Ecuador slams on the brakes

Ecuador’s burgeoning mining industry has been dealt a serious blow with the passing of a new mining mandate.

TSX-listed miners in the country say they were blindsided by the news that a constitutional assembly had overwhelmingly passed a mandate that cancels 88% of all concessions, limits companies’ holdings to a maximum of three concessions and suspends all mining activity for 180 days while the government drafts a new mining law.

The news came as a surprise for miners, both because the small South American country of 14 million people has little mining experience and is in need of foreign dollars and expertise, and because, hitherto, President Rafael Correa — an economist by training — had expressed an understanding of the situation.

Whether or not the announcement has dealt a fatal blow to foreign investment in the country — or just erected a hurdle that foreign capital will learn to flow over — remains to be seen. What is certain, however, is that the country’s reputation in the eyes of investors has been damaged.

“Any expectation that Ecuador is moving sharply toward development of the country’s mining industry has been shattered by the measures contained in the mandate approved by the constituent assembly,” wrote John Hayes, an analyst with BMO Capital Markets in his most recent report.

In Toronto on the news, the hardest hit companies were: Aurelian Resources (ARU-T, AUREF-O), down 30% to $5.14; Corriente Resources (CTQ-T, ETQ-X), off 11% to $4.11; EcuaGold Resources (EGR-V, ECAUF-O), 19% lower at 9; and Dynasty Metals & Mining (DMM-T, DMMIF-O), which slid 34% to $4.05.

For Aurelian, the news is just the latest in a long string of share-price-depleting edicts from the government. Its market cap has come off quite a bit since the end of March, when its shares were closing as high as $9.80; at presstime its shares were trading at just $3.71.

Aurelian had built up its original market value on the back of its discovery of the country’s largest gold deposit, Fruta Del Norte, which boasts an inferred resource of 13.7 million oz. gold and 22.4 million oz. silver.

If a silver lining can be found for Aurelian, it is that Fruta Del Norte is situated on a single concession, so should the three concession limit hold up, the company would maintain its claim.

Iamgold (IMG-T, IAG-N) — one of the first Canadian-based miners to establish a presence in the country about 10 years ago — has lost roughly 11% since the news was released. Its shares were trading at $6.60 at presstime.

The company is developing the Quimsacocha project, which currently covers four concessions. Company spokesperson Lisa Doddridge says Iamgold president and CEO Joseph Conway is currently in Ecuador to meet with Correa and find out more about the implications of the mandate.

Both Iamgold and Aurelian say they have completed enough work to finish prefeasibility studies at their projects without doing any additional drilling. Both estimate that those reports will be finished by July.

And while the relatively early stages of Aurelian and Iamgold’s projects afford the companies some time in which, hopefully, many of the issues can be worked out, Dynasty Metals & Mining has no such luxury.

The company’s Zaruma gold project was slated to go into production at the beginning of July, but now its future is uncertain.

Director of business development for Dynasty, Bill McCartney, says the government has not directly contacted the company with regards to how its project startup date will be affected.

“The government has been helpful up to this point. We didn’t see this coming,” he says. “As a company, we have to be active listeners right now to get a clearer understanding of their intentions in the long term and make some serious decisions based on that.”

While Dynasty tries to parse out what it all means for Zaruma, the company could also be left with the unenviable task of trying to decide which three of its 125 concessions it will hold on to.

Meanwhile, Correa continues to insist he is not against mining but is merely looking to introduce measures that will encourage socially, environmentally and economically responsible mining. The latest developments have raised the fear that the nationalization of key mining assets could work its way onto the agenda. In particular, some observers are worried about a provision of the mandate that calls for the creation of a new state-owned mining firm.

“The creation of a state mining company begs the question as to what role it would play with major projects such as Fruta del Norte,” Hayes wrote. “The mere existence of this company is likely to cause those on the left of the political spectrum opportunity to consider and perhaps push for direct participation in mining ventures. Betty Tola, a member who introduced the bill, said the seized concessions would be transferred to this entity.”

But the Mines and Oil Minister Galo Chiriboga rejected the notion of a national mining company interfering with projects currently held by foreign mining companies. Chiriboga told Dow Jones Newswires that a new state-run mining company will not take over revoked metal concessions, but will instead focus on mining matter to make construction materials like cement.

In his most recent research report, Dundee Securities analyst Mark Smith shows faith in the sentiment expressed by Chiriboga.

“The government has made it clear in previous statements that it is not considering nationalization. The creation of the government mining company as discussed in the mandate is that it is to focus on industrial minerals — not metallic mining,” he wrote in an April 21 report.