By TBY | Ecuador | Feb 01, 2015
Ecuador has a huge amount of resources waiting to be exploited; however, a lack of expertise and willing foreign investors has hampered development in the past, but hopefully this is all about to change.
Because of this, Ecuador’s mining industry still remains largely unexplored and unexploited. President Correa is hoping that the mining sector can reduce some of the economy’s dependency on oil; however, the country will need outside help. In the new reform package, the government set a new royalties ceiling of 8%, which was previously open-ended. Small mining operations will pay a minimum of 3%, medium-sized operations 4%, and large-scale mining operations will pay 5% in royalties. The government is hoping to attract more small- and medium-sized companies to take up concessions by having lower royalty payments and allowing the signing of flexible concession agreements, meaning they do not need to negotiate exploitation contracts with the government. It also streamlined the permit application system, removing many of the time-consuming processes. Still, while the government has made some much-needed changes to the sector, many companies feel that it did not go far enough in its reforms. The windfall tax is still seen by many as a possible deterrent to investors, and some say it should have been lowered. The windfall tax can be as high as 70% on revenues for mining companies; however, this comes into action only after the company has recouped its initial investment. While the new reform may need some ironing out, overall the industry seems pleased with the direction that the authorities are taking, and the government is almost fully behind President Correa’s leadership, with the reform passing 105 in favor and 14 against in the local parliament.
Ecuador has a vast amount of reserves, mainly gold, silver, copper, and zinc. The latest estimates by ENAMI EP places Ecuador’s gold reserves at 39 million ounces and USGS places the country’s silver reserves at 17 million troy ounces. When Kinross backed out of its concession, it created quite a headache for the government; yet, the $720 million charge would have gone some way to alleviate this. However, Ecuador’s minerals still remained in the ground, and someone new needed to be found to take over the project. In August 2013, only a month after Kinross walked away, Codelco, Chile’s largest copper mining company, stepped up to the plate. Codelco will be able to bring its vast experience and knowledge to Ecuador, something at the moment that the country lacks. ENAMI EP will own 51% of the joint venture and Codelco the remaining 49% to work on the Llurimagua reserve. It is estimated that the reserve could be worth as much as between $200 billion and $220 billion in total, depending on the viability of some of the deposits. The joint venture is expected to receive its environmental license by the end of 2014, and Codelco has committed to invest $28 million over five years to explore the 4,956-hectare reserve. It is hoped that commercial mining will begin by the end of the decade; however, it could be up to eight years before any mining begins, depending on the exploration results.
Another major deposit that is currently being explored is El Hito, which is located in southeast Ecuador in the Santa Barbara area. The deposit, under the concession of Ecuador Gold & Copper Corp., has estimated reserves of 161 million tons of copper and exploration is well underway to find the most viable way to exploit the mineral. El Hito is a part of the large Zamora Gold and Copper Belt that runs for 40 kilometers and holds a vast amount of reserves. The total belt is thought to hold 8 million ounces of gold at 0.56 g/ton in the inferred category and 2.6 million ounces at 0.4 g/ton in the indicated category, as well as 800 million pounds of copper in the inferred category and 1.5 billion pounds in the indicated category.
Even though Ecuador has an enviable amount of resources in the ground, unfortunately it is suffering from something of a liquidity problem at the moment. To try and resolve this, in June 2014 the government decided to sell 1,165 gold bars from its reserve for $580 million to Goldman Sachs to increase the country’s liquidity issues. The country has borrowed over $12 billion from Chinese banks to fund infrastructure development, and has now re-entered the global bond market after a near half-decade hiatus. Also, with Ecuador one of the few countries on the continent to use the US dollar, liquidity issues have their own unique challenges. Under the deal, the country will get the gold back in three years time and, in theory, make a profit of $20 million.