador with Cornerstone.

Other majors active in the country include Australian iron ore miners Hancock Prospecting and Fortescue Metals. Meanwhile, Anglo American (LON: AAL) and First Quantum Minerals (TSX: FM; US-OTC: FQVLF) have both entered option agreements to acquire projects controlled by Luminex Resources (TSXV: LR: US-OTC: LUMIF), a spinout from Ross Beaty’s Lumina Gold (TSXV: LUM: US-OTC: LMGDF).

Lumina is at the forefront of a second wave of mining companies looking for resources in the country. At its Cangrejos project, located in a former mining district near the coast, the company recently announced the discovery of a satellite deposit, Gran Bestia, which it plans to incorporate into a resource estimate scheduled for later this year.

“It may take some time for these issues to get totally resolved, but, in the meantime, the industry is continuing to invest,” Youle said.

— Based in Santiago, Chile, Tom Azzopardi is freelance journalist specializing in the resource industries.