A GOLDEN OPPORTUNITY

Ecuador 2012 | ENERGY & MINING | REVIEW: MINING

Once little known by foreign investors, the mining sector is now poised to take off with major international players scrambling to invest in the country's reserves of copper, gold, and other minerals.

With its strategic geotectonic and metallogenic setting, Ecuador has significant mineral resource potential. Deposits of gold, silver, copper, titanium, and silicon have recently been discovered, all of which represent important resources for national development. Although Ecuador has no significant mining industry at present, exploration studies have determined that the greatest mining potential is located in the Amazonian provinces of Morona-Santiago and Zamora-Chinchipe. Overall, the country is considered to have mineral reserves worth $185.4 billion at current international prices. That is a sum worth more than seven times the government budget for 2012. In early 2010, the National Secretariat for Planning and Development (SENPLADES) announced that the projects located in these two provinces were among the priorities for national investment.

In January 2009, the country passed a new Mines Law to promote investment and growth in the mining industry. In an interview with TBY, Wilson Pástor, Minister of Non-Renewable Natural Resources, explained that unlike the oil sector, “where we have extensive experience and capacity and have signed contracts for service provision with two state companies, we are beginners in the mining sector."

About 20 projects in Ecuador are in the advanced exploration stage prior to the signing of the contract and the exploitation of gold, silver, and copper on a large scale. The most advanced is Río Blanco, located about 40 kilometers west of Cuenca and owned by International Minerals. Having concluded a positive feasibility study in January 2008, International Minerals is preparing to build a seven-year $120 million gold and silver mine in Río Blanco. “Bearing in mind the emblematic projects in the country, the exploration stage usually lasts about 15 years. To maximize the benefits of the resource, we must begin dynamic exploration and investment," explained the Country Manager of International Minerals, Hernán Moreno, in an interview with TBY.

There are three other strategic projects in the advanced exploration phase: Fruta del Norte (Kinross Aurelian Ecuador); Mirador (EcuaCorriente); and Panantza San Carlos (Explorcobres). Nevertheless, mining analysts are pinning their hopes for Ecuador's mining future on Kinross Gold Corporation, the only major company that is a player in Ecuador. “This is the first time that Ecuador has been an attractive market for investments in mining, which brings a lot of challenges," said Kinross' president, Eduardo Flores, in an interview with TBY. “Although it is an intensive business in terms of capital requirements and operating costs, mining can help to fill the investment gap that we are currently seeing in the Ecuadorean economy."

In September 2008, Kinross acquired Aurelian Ecuador, a company founded in 2003 by two Canadian geologists who discovered significant reserves of gold in Fruta del Norte. Kinross Aurelian Ecuador has estimated an investment of $1.1 billion for the development of Fruta del Norte from 2011-2016. In December 2011 Kinross and the Ecuadorean government were close to an agreement over the development of Fruta del Norte, but a change in market conditions led to a last-minute halt to negotiations. The Chinese company EcuaCorriente quickly took advantage of the situation and, in March 2012, it became the first to sign a large-scale mining contract with the government of Ecuador. The agreement will bring in $4.5 billion in revenue for the government and take the current price of copper above $4 per pound. In an interview with TBY, Li Dongqin, President of EcuaCorriente, explained that “there was a need for both parties to reach an agreement. For Ecuador, there was a desire to open the sector and obtain more resources for the development of the country. On our part, we sought to obtain more natural resources for the development of the industry."

EcuaCorriente has been exploring copper deposits in Ecuador for over 10 years, and during this time has invested over $80 million. The contract for the Mirador field in Zamora-Chinchipe, which has estimated copper reserves of 4.7 billion pounds, will see an investment of $1.5 billion over the first five years, and is expected to generate $20 billion total, $5.4 billion of which will be received by the government. The state share will be 52% of income, higher than similar mining operations in Chile (36%), Peru (32.9%), and Mexico (30%), but less than the 85% that Ecuador receives from oil exploitation. EcuaCorriente, which will start production by late 2014, has committed to spend $100 million in advance mining revenue on development projects in neighboring communities. Nevertheless, after the contract was signed, indigenous protestors claimed that they had not been sufficiently consulted prior to the agreement. In an interview with TBY, Jorge Glas, Minister of Coordination of the Strategic Sectors, explained that “the constitution obliges us to keep at least 50% of mining income for the state, with a tremendous respect for nature. These resources will be invested by the government in infrastructure and development projects in the towns of the areas affected by the projects. It is a new issue in Ecuador; we are at the beginning, but now there is a clear legal framework. The take off of mining in the country is going to be very important." Most projects are located in the environmentally sensitive Amazonian regions. But for Hernán Moreno, Country Manager of International Minerals, the situation represents “a big opportunity for the country. The mining industry has developed profitably worldwide. Ecuador offers the opportunity to start mining in good conditions; there are regulations and control mechanisms that enhance our work. We shouldn't let this opportunity pass, but we are open to many possibilities that may result from the negotiations."

Small-scale metal mining has historically been carried out in the region since Spanish colonization. Currently, some communities in the Andean highlands, the coastal region, and the Amazon basin continue to pan for gold using traditional methods. However, the importance of small- and medium-scale mining for the government, measured in terms of annual concession fees, continues to be minimal. Institutional promotion of large-scale metal mining began in the 1990s, after the Mining Law was passed and implemented in 1991. “Not long ago, mines in Ecuador were being illegally exploited without permission or environmental controls," Fabián Rueda, General Manager of The National Mining Company (ENAMI), explained to TBY. “ENAMI is responsible for regulating and eliminating illegal mining, fostering technical and environmentally sustainable methods, and favoring communities by offering them a source of regular employment."

The Ecuadorean government aims to be a direct participant in the mining sector to ensure the management of key resources for the country. However, at present, the state-run ENAMI lacks the know-how and technology to build large mines, which means that, for the time being, Ecuador needs foreign investment to get the sector going. Negotiations are being held with South Korea and Iran to participate in developing the industry. Iran has offered $30 million in seed capital, and South Korea is considering 14 mining projects in Ecuador. They are both interested in developing copper, zinc, uranium, and gold reserves. “we have always been interested in active capital participation, and we invite capital investors who are interested in these projects," confirms Fabián Rueda, General Manager of ENAMI.