Exactly one year ago, in an article I wrote for MINERGIA with a similar title, I predicted that 2016 would be an important year for the mining industry in Ecuador. This prediction came true.

Despite the general crisis experienced in Ecuador, the mining industry has seen extraordinary progress, in both the public and prívate sectors, which places the country on the radar of international investors. The main highlights during 2016 include the signing of an exploration contract between the Republic of Ecuador and Lundin for the development and exploitation of Fruta del Norte; the exceptional results of the Cascabel project of ENSA, owned by SolGold (SOLG); the expectation created on the international market due to the merger of Odin with Ecuador Gold and Copper, forming a new company known as Lumina Gold Corp. (LUM), headed up by mining legend, Ross Beaty; and the opening of the mining cadaster by the Mining Ministry in order to grant new areas. Additionally, Australian and Canadian mining exploration companies operating in the country have closed financing operations in recent months, for example SolGold (SOLG), Salazar Resources (SRL), Cornerstone (CGP) and Lumina (LUM) In general, 2016 was a year full of positive news, providing lots of hope for 2017, a year with looming difficulties due to the country’s elections.

Ever since the promulgation of the Mining Mandate in 2008, no metallic mining concession has been issued for industrial mining, due largely in part to the legal requirement for a bidding process to issue new concessions, which is atypical to traditional mining jurisdictions. The current mining authorities, led by Minister Javier Cordova, have put forth great efforts to foster the granting of new areas to individuals, navigating the difficulties and limitations of the Ecuadorian regulatory system. The process being carried out by the Mining Ministry has received overwhelming acceptance on the market, as more tan 1,900,000 mining hectares have been reserved, of which 650,000 hectares have been granted, representing committed investments for more of US$120,000,000 for initial exploration(2).

Regarding legal aspects, there were two legal matters in 2016 that were really important for investors. In order of importance, in my opinion, they are: The official demise of the Mining Manclate on April 6, 2016. Through Ruling No.002-16-SAN-CC, the  Constitutional Court handed down a sentence in two cases of non-compliance, which resolved that Constitutional Mandate N° 6 (otherwise known as the Mining Mandate), published in Official Gazette N° 321, dated April22, 2008, was left null and void as of the promulgation of the Mining Law issued on January 29, 2009.

This judicial and official acknowledgement of the repeal of the Mining Mandate is essential for the development of the industry, as there was never legislation to repeal it, whatsoever, and there were individuals in the public sector that clamed that its standards remained in effect. We must remember that the Mining Mandate, issued by the Constitutional Assembly in 2008, extinguished the ~  mining rights of more than 2.000 concessions for causes that were not included in mining legislation at the time, thereby creating a standstill that pushed the industry to the brink of collapse. The ruling by the Constitutional Court is a key piece in the development of an environment with juridical security, as demanded by any foreign investor.

More news that must be mentioned is the reimbursement of VAT for mineral exporters. In my opinion, this is one of the most important amendments for the mining industry in recent times. Mineral exporters were impeded from recovering the VAT paid during the production process, as permitted for all exporters of any other industry, due to a tax standard that was originally created for the petroleum industry and subsequently included for the mining industry. Through the reforms introduced by the Organic Law of Incentives for Public-Private Associations and Foreign lnvestment (APP), mineral exporters can now recover VAT paid during operations as of January 1, 2018. Despite the future date for application of this benefit, there is no doubt that this will make investments more attractive in small-, medium- and large-scale projects in our country.

Nevertheless, there is still a 1ot of work to be done. Essentially, the true interest of the State attempting to prevent concessions from falling into the hands of those who are not willing to perform activities in the concessions is not achieved by ignoring the realities of the industry, but rather by fostering conditions that attract the best, serious, responsible miners, and this is achieved by treating them as partners, understanding their needs and acknowledging their legitimate interests in the law. This is how miling is carried out in Chile, Canada and Peru.

Additional measures must be taken in the future to improven and amend the rules of the game and the economic conditions in Ecuador, in an attempt to make mining investments more attractive. For example, there must be modifications to the Mining Law in order for mining rights to be deemed a real right, as is the case in all countries where this industry is developed, and not a personal right, as is the case in Ecuador. The bidding and auction process must be eliminated, which is not successful in any mining jurisdiction. Additionaly, the cost of conservation patents must be reduced to amounts that are competitive within the region. Finally, the maximun term for exploration and other phases must be eliminated, as this is contrary to the logic of all mining projects, which cannot be dependent upon timelines set forth in a law, but rather are based on the geological conditions of the area and the international market of the commodities.

The fiscal model for the industry must be flexible. lt is necessary, for example, to eliminate the windfall profit tax and the recently created capital gains tax, as these are additional burdens on an already excessive tax system, which are not even comparable with the parameters of the region when dealing with mining. I admit that the government has made efforts to mitigate the impact of the windfall profit tax and the sovereign adjustment; however, due to the complexity of the appicable formulas, investors have concerns regarding the effectiiveness of the model.

Timely reforms and various derogatory provisions (a few pages of text) would be enough to get rid of these obstades. lf the new government believes that mining is the only means of attracting large amounts of foreign investment, which are essential for an econonny based on the Dollar and with low oil prices, I am sure that we can replicate and even surpass the positive progress we had in 2016. Hopefully this comes to fruition.

“Despite the general crisis experienced in Ecuador, the mining industry has seen extraordinary progress, in both the public and private sectors, which places the country on the radar of  intemational investors”

MINERGIA Magazine 10 – Marzo 2017

Mining industry

1. What is the nature and importance of the mining industry in your country?

The quality and quantity of Ecuadorian mineral resources is very similar to that of its neighbours, such as Chile and Peru, who have managed to develop their mining potential. However, most of Ecuadorian territory is still unexplored. In fact, according to the Financial Times, Ecuador has some of the most attractive gold, silver and copper deposits in Latin America, nevertheless, production has been almost non-existent. There are many reasons for the delay in developing this industry, but if we have to choose the main reason, we would point to erred public policy regarding the mining industry and the absence of legal security, owing to legislation largely inspired by the oil industry. In terms of the mining industry’s importance in Ecuador, considering the tendency for decreasing oil prices and given the fact that traditionally Ecuador is an oil dependent country, we do not see any industry other than mining capable of attracting investments to develop the country.

2. What are the target minerals?

The principal minerals targeted in Ecuador are gold, silver, copper, lithium, rare earth, potash, iron, uranium and coal. Ecuador has a much wider geological potential but, to an extent, the minerals targeted depend on global trends and the interest of individual companies.

3. Which regions are most active?

The most important gold and copper deposits discovered to date are located in the south-east of Ecuador, principally in Zamora Chinchipe, Morona Santiago, Azuay and El Oro provinces. However, it is also important to consider Imbabura province in the north of Ecuador since there is also considerable mining potential in this area. There are nonmetallic mineral deposits in the south of the country and in particular in the province of Azuay.

Legal and regulatory structure

4. Is the legal system civil or common law-based?

The Ecuadorian legal system is civil law-based.

5. How is the mining industry regulated?

According to the Constitution, the state owns all minerals and nonrenewable natural resources within the national territory. These minerals and resources are considered as strategic sectors, which are managed, regulated, controlled and governed by the state. The state can, on an exceptional basis, delegate the development of extractive sectors to individuals or entities by granting mining concessions for a term of 25 years. Thus, the concessionaire will have the exclusive right to explore, exploit, process and sell any metallic minerals within the concession. When a project is considered in the range of large-scale mining, prior to the commencement of the exploitation phase, the concessionaire must first sign an exploitation contract with the Ecuadorian state. This contract is not needed when a project is in the range of artisanal, small or medium-scale mining.

The Mining Act defines artisanal mining as that which is carried out for the subsistence of family units through the use of manual equipment or portable devices.

The daily production ranges for artisanal mining are:

• for metallic minerals: up to 10 tonnes in underground mining and up to 120 cubic metres in alluvial mining;
• for non-metallic minerals: up to 50 tonnes; and
• for construction materials: up to 100 cubic metres in alluvial deposits and 50 tonnes for hard rock open-pit mining.

The daily production ranges for small-scale mining are:

• for metallic minerals: up to 300 tonnes in underground mining, up to 1,000 tonnes in open-pit mining and up to 1,500 cubic metres in alluvial mining;
• for non-metallic minerals: up to 1,000 tonnes; and
• for construction materials: up to 800 cubic metres for alluvial terrace mining and up to 500 tonnes for open-pit mining.

The daily production ranges for medium-scale mining are as follows:

• for metallic minerals: 301–1,000 tonnes in underground mining, 1,001–2,000 tonnes in open-pit mining and 1,501–3,000 cubic meters in alluvial mining;
• for non-metallic minerals: 1,001–3,000 tonnes; and
• for construction materials: 801–2,000 cubic metres for alluvial terrace mining and 501–1,000 tonnes for hard rock open-pit mining (quarries).

Any range that exceeds those established for medium-scale mining is considered as large-scale mining.

By way of amendments to the Mining Law introduced on 16 July 2013, the process for obtaining environmental permits to carry on mining activities was simplified (see question 35).

6. What are the principal laws that regulate the mining industry? What are the principal regulatory bodies that administer those laws? Were there any major amendments in the past year?

Overall, there are several legal provisions regarding the mining industry within the Constitution. Added to that, there is the Mining Act that was enacted on 29 January 2009, further modified by the amendment passed on 16 July 2013 as well as the General Mining Regulations and the Small-Scale and Artisanal Mining Regulations that were promulgated on 4 November 2009. There is also the Mining Environmental Regulations for Mining Activities promulgated on 27 March 2014.

The principal regulatory body that regulates and controls the industry is the Mining Ministry, created in February 2015, which replaced the former Ministry of Non-Renewable Natural Resources (MNRNR). The other relevant bodies are the Ministry of the Environment, the Mining Regulation and Control Agency (ARCOM) and the National Geological Mining Investigation Institute (INIGEMM). In addition, with the Mining Act, the national mining company (ENAMI-EP) was created, which is responsible for developing state mining projects by itself or in association with private or public companies, or both.

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Reproduced with permission from Law Business Research Ltd. Getting the Deal Through: Mining 2017, (published in June 2017; contributing editors:  Michael Bourassa and John Turner, Fasken Martineau) For further information please visit https://gettingthedealthrough.com/area/22/mining-2017

LAW AND PRACTICE

1. General Structure of Mineral Ownership and Regulation

1.1 Ownership of Mineral Deposits

1.2 Regulation of Mining Industry

1.3 Administration of the Mining Industry

2. Required Authorisations and Permits

2.1 Requirements to Conduct Prospecting

2.2 Requirements to Conduct Exploration

2.3 Requirements to Conduct Mining

2.4 Environmental Requirements to Conduct Exploration and Mining

3. Duties and Rights Derived from a Mining Title or Concession

3.1 Rights Granted by Mining Title to Holder

3.2 Duties Acquired by Title Holder

3.3 Right Acquired by Title Holder

3.4 Duties Acquired Towards Landowners

3.5 Duties of Title Holder at End of Life

4. Environmental

4.1 Principal Environmental Laws

4.2 Bodies of Environmental Competence

4.3 Environmental Obligations

5. Miscellaneous

5.1 Special Rules or Taxes

5.2 Restricted or Excluded Zones

5.3 Rights of Indigenous or Ethic Communities

5.4 Unilateral Termination of a Mining Title

5.5 Taxes of Royalties

MINING 2018

See the link available online: 

https://practiceguides.chambersandpartners.com/practice-guides/mining-2018/ecuador

On June 21, 2018, the National Assembly of Ecuador approved the final draft of the Law for Production Development, Investment Attraction, Employment Generation and Fiscal Stability (hereinafter “Production Development Law” or the “Reform”). This law is geared towards the economic sector and modifies various other pieces of legislation. The most significant changes that have a direct impact on the mining industry are summarized hereunder:

1. Modification of Capital Gains Tax

The Production Development Law modifies the relevant part of the Organic Internal Tax Regime Law that establishes a 22% rate on earnings obtained from transferring share capital of a company or rights arising from concessions, for both residents and non-residents of Ecuador.

Currently, the Reform is confusing and contradictory. Nevertheless, we expect the President’s Office to correct this ambiguity. Based on our review, it is evident that the Reform divides the capital gains tax into two scenarios: i) when the gains arise for a company residing in Ecuador, a progressive table ranging from 0% to 10% will be applied to the earnings generated from said operation; or, ii) when said gains are obtained by a company that does not reside in Ecuador, the tax rate will always be 8%.

By all means, the Reform substantially mitigates the current capital gains tax, which was heavily criticized by the mining industry for being excessive.

2. Elimination of the Windfall Profit Tax:

The Reform includes one of the most widespread petitions throughout the industry, which is the elimination of the Windfall Profit Tax.

This tax levied a rate of 70% on the difference between the sale price of the metal extracted from the ground and the base price established in the Mining Exploitation Contracts. Although modifications were made to the regulatory standards in order for the calculation of this base price to have a reduced effect on investors, the tax in and of itself reflected the State’s intolerance for investors to earn a fair profit based on the risk that they take on in projects that require significant investments.

Without a doubt, this is the best news the mining sector has received in a long time.

3. Modification to Royalties:

In accordance with the Reform, mineral royalties will range from 3% to 8%, calculated as NSR (Net Smelted Return), as set forth in the applicable standard.

Currently, the royalty starts at 5% for largescale mining. Said percentage has been negotiated in the signed exploitation contracts. Therefore, it would not be surprising if investors establish reduced, more convenient royalties (3%) with the State in future exploitation contracts.