Ecuador studying mining royalties and windfall tax

By Alonso Soto

QUITO, Jan 31 (Reuters) - Ecuador is analyzing whether to set mining royalties based on gross output or net profits for firms reworking their agreements with the government, which is seeking to boost its control over the growing sector.

Deputy Mining Minister Jose Serrano told Reuters the country plans to use current metals prices and banks' lending rates to the industry to set a base price for minerals in new deals to comply with a recently approved windfall tax.

The windfall tax will force mining companies, most of which are only exploring, to share 70 percent of their revenues above the base price in deals once they start production.

Foreign mining firms are worried that a low base price and more state intervention could hamper the nascent sector in a country that has $130 billion worth of precious metals.

"There are several elements that will help us set this base price ... we are going to be very pragmatic on this issue," Serrano said.

President Rafael Correa has said he would allow big mining, if it brings billions in revenues to state coffers, and started negotiations with Canada's Aurelian Resources and Corriente Resources to rework their deals.

But some members of a powerful legislative assembly that is rewriting the constitution, including its chief, Alberto Acosta, have said they oppose large-scale projects.

Serrano said Canada's International Mineral Corp, which plans to develop two gold-silver projects in southwest Ecuador, also wants to renegotiate its deal.

The company's spokeswoman, Wendy Yang, said the firm wants to start talks to "have some clarity."

The government has proposed the assembly issue a decree to overhaul the mining industry -- revoking most of the country's concessions, but sparing the sector's biggest players. It also calls for future royalties to be at least 3 percent.

Monica Chuji, the head of the assembly's natural resources committee, which will draft the decree to boost state control, said the panel was evaluating the government's proposal.

Chuji said she favored banning open pit mining and extraction in nature reserves, near Indian settlements and near water sources. However, she said the group has not yet reached a consensus.

"We are debating, and in this process that is crucial," Chuji told Reuters in an interview. "We want to finish this (decree) as soon as possible ... most likely in February."

The 130-member assembly, controlled by Correa's party, will have to vote on the decree drafted by the committee. In a previous decree, the body closed down the opposition-led Congress and took over its powers.

Government officials expect to introduce a mining reform bill before the assembly drafts a new constitution by the second half of this year.