Bordered by well-established mining destinations, Peru and Colombia, Ecuador is considered one of few as-yet untapped mineral regions in an otherwise relatively well-explored continent.
Like its neighbours, Ecuador is estimated to have sizeable extractable reserves, including antimony, iron ore, silver, and most notably, world-class copper and gold deposits.
However, a historically fractious relationship with the mining industry resulted in then-President Rafael Correa briefly instating a moratorium on mining in 2008, resulting in the country’s reserves remaining largely under-developed.
Now, however, the government is eager to rebuild the sector and has expressed a desire to more than double the value of contribution to the country’s struggling economy by 2021, which stood at less than 1% of gross domestic product in 2014.
Previously uneconomic terms dissuade foreign firms
Foreign mining firms have shied away from investing in Ecuador largely due to unattractive and risky fiscal terms.
According to Alex Bevacqua, global head of metals and mining consulting at Wood Mackenzie, previously, some aspects of the country’s mining code were simply ‘nonstarters for the industry’. This includes a windful tax of 70% on ‘excess profits’ which made it virtually impossible for firms to obtain project financing.
Similarly, mining companies were hampered by a quirk in Ecuador’s constitution that requires so-called ‘sovereign adjustment’ from projects. This effectively guarantees that the government will receive at least 50% of the ‘benefits’ of all mining projects.
However, the ‘adjustment’ typically kicked in well before projects had recovered their investment, effectively rendering the entire industry uneconomic, says Bevacqua.
“These terms, in general, came into effect because the country had applied rules and policies from the oil sector to the mining sector, without adjusting them to reflect the differences between mining and oil and gas,” he explains.
Making changes to win back investment
As a consequence of the unattractive fiscal environment, investment in Ecuador’s mining sector stagnated. In fact, Ecuador received less foreign direct investment per capita in 2013 than any other country in Latin America. It also suffered heavily as the oil price plummeted.
In 2015, keen to turn things around, the government hired Wood Mackenzie to provide recommendations on how to win back firms.
To do this, Bevacqua says the government had to “literally demonstrate a real comprehension of and appreciation for partnering with the [mining] industry through its actions and its policies.”
This involved changing some key tax calculations to be more congruent with the needs of the industry, and implementing additional incentives to bring the tax burden in the same range as countries like Mexico and Peru, which receive significant investment in mining.
The government also adjusted the application of the sovereign adjustment, and the way new concessions are awarded to align “as close to best practice as possible”. They then advertised these improvements in fiscal conditions to the global financial community at major international industry events.
“It was the sum of these many smaller changes that showed investors that the Ecuadorian mining sector was open for business again, and that the country was committed to a continuous process of improving conditions and reducing risk for investors by becoming real partners,” explains Bevacqua.
New activity in prospective mining jurisdiction
If the government remains committed to these new terms, Bevacqua says Ecuador will remain one of the most interesting countries for mining investment.
“Most geologists would say it is one of the most prospective mining jurisdictions in the world… perhaps even in the top five, particularly for precious and base metals. Furthermore, it has excellent infrastructure, relatively low costs, and other competitive factors,” he adds.
It has since certainly garnered attention and tangible investment. According to Wood Mackenzie, after implementing its recommendations, the country has seen a 200% increase in direct foreign investment, jumping from an average of less than $45m per year to more than $250m per year currently, with an expectation of nearly $1bn per year for the next four years.
Over 200 new mining concessions were granted in the first year, accompanied by investment commitments of nearly $500m in the first four. And in the last two years, 28 internationally renowned mining companies, including BHP Billiton, Newcrest and Codelco, have established entities in Ecuador to pursue investment opportunities.
Currently, five mines are in development, four of which are expected to be in operation by 2021.
Ongoing challenges: local opposition represents key risk
So far, although BHP, Codelco and Newcrest have each made investments in ongoing projects, Ecuador has largely piqued the interest of the smaller, more risk tolerant, junior miners, such as Core Gold and Sole Gold.
Perhaps this is because, as noted by Philip Wrenn, associate director of Fitch Ratings, while there has been much enthusiasm around the country’s untapped reserves, Ecuador still represents much risk for miners.
“It is still a very underdeveloped country relative to its neighbours, with much local opposition to mining and this represents a key risk for government trying to set aside land for exploration and mineral rights,” he says. “Due to this opposition, companies could face significant project delays, so – yes – it is attractive, but it is still risky.”
Notably, last year, in two landmark cases, the Ecuadorian courts sided with rural and indigenous communities who argued the national government had not informed them it was setting aside parts of their territories for mineral exploitation – a right protected by the 2008 Constitution.
In one case, the court nullified 52 mining concessions granted by the government in violation of the local indigenous people’s right to consent.
Bevacqua acknowledges this risk, which he says is not unique to Ecuador. However, he adds that the government has been “trying to be on the front foot” about issues such as prior consultation and enact policies to ensure that local communities benefit significantly from mining in their vicinity.
“It’s a work in progress, and one that merits a significant sustained focus from the government, including good policy that promotes real benefits from the mining sector to the local communities, as well as compliance, and transparency throughout the process,” he says.
This must include, he adds, a clear and public view of all the financial flows, employment and other metrics, and a good long-term plan for leveraging the development of mining to generate productive linkages and ancillary value chains.
What more can be done? Increasing investment attractiveness
In terms of investment attractiveness, Fitch currently rates Ecuador a B-, whereas neighbouring Peru is rated BBB+.
Though Ecuador is evidently proving initially successful in its mission to rebuild and expand its mining sector, to double it will likely take more concerted and sustained work to overcome early growing pains.
Bevacqua suggests that the entire government should try to understand the sector better and help to promote, regulate and administer its benefits.
“History has shown countries that have the most success using mining as a tool to develop are those that can sustain a stable national mining policy through multiple political cycles and try to limit changes to minor course corrections as presidents and legislative representatives change over,” he says.
To do this, Ecuador needs to develop strong institutions and strong administrative machinery as support, and eventually the sector will become more and more formal and sustainable, he adds.
“The main thing the government can do is remain firmly committed to generating and ensuring the right conditions for investors, for communities, and for other stakeholders,” says Bevacqua.
“This will take some effort, money and even political capital, and there will be bad days, when mistakes are made or when some stakeholders feel they aren’t being heard or benefitted, but if the government can forge on, perceived risk will continue to fall, and in turn, more investment will flow to allow Ecuador to fully utilise its world-class geological potential.”