Ecuador is about to take a giant leap toward becoming a big gold and copper exporter, but President Rafael Correa must soften his stance toward investors if he wants the country to realize its full mining potential.
Despite having a bounty of copper, gold and silver resources, the Andean country has no mining industry to speak of and the leftist president has effectively delayed mining investments for years while redrawing rules for the sector.
However, months of negotiations described by industry and government sources as very difficult are set to bear fruit before the end of the year in deals with Kinross Gold Corp. and Ecuacorriente, two Canadian miners.
Toronto-based Kinross plans to develop Ecuador’s largest gold mine, Fruta del Norte, while Ecuacorriente – an affiliate of Richmond, B.C.-based Corriente Resources, which is Chinese-owned – will work on the Mirador copper mine.
According to the Ecuadorean government, they plan to invest some $3-billion (U.S.) in the next two-and-a-half years, which would let the government make the economy less dependent on oil exports.
The deals call for the miners to pay about half of their income, after production costs, in taxes and royalties. That would allow Mr. Correa to increase social spending – the key to brisk economic growth, and his high popularity ratings.
His government has said the agreements would be a template for future mining deals that should allow Ecuador to develop a large mining industry in which the state will have a great degree of control and pocket most of the profits.
“We understand that the government is concerned about getting as much benefit as possible ... but they have to understand that in a risky sector this could dampen the inflow of foreign investment,” said Santiago Yepez, president of the country’s mining chamber.
The companies have agreed to pay high royalties – between 5 per cent and 8 per cent – and to pay them before their projects come on-stream. Mining sources said Ecuador expects some $150-million from these payments.
“The conditions allow us to live. They could be better but we can live with them,” Mr. Yepez said, adding that miners welcomed the deals because they implied clear rules for the game.
However, he said that in addition to the operating agreements, companies want to negotiate investment-protection contracts that would give them “clear guarantees.”
Ecuador is set to start negotiations for contracts with Arizona-based International Minerals over its Rio Blanco gold-silver project; with Ecuacorriente over its Panantza-San Carlos copper deposit; and with Toronto-based Iamgold , which plans to develop the Quimsacocha gold-copper-silver mine.
Those three are in relatively advanced stages of exploration, but junior miners have about 15 other exploration projects and need to secure financing from investors.
“Depending how high the rope ends up being, maybe it’s still worth it for Kinross; but for a smaller miner, where is the profit? I think that it’s really going to discourage smaller miners,” said Risa Grais-Targow, an analyst at the Eurasia Group consultancy.
However, state-run miner Enami lacks the know-how and technology to build large mines, which means for the time being Ecuador needs foreign investment to get the sector going.
“Because the mining sector is so embryonic, the government’s statist attitude does not in itself constitute a fatal problem in the medium term,” said James Lockhart Smith, a senior analyst with risk analysis company Maplecroft.
“The government can only take a tougher line with mining companies once they have invested enough time and money to be loss-averse and hence committed to staying in the country even when things get worse.”
Miners in Ecuador may be relieved that contracts will finally be signed. But they are also wary about Mr. Correa’s hostility toward foreign investors, and it is hard to find executives willing to discuss the issue, even off the record.
Mr. Correa is part of a South American leftist alliance that includes presidents Hugo Chavez of Venezuela and Evo Morales of Bolivia, who have changed laws to boost their power and increase state revenue from foreign investors.
Mr. Correa redrafted contracts with oil investors last year, and while talks with miners were in full swing, his party introduced a bill calling for state ownership of mining infrastructure and technology when the contracts expire or if they are rescinded. The bill has not yet been approved.
“I’m actually surprised that he’s been playing hardball to the extent that he has,” Ms. Grais-Targow said. “This is a sector that he wants to and sensibly needs to develop giving that oil production is going to peak and then decline.”
Although the government says foreign miners are eager to invest, some analysts believe Correa’s attitude toward miners means they will constantly have to watch their backs.
“To some extent, once they start, the project is going to be a race against time for them to get their money’s worth out of these mines and then move out, because they are keenly aware of the risks of doing business there,” Ms. Grais-Targow said.