Daily News Friday, June 13, 2008

Ecuador update: many questions, a few answers

Vancouver – On June 9th, 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, has been one of
few clarities to surface about what the new law will mean for foreign
companies working in the small South American country. The mandate of
April 18th, 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. Since then, little else has been
Lawyer Raul de la Torre, 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 he 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 one-time fee
or an annual charge. Either way it’s a considerable cost – Aurelian
Resources’ (ARU-T, AUREF-O) 95,152 mining hectares would cost the
company US$9.5 million per payment, for example. Dynasty Metals &
Mining (DMM-T, DMMIF-O) is in a similar position, holding 96,900
hectares that could cost US$9.7 million.
A second new piece of insight from Torre is that the new law will
include a 3% to 5% royalty. He describes the royalty as “payment to
the state for exploitation of mineral resources.” Whether the tax
would be a net smelter 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 concessions in which there had been no
exploration investment before the end of 2007 invalid. Similarly, any
concessions for which no environmental impact assessment had been
submitted by the end of 2007 were declared extinct as well as any
concessions within natural protected areas. Finally, any 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 concessions. Until recently, however, the government had not
formerly seized invalidated claims. According to Torre, the process
of transferring invalid claims into the new national mining company
has now begun.
While that process sounds dire, in an April interview with Dow Jones
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 very 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 disable 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 (CTQ-T, ETQ-X) holds some
two dozen concessions in the country, with its 25 billion lbs. of
copper resource spread out among them.
Aurelian’s Fruta del Norte deposit is, luckily, situated on a single
concession. That being said, the company 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. All
should become clear when the new law is published on June 27.