Ecuador’s new mines minister Javier Cordova has only been on the job since February, but he knows that the country’s infamous windfall profits tax is unpopular with miners.
“We know it’s something that worries investors,” he said in an interview during Ecuador Day at the Prospectors & Developers Association of Canada convention in March.
Cordova wants to convince miners to invest anyway.
Ecuador — which for the first time is a “country sponsor” at the international mining convention — has made changes to its tax regime, including the 70% windfall profits tax, Cordova says.
With help from consultancy Wood Mackenzie, Ecuador introduced a formula last year for the windfall tax that offers investors more certainty. The tax is no longer based on a pre-negotiated base price on a project-by-project basis, but on the average commodity price for the past decade.
The tax no longer applies from the first day of production, but starts after a company recoups its full capital investment.
Cordova hopes to revamp, scale back or get rid of the tax when he meets with Ecuador’s President Rafael Correa.
“But for now, we already have this formula that was signed in a decree by the president, pushing the date [when payment starts] as far as possible, letting the companies first recover all of their investment, creating a formula that lets them know exactly how it’s going to work,” Cordova says.
President Correa brought in the windfall profits tax after he was first elected in 2007, but it has not brought the government any mining revenue. (The only mine under construction in Ecuador is the Mirador copper mine, owned by China’s EcuaCorriente.)
Less than two years ago, Kinross Gold (K: TSX) couldn’t make its rich Fruta del Norte gold-silver deposit work given Ecuador’s tax regime and the windfall profits tax.
Even so, Cordova says that tax incentives over the last two years have brought down taxes for would-be miners to the regional average of 25–26%. Several years ago, the tax burden was 35%, he says.
While miners may still be skeptical about investing in Ecuador, Ecuador Day at PDAC drew in good crowds, with a standing-room only at some points. Both Cordova and Strategic Sectors Minister Rafael Poveda presented. Poveda’s higher-level ministry is responsible for coordinating the activities of mining, energy, environment and other ministries.
New mines ministry
Ecuador’s government wants sustainable, responsible mining to become a pillar of its economy in the long term, and something that can help it meet its social investment and development goals.
But first, the government needs to persuade miners it’s committed to building a competitive and stable fiscal and legal framework.
This year Ecuador is hoping to sell itself as a destination for mining investment, and get the word out about its tax reforms, other initiatives and geological potential.
This year, the country is auctioning off mining blocks in new areas where initial exploration work has been carried out by state-owned mining company ENAMI, as well as exploration and advanced exploration projects. It’s also hoping to attract investors to partner with ENAMI in eight projects.
Several junior miners with projects in the country — including Lundin Gold (LUG: TSX; US-OTC: FTMNF), which in December bought Fruta del Norte from Kinross for only $240 million — are also on board, and took part in the Ecuador Day presentations.
“Basically the idea is to show the potential of our country, all of its benefits, including eight years of political stability — the president is well respected, people trust him — and what we’re doing as a government to work with the communities. That’s something that’s really important to us.”
As part of its push to attract mining investment, the government has created a mines ministry. Before, mining fell under the same ministry as oil and gas in Ecuador. But because Ecuador has a 40-year history as an oil producer, mining policy was always overshadowed by oil and gas and never got the attention it deserves in such a mineral-rich country.
Now that a mines ministry dedicated to getting large-scale mines developed has been established, Cordova is optimistic that the country can kick-start its mining sector. With tax reforms complete, Cordova intends to streamline and simplify Ecuador’s mining laws this year. With the input of mining juniors, the ministry is looking to make exploration rules and timelines more flexible and the process of granting concessions easier.
“I believe that with those reforms and what we have done with the tax regime, and with the new ministry, we’ll have all the appropriate conditions for investors to come,” he said.
The country’s mining registry will also be reopened after a seven-year closure so new concessions can be granted.
While Ecuador introduces reforms to its mining sector, it is also looking at the communities that in many cases, have had tumultuous relationships with mining companies in the past.
“The social aspect is our focus, because we believe that in this kind of industry we need to have a community that works together with the project. It’s going to be difficult for a company to develop a long-term project if you’re going to always have a problem with the communities,” he says.
Cordova says Ecuador has learned the importance of community investment from its history with oil — oil revenues were not reinvested in the communities the oil was produced in, which turned communities against oil production.
The country’s mining law now stipulates that 60% of the royalty that a project generates be invested in the local community through Strategic Ecuador. The public institution, created in 2009, invests in social projects in health, housing, education, telecommunication, etc., in coordination with the local government.
Cordova says the government is seeing the results of Strategic Ecuador — six years later.
“The Correa government has been in power for eight years, and that was one of the main changes we did. Before our government, community relations was just between the company and the community — it was a direct relationship, and that created bad results.”
Now that the government is more involved through Strategic Ecuador in communicating the benefits of resource development and investing in communities, people have become much more open to development, Cordova says.
“It’s a win-win situation for everybody. The local governments receive much more resources that they didn’t have before, and the communities see a social investment, so that they know in advance what these kinds of projects can bring.”