Ecuador update: many questions, a few answers (June 23, 2008)

VANCOUVER–On June 9, fifty-two days after a mining mandate in Ecuador suspended all mining activity while the government drafts new mining legislation, the government began transferring the country’s mining concessions to the state.

The move, entirely expected as part of the new law, was one of few clarities to surface about what the new law will mean for foreign companies working in Ecuador. The mandate of April 18, supported by an overwhelming majority in the constitutional assembly, cancelled 88% of all concessions, limited companies’ holdings to a maximum of three concessions, and suspended mining activity for 180 days.

Lawyer Raul de la Torre, a partner in the leading Ecuadorian law firm Perez, Bustamante& Ponce, has been following the situation from within the country and in a recent article in LatinLawyer, outlined what he’s managed to discern so far.

Torre writes that administrative charges will increase to US$100 per mining hectare. It is unclear whether this refers to a onetime fee or an annual charge. Either way, it’s a considerable cost — Aurelian Resources’ 95,152 mining hectares (951 sq. km) would cost the company US$9.5 million per payment, for example. Dynasty Metals & Mining is in a similar position, holding 969 sq. km that could cost US$9.7 million.

A second new piece of insight from Torre is that the new law will include a 3-5% royalty. He describes the royalty as “payment to the state for exploitation of mineral resources.” Whether the tax would be a net smelter return royalty or take another form is not clear.

Thirdly, Torres writes “any environmental damage from a mining concession would be cited as cause for contract termination.” Since mining damages the environment by its very nature, this clause could give the government wide-ranging power to cancel mining rights and thereby take back deposits.

In addition, the role of the state mining company being created under the law is still a subject of great debate. Torres says the national company will oversee development of any projects reserved for the state. The question is which those projects will be.

One of the members of the national assembly who introduced the bill, Betty Tola, said in the past that the new entity would hold the concessions invalidated through the April mandate. That mandate declared all mining claims in which there had been no exploration investment before the end of 2007 invalid. Similarly, concessions for which no environmental impact assessment had been submitted by the end of 2007 were declared void, as well as any concessions within natural protected areas. Finally, concessions carrying unpaid fees were invalidated. There is to be no compensation for cancelled concessions.

Concessions in those categories add up to 88% of the country’s issued mining claims. Until recently, however, the government had not formally seized invalidated claims. According to Torre, the process of transferring invalid claims into the new national mining company has begun.

While that process sounds dire, in an April interview with DowJones Newswires, Ecuadorian Mines and Oil Minister Galo Chiriboga rejected the notion of the new national mining company interfering with projects currently held by foreign companies. He indicated that the state-run company would focus on industrial mining, that is, mining matter for construction materials such as cement.

The three-concession limit remains another significant point of confusion. The mandate officially limited any one person or company to holding only three mining concessions. Chiriboga has since suggested that this limit could be raised.

The limit could stop many foreign companies from proceeding with their projects. Dynasty was slated to take its Zaruma gold project into production at the beginning of July; the 180-day mining moratorium delayed that, of course, but the three-concession limit could halt it permanently. Dynasty holds 125 concessions in Ecuador.

Along the same lines, Corriente Resources holds some two dozen concessions in the country, with total resources of 25 billion lbs. copper.

Aurelian’s Fruta del Norte deposit is, luckily for shareholders, situated on a single concession. However, the company still holds 39 concessions in the area, so as to control the possible deposit extensions.

The questions are still far more plentiful than the answers but Torre’s insight gives a window into the law under development. The new law will be published on June 27.