The state of mining in Ecuador
Michael Schwartz reviews the state of mining in Ecuador, a country that is opening up to foreign investment.
Ecuadorean president Rafael Correa is a keen supporter of large-scale mining in his country. In recent years, the Correa Government has introduced several pieces of mining legislation to encourage investment. The Minister of Mines, Javier Cordova Unda, has also publicly pointed out the low cost of electricity in the country, especially compared with other Latin American countries.
Previously, there had been no ministry for mining and the Government had insisted on a punitive 70% windfall tax. That has changed under Correa. The country’s Mining Law was amended in July 2013 to distinguish between small-, medium- and large-scale operations. Mines generating up to 300t/d of mined material are regarded as a smaller scale operation and are only required to pay 3% fixed royalty. Operations mining between 301 and 1,000t/d qualify for medium operation status and a fixed royalty of 4%. Any mine generating more than 1,000t/d has to enter an exploitation contract with the Government, resulting in royalties of 5–8%, plus a windfall tax.
Among South American mining states, Ecuador is sometimes regarded as a late arrival and a greatly unexplored country. Diego Benalcazar, VP Corporate Development and Exploration at Odin Mining, articulates this viewpoint. ‘Ecuador had been an oil- and agriculture-based economy for the last four decades and had not been a traditional mining country. Now Ecuador is 100% committed to mining, especially when there are very few other income alternatives in times of a depressed economy and low commodity prices.’
A more historical opinion was expressed by Dynasty Metals & Mining’s VP Investor Relations Naomi Nemeth, ‘Mining has been part of the Ecuadorian economy for decades. Several Canadian companies had active exploration programmes in place prior to the introduction of the 2008 Mining Mandate, which suspended exploration activities until the new Mining Law was introduced in January 2009 and amended in July 2013 to establish the parameters for small-, medium- and large-scale mining. We don’t see this as a ‘delay’ on the part of Ecuador, but rather a change of thinking and administering the laws and regulations surrounding mineral exploration and extraction.’
In fact, Dynasty’s website points out that the Incas had been working gold and silver from the hills of Zaruma and that one of Pizarro’s force, Mercadillo, encountered the Inca mine and founded the town of Zaruma in 1549.
Dynasty also commented on the attitude of the Correa government, saying, ‘We believe that the current Government takes mining seriously as part of a healthy economy for the country. Dynasty and the Ministry of Mines continue to work cooperatively and we believe that the current Government is supportive of the extractive industries.’
One important factor is the question of foreign ownership. Benalcazar stated, ‘Under Ecuador’s Mining Law up to 100% foreign investment is allowed. This applies to every size of mining operation, whether that operation is production or exploration.’ Dynasty confirmed that it enjoys 100% ownership of its Zaruma project, with a 1% royalty going to the Ecuadorean government.
Fraser Institute assessments
Every year, Canada’s Fraser Institute surveys many of the world’s leading mining executives, using their views to compile an assessment of mining administrations (regions as well as whole countries) in terms of attractiveness for investment, mineral potential, government support, environmental requirements and several other factors.
For 2015, there were 109 of these administrations. In 2014, Ecuador had finished in the bottom 10 administrations, but made its way out of that section during 2015 to finish 92nd. While Chile (11th), Peru (36th) and Mexico (37th) are the most attractive jurisdictions in the region for investment, Ecuador, in the words of the survey, ‘experienced the largest improvement in Latin America and the Caribbean this year [...] and improved investor perceptions in a number of areas, including infrastructure (+19 points), availability of labour and skills (+6 points), and uncertainty concerning disputed land claims (+6 points).’
If senior executive responses are typical, Ecuador has a long way to go until it is equal with Mexico, let alone Chile. One concern expressed was regarding property, ‘It is difficult to be confident about the ownership of property given the mining recorder laws and process.’
Then there were concerns regarding time-scales, taxation and bureaucracy. Responses noted the extensive period of time required to get approval for a drill permit, the fact that import taxes have been raised to protect national production, with a 5% tax on capital export, the new capital gains tax enforced last year, and a difficult bureaucratic process.
More positively, one CEO respondent commented that ‘the President of Ecuador has expressed publicly his support for the mining industry. He created the Mining Ministry to more closely oversee the requirements of the industry. These types of statements have a great impact on the decision process of investors. However, his statements need to come with actions to be implemented in a short period.’
Major mining firms
The Cangrejos gold/copper project in Southern Ecuador is 100% owned by Odin, a Vancouver-based company that has been active in the country since 1987. Cangrejos is situated in the foothills of the Andes and the advantage of low altitude is enhanced by the mine being just 30km from both the Pan American Highway and the port of Machala, while deep-water commercial port facilities lie 40km away at Puerto Bolivar.
There is a minor problem at Cangrejos with artisanal mining, although this is being taken care of. Benalcazar explains, ‘Artisanal miners are a problem to a certain extent but there are legal mechanisms to stop illegal miners coming into concession areas. We do have good support from the Government and police force to control the situation.’
Finally, Odin is involved in Corporate Social Responsibility (CSR), as Benalcazar confirms, ‘We do have a very active programme with the community, based on collaboration through several projects. The most important is the aid we supply for growing high-quality cocoa. Ecuador's chocolate is recognised as the best quality in the world.’
Dynasty wholly owns three mining exploration areas in Ecuador. Its focus is on the Zaruma Gold Mine, which began commercial production in October 2013. Dynasty also has two non-producing exploration assets, the Jerusalem and Dynasty Goldfield projects.
Zaruma lies in southern Ecuador, within a significant, high-grade goldfield, having previously produced over 5Moz of gold. Since 2003, both processing and mining have been available at Zaruma. A preliminary assessment indicates a 15-year mine life, based on current operating and financial metrics. Five concessions at Zaruma have been granted small-scale mining licences, meaning mining can reach 1,500t/d.
Nemeth commented on artisanal mining, saying, ‘Because the Zaruma Mine is located in a known mining area where there are several active operations, artisanal mining is less of an issue than it may be for other companies in more remote areas.’ She also spoke about CSR, saying, ‘Dynasty regards CSR as a prudent business practice, whether mandated or not. Dynasty has been involved in or has contributed to community projects over the years that it has been operating the Zaruma Mine.’
Just how much progress has been made by those investing in Ecuadorean mining was brought home at the recent PDAC conference and exhibition in Toronto. Not only was a whole day devoted to a seminar on Ecuador, but companies involved with the country were also in abundance among the investor areas.
One such exhibitor was Sol Gold, with its 85% interest in Exploraciones Novomining SA (ENSA), which, in turn, holds 100% of the 50km2 Cascabel concession. Based 180km north of Quito, the primary target is porphyry copper-gold. The region in question lies in the mineral-rich Andean Copper Belt, but relatively little of the region has been explored. Sol Gold’s CSR is varied, taking in coffee and lemon cultivation, an agricultural nursery and an athletics festival.
Ecuadorean mining is changing beyond all recognition in terms of its extent and its perception by the mining community. A comment was made by a speaker at last year’s MineLatinAmerica event in Toronto that only 5% of Ecuador had been explored for minerals – this opinion is no longer tenable.