How will the mining industry adjust to the impact of COVID19 in Ecuador?
The effects of the current COVID19 world pandemic are far from defined. The only certain thing is the negative impact of the disease on a global scale and the acute economic deceleration of most economies.
The virus landed in Ecuador on February 14 through an imported case from Spain, according to national health authorities.
Since then, both national and international media has documented the presence of the lack of medical protection equipment, breaches of social distancing, and the shutdown of businesses and industries, as well as assorted collapses of healthcare systems.
This has been coupled with conflict between central and local governments and shifting public opinion.
All this combined has led Ecuador into its worst economic crisis since the establishment of the republican system there.
The current situation could potentially be worse than the major crisis suffered in 1999 popularly known as the “Feriado Bancario” (Bank holiday), when banking institutions went bankrupt and caused massive migration from Ecuador to countries such as Spain, Italy, and the US, which are all now being severely affected by the pandemic.
In 2013, Ecuador started an international investment promotion agenda, which included the creation of a Ministry of Mining, participation in specialized trade fairs, a review of tax laws, the resolution of large and medium-scale projects which had stalled, and of course, the reopening of the mining cadaster.
This resulted in investment agreements worth USD2.2 billion and Ecuador was even recognized as Most Innovative Country at the “Mines & Money London” Awards in the UK and Toronto in 2017.
Nevertheless, while steps were being taken forward, they were followed by steps backward. President Moreno announced in December 2017 the closing of the mining cadaster due to pressure from indigenous political parties.
In 2018, the Ministry of Mining was eliminated and merged with the government authorities in charge of hydrocarbons.
Additionally, over the most recent government term there was a high rotation of public executives in charge of mining activity, ultimately resulting in perceived instability for investors.
Despite all this, mining plays a unique role in the COVID-19 scenario.
The first measures taken by the government and the mining authority now permit the sector to keep operations going during the pandemic thanks to the sector’s designation as “strategic” in Ecuadorian legislation.
This allows companies to postpone the payment of annual fees which are typically due in March every year.
Despite being positive, these measures are still not enough since they do not allow companies (mostly small mining ones) to access economic resources to implement security and health prevention measures.
Additionally, non-operating companies cannot generate revenue for the state, which will see a reduction of tax and royalties collections in 2020.
Medium-term measures to revamp the sector will require a reopening of the mining cadaster, giving priority to investments and making the tax laws more flexible for exploration activity. The sector also advocates for the independence of institutions in order to avoid the politicization of public authorities and to avoid situations where the current measures taken in-field are confused with political agendas.
With Ecuador just a few months away from presidential elections in 2021, this is of critical importance.
The Llurimagua opportunity
In the middle of this crisis, the Ecuadorian state is considering selling national assets to allow access to fresh financial resources according to the Letter of Intent to the International Monetary Fund (IMF).
This is in order to avoid increasing foreign debt.
And here is where Llurimagua plays a role as an opportunity for the country. Previously known as Junín, and originally explored by the company Cooper Mesa (which won an international arbitration case against Ecuador for USD19 million), the project featured prominently in Chile-Ecuador relations in 2008.
Since 2011 it has been developed by Chile’s national mining company CODELCO, but under a bi-national agreement in 2013, Llurimagua was to be explored by a public joint venture (51% owned by Ecuador and 49% by Chile).
Given changes in company legislation in both Ecuador and Chile and a lack of liquidity, what seemed to be a good deal ended up as a legal minefield, and the project has been on hold for much time.
Chilean media seems to suggest that a solution is not foreseeable in the near future.
Following increasing concerns about the lack of financial resources and the implementation of new taxes, an offer made by a world-class Australian company in 2017, and increased and renewed in 2019, has been brought back to public attention. The company offered ENAMI (Ecuador’s National Mining Company) and the Ecuadorian government the acquisition of Llurimagua for an amount exceeding USD400 million, without taking into account further needed investments or taxes.
If the Ecuadorian state accepts this offer it would turn an unproductive asset into a much-needed financial resource, without resorting to additional taxes in a stagnant economy which requires dynamism above all else.
What is more, it could guarantee funds for health and education services as well as support for economic reactivation in a post-pandemic scenario.
These decisions should become clear soon.
Special Report: Mallorca launch event
The Business Year: Mexico 2022 Launch Event - Closing Speech
The Business Year: Mexico 2022 Launch Event - Panel 2