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Ecuador 2013 | ENERGY & MINING | FOCUS: MINING

Ecuador's arrival on the world's mining scene has been fraught with delays as the government seeks to strike the right tax balance to encourage investors.

Having been poised to break onto the world's mining scene in 2013, the collapse of a major deal involving Canadian mining firm Kinross means the wait is not over. New amendments to 2009's unpopular mining reform could, however, set the ball in motion on the development of Ecuador's gold, silver, and copper wealth.

In 2009, mining reform introduced by President Correa saw the return of open-ended royalty payments, an increase in exploration and extraction fees and taxes—mining land usage fees skyrocketed from $1 to as much as $7—and the implementation of tough social and environmental regulations. The sector was to be reinvented, with 80% of mining concessions revoked and the remaining 20% suspended. Unfortunately for the government, investors didn't bite, and Ecuador failed to realize its ambition of diversifying its export basket through the exploitation of its mineral wealth.

In June 2013, another blow was struck to the fledgling mining sector, as Canadian miner Kinross decided to abandon negotiations over the $1.2 billion Fruta del Norte (FDN) project, preferring to take a $720 million charge to walk away from the concession to continuing down an unprofitable road. FDN boasts proven and probable reserves of 6.7 million ounces of gold and 9 million ounces of silver, with a further 3.6 million ounces of gold and 7.3 million ounces of silver inferred. The announcement came almost two months before an August 1 deadline on an extension to Kinross' exploration contract, surprising analysts. The move also shook confidence in the sector, with INV, a smaller Canadian mining firm that took over IAMGOLD's 3.3 million ounce Quimsacocha gold project near Cuenca in 2012 in a share deal worth $20 million, also announcing that it was considering pulling out of the project. Commentators now largely expect Chinese firms to take on the FDN project, although, at time of writing, no announcements had been made. It wouldn't be the first time the Chinese have become involved in Ecuador's mining sector, however, with a $2.04 billion contract signed with Chinese-owned Ecuacorriente in late 2012 for an open-pit copper mine.

The collapse in talks between Kinross and government officials also came just days before Congress approved amendments to the 2009 mining reform, in the government's latest efforts to tap the wealth of minerals that remain trapped underground. The changes include imposing an 8% ceiling on previously open-ended royalties, and a significant streamlining of the permit process, which had, beforehand, even held up the state-owned miner Enami EP. A 70% windfall tax is likely to make potential investors uneasy, however, despite a clause that means it won't come into affect until investment has been recovered on a project. The new amendments are aimed at easing the investment in medium-sized mines, although time will tell if the venture is successful.

Enami EP has 12 mining projects in its portfolio, all of which are at the exploration stage. Enami EP Manager, Fabián Rueda, told TBY he has high hopes for discoveries; “the countries in the Andes form part of a copper belt that originates in Chile, continuing through Peru and Ecuador on to Colombia, and that is why we have high hopes for discovering deposits." He is also bullish on the investment environment, having “seen interest from Chinese, South Korean, South African, and Canadian companies that want to enter the Ecuadorean mining industry." The firm is currently operating on a four-year plan, with each project having received $3 million for exploration work, with that figure to “increase to $8 million if everything goes according to plan." In the third and fourth years, funds for each project could be increased to $15 million, with each project requiring “$20 million to $30 million in investment over the next four years."

In August 2013, Enami EP also announced the creation of a joint venture with Chile's Codelco, the world's top copper producer. The joint venture will explore the Llurimagua copper reserves in the north of the country. Enami EP will have a 51% stake in the venture and is banking on pre studies that suggest deposits could extend for about 4,840 hectares. Mining could begin in 2017, while Enami EP is also hoping to explore two more copper projects, Telimbela and El Torneado, as well as iron and titanium reserves at the Tola Norte project. With the sector having had a turbulent June, the announcement of the joint venture will go a long way to convincing investors of the government's new, pragmatic approach to foreign investments in its metal mining sector. Whatever its approach, the government will also have to contend with environmentalists, who had reacted relatively well to the 2009 mining reform. A more liberal approach, they fear, could lead to overdevelopment and pollution, with anxiety compounded by the lack of a ban on the use of cyanide, despite the prohibition on mercury.

With around 50% of the country's export basket composed of oil, the time is nigh for Ecuador to diversify its external offerings. Following a slow year for FDI in 2012—Ecuador pulled in just $568 million of the $173.4 billion inflows to Latin America, down 5% on the 2011—The country's long-awaited arrival on the global mining stage couldn't be more crucial in proving to investors across the board that the Correa administration means business. With $5 billion banded around political circles as the figure that could be attracted in foreign investment terms if development on major deposits goes ahead, the haul could indeed be significant. However, with the new reform amendments catering mainly to medium-sized mines, Ecuador could have to play with the Dominican Republic, Guatemala, and Panama before it is allowed to frolic with mining heavyweights like Chile and Peru.