The people of Ecuador are rising up to refound their country as a pluri-national homeland for all. This inspiring movement, with Ecuador's indigenous peoples at its heart, is part of the revolution spreading across the Americas, laying the groundwork for a new, fairer, world. Ecuador Rising aims to bring news and analysis of events unfolding in Ecuador to english speakers.

Monday, April 30, 2007

Above-Ground Risk in Ecuador

Huliq, April 30. 2007

The political or “above-ground” risks that concerned multinational corporations in the past usually involved expropriation and nationalization, currency inconvertibility and war or civil unrest. While it is true that these risks still necessitate concern, relative to other types of above-ground risk they are occurring less frequently.

As resource companies like Ascendant Copper [TSX: ACX] are discovering, the national government is no longer the only heavy on the block. Today, the threat of political risk can also come from local governments, community groups and NGOs.

Ascendant Copper Corporation, a Canadian company, owns a 100% interest in three projects in Ecuador: Junin, Chaucha and Telimbela. Although they haven’t experienced any opposition to the latter two projects, with Junin they’ve inherited a problem brewing some years before they acquired the property.

Local government officials and an NGO known as Defensa y Conservacion Ecologia de Intag (DECOIN) have managed to put enough pressure on the Ecuadorian Ministry of Energy and Mines to cause delays with the approval of Ascendant’s Environmental Impact Study.
Recently, I spoke with John Haigh, Manager of Investor Relations for Ascendant Copper. I asked him if the company’s prior knowledge of the political issues associated with the Junin property were integrated into their initial political risk planning. “Yes,” he said, “we asked are we going to have a problem with active NGOs? And the answer was: Yeah, you probably are.”

As for taking specific action, Ascendant Copper is trying to manage their political risks by dealing directly with the community. In efforts to further minimize potential problems Ascendant has funded social development and environmental programs in the Intag region. These programs have included medical and dental services, education and teacher training, farming, waste disposal and developing nurseries to support reforestation.

In the course of the financial impact assessment, “it becomes part of the budget, how much money we’ve spent in the area, how much has gone to the communities.” On November 27, 2006 Ascendant made an agreement with local communities and organizations to commit $4,000,000 over four years to support such programs. The funding is scheduled to begin 60 days after commencement of exploration activities on the Junin property.

The hostility between Ascendant Copper and local community groups grew so intense that the government intervened.

On March 20, 2007, Ascendant Copper met with members of government, including the provincial Governor, a representative of the Ministry of Energy and Mines and of the Ministry of Government and Police and with representatives of the Community Development Council. The parties made agreements that will hopefully reduce tensions and respect the rights of all involved. As part of the agreements, Ascendant had to let go of 111 of its 159 local employees and cease some of its public services in the community.

I spoke with Stephen Bailey of Frontier Strategy Group, an expert on above-ground risks in Latin America, concerning the issue. Although Mr. Bailey had no insider knowledge directly pertaining to Ascendant’s case he did offer some valuable insight as to why the company might have incurred forced layoffs. The “untold story” often involves regional elites, for example those with agricultural estates, who see foreign companies as a threat. Mining companies offering employment to locals drives up wage costs and Bailey sees this as a major underlying factor driving local opposition in circumstances such as these.

Such political risk has not cooled Ascendant Copper’s desire to pursue the economic rewards Ecuador’s virgin lands have to offer. “The size of the asset [in Junin] is significant enough to attract us,” Haigh said. “It is a billion tones of one percent copper. It is one of the largest undeveloped copper deposits in the world. We are willing to take those above-ground risks and deal with them on a smart basis.”
Robert Washer, President and CEO of Dynasty Metals and Mining [TSX: V.DMM], reports a rather different experience operating in the politically evolving country. Throughout his fourteen years of living and working in Ecuador he has seen many governments pass through the seemingly revolving door of political power without a severe upset to the mining industry.
When Rafeal Correa won the Ecuadorian presidential election in November of last year many considered his victory the latest triumph for left-leaning candidates in Latin America. This has worried those who fear the effects of Chavez-style nationalization on Ecuadorian resources. Washer thinks this perception exists mainly outside of the country and is a little overdone.

Washer is speaking from the perspective of an experienced insider who has lived through nine other Ecuadorian presidential elections. As in most governments, newly-elected presidents may shift their cabinet around and appoint a new minister and undersecretary of mining along party lines. What generally doesn’t change is the administrative staff. “The same people I’ve dealt with for fourteen years are still there,” Washer says. “So, over the last fourteen years we’ve developed a working relationship with the government.” He believes that “the mining industry will go ahead successfully here in Ecuador. Put it this way - it’s no more difficult for me to work in Ecuador than it was to work in Australia.”
Canadian-based Dynasty Metals, a gold exploration and development company, holds the largest gold concession in southern Ecuador. Dynasty owns 100% of two advanced-stage gold projects nearing production (Jerusalem and Zaruma). A third newly-discovered large-scale property (Dynasty) shows significant potential for containing a large bulk mineable gold resource. Recent estimates indicate resources of over 420,000 ounces of gold, and an additional 427,000 ounces of inferred gold resource. “Right now we’re discovering gold-bearing deposits right on the surface because basically the country has been well under-explored, so it’s like going into Australia 70 years ago,” Washer said.
I asked him if Dynasty Metals has faced political issues similar to those of Ascendant Copper. “No, actually, we’re going ahead full steam. The government has been giving us environmental approvals and we’ve been working with the government just fine. We’re actually looking at building a plant this year in Ecuador.” Dynasty’s location for the new mill is on its Zaruma concession and will actually be the first in the country. The company has obtained permission from the local community to build and run the mill and Dynasty expects permit approval from the government any day. Washer expects about 100,000 ounces per year in Zaruma. When the numbers for the other two projects are considered into the equation, four to five years from now Washer foresees Dynasty producing 500,000 ounces per year.

Stephen Bailey is not at all surprised by the varied experiences of Ascendant Copper and Dynasty Metals in Ecuador. “Different companies are likely going to face really different challenges depending on the region in which they are operating,” he said.

Bailey agrees with Robert Washer’s estimation of the media’s depiction of politics in Ecuador. The general trend in the media seems to group Ecuador politically with other Latin American countries. According to Bailey, it’s important to distinguish between regimes like Venezuela and Bolivia, and that of Ecuador. “I think that there is a lot less in the way of concrete action being taken to impair the interests of foreign investors in a country like Ecuador than in a country like Venezuela. Certainly Correa is not an ideal pick for foreign investors, but I think that he’s taking more of a measured approached,” he said.

Bailey believes the biggest challenge for companies in Ecuador is more at the regional level. Centralized government control is relatively weak in comparison to Venezuela, for example, where Chavez now exercises almost complete control. The best strategy for managing political risk successfully in countries like Ecuador, Bailey suggests, is to establish strong relationships with regional governments while cultivating an understanding for how the political landscape differs from region to region, “rather than looking at the country as one monolithic whole.”

Melissa Pistilli is a contributing writer with the Resourcex Investor, an internationally distributed newsletter specializing in identifying as-yet undiscovered resource companies representing the best in their class. For more information, visit the website - By Melissa Pistilli

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