New Mining Law to be approved after referendum

WASHINGTON
Petroleumworld.com, Aug 18, 2008

Ecuador's new mining law will be approved in the next few weeks, right after the September 28th constitutional referendum, which will also give the green light to create the nation's Assembly. The legislative body will uphold the mining code currently being reviewed by President Rafael Correa, said MMP minister Galo Chiriboga in a meeting with Canada's International Trade Minister Michael Fortier yesterday, in Quito. Read Presidential Press Release

The MMP's 110-page draft is available on the ministry's website. So far it reveals that the Ecuadorian government favors open pit mining, creates a new royalty of 5 percent maximum, and leaves open a door to apply the feared 70 percent windfall tax – even though the WFT is not specifically mentioned in the draft. Read draft excerpts translated by EMN below
Read the draft Mining Law Draft [Spanish only]

One of the positive things proposed in the mining law is a provision to allow—and even to facilitate—open pit mining. Former MMP minister Alberto Acosta committed to halting the technique and later, as speaker of the Constituent Assembly convened to rewrite the constitution, he wanted to include such a restriction in the new constitution. This is one of the disagreements that Acosta had with Correa that may have forced his resignation as speaker. Read Reuters article

Royalties will be taxed over processed minerals and will not exceed five percent. Three percent royalties will be applied for processed minerals valued under USD 50 million per year, four percent for those valued at between USD 50 and 100 million, and five percent for minerals valued over USD 100 million. Also, the law details how the royalty revenue will be distributed. Most will be spent in the communities where the development takes place, facilitating the mining project's acceptance among locals and, indirectly, cultivating a pro-administration constituency.

The idea that the government will head up social responsibility projects was also discussed by MMP Undersecretary of Mines Jose Serrano during his recent speech to the LatAm Mining Congress in Miami. It is becoming clearer that the government wants mining firms to focus only on developing projects with the best environmental standards, and paying taxes. Corporate social responsibility (CSR) projects are to be the domain of the government. International mining firms are accustomed to including CSR projects, but their exclusion from such didn't alarm company executives who attended the Congress.

“We are the only face the locals see in these remote communities. For them, we are their government,” said one executive in an informal exchange. “Sure, the corporate responsibility projects help us to get credit lines, but it's not something we should worry about,” he added.

One red flag that EMN identified in the mining law draft is the General Provision, which changes the terms "mining title" to "exploration contract.” In the Reformed Tax Law, approved last December 2007, Art. 166 provides for “a tax revenue over the extraordinary income earned by companies that have signed contracts with the state to the exploration and exploitation of non-renewable resources.” The switching of the terms, then, leaves open the door for the application of the WFT. Read EMN article on WFT Read Equities Analyst Mark Turner Article “Why the WFT Would be Bad for Ecuador and its Industry”

Other articles in the law reveal the government's position to prevent land speculation by domestic owners buying up land in the hopes that mining firms will seek to explore there, and an article to prevent the arbitrary revocation of concessions, now contracts. Furthermore, the number of years for exploring is reduced from 30 renewable years to 20 non-renewable years, a minimum investment per hectare is required, and permissions will be granted through best bid, not first come first serve as it was before. These provisions seem to rid the marketplace of speculators rather than affect international mining companies. Read Inca Kola News about the mining law

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Extracts from the Mining Law – under President Correa's review

General Provision:

Throughout the Organic Mining Law text, change the words "mining title" to "exploration contract”, and "mining exploration/exploitation", "mining concessionary" for "contractor" and "concession" by area.

ANNEX

ROYALTY

Royalty definition: State payment for mineral resources exploitation. It is paid based on the value of the processed mineral.

Royalty Payment ranges:

From USD 1 to USD 50 million per year pay 3%
Between USD 50 to USD100 million pays 4%
Over USD 100 million pays 5%.
Small producers and artisan miners do not pay.

What the royalty will finance:

• 40% of this tax is intended for Parish Councils development plans
• 25% for the Provincial Council
• 25% for the Municipality
• 10% for public universities

Art. 6: The concessions will no longer be awarded by first come first serve, but by auction.

Art. 8: Establishes a minimum investment for exploration concessions of USD100 per hectare within the first two years.

Art. 16: The state runs mining operations through the National Mining Company, which may set up mixed companies, associations, join ventures, strategic alliances, and in general, all contracts permitted by national laws in order to meet its social goals.

Art… (p. 24): Reduction of the 30-year exploration concession period, automatically renewable, for a maximum of non-renewable 20 years. Each mining concession may not exceed 5,000 contiguous mining hectares, and will have a term of non-renewable 20 years, and 20 years renewable for exploitation concessions.

Art… (p. 25): Administrative fees will increase from USD 100 [one-time] to USD 100 per concession per hectare requested.

Art… (p. 30): If the project is an open pit mine, the company must request in writing state intervention (through the MMP) to assist in a fair negotiation of purchasing land, but only if the contractor has not been successful in purchasing it to be used for the operation.

Art. 48: The state mining company, through alliances, JVs, partnerships, etc. will manage the construction of one or two plants benefit, smelting and refining for mineral processing of artisan mining and small scale with a capacity of no more a 5000 MT / day.

Story by Silvia Santacruz from Ecuador Mining News
Ecuador Mining News 15 08 08

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