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Ecuadorian Mining Industry, trends in 2017

Cesar ZUMARRAGA

Exactly one year ago, in an article I wrote for MINERGIA with a similar title, I predicted

that 2016 would be an important year for the mining industry in Ecuador. This prediction

came true.

Despite the general crisis experienced in Ecuador, the mining industry has seen

extraordinary progress, in both the public and private sectors, which places the country on

the radar of international investors. The main highlights during 2016 include the signing of

an exploration contract between the Republic of Ecuador and Lundin for the development

and exploitation of Fruta del Norte; the exceptional results of the Cascabel project of

ENSA, owned by SolGold (SOLG); the expectation created on the international market

due to the merger of Odin with Ecuador Gold and Copper, forming a new company

known as Lumina Gold Corp. (LUM), headed up by mining legend, Ross Beaty; and the

opening of the mining cadaster by the Mining Ministry in order to grant new areas.

Additionally, Australian and Canadian mining exploration companies operating in the

country have closed financing operations in recent months, for example SolGold (SOLG),

Salazar Resources (SRL), Cornerstone (CGP) and Lumina (LUM). In general, 2016 was a

year full of positive news, providing lots of hope for 2017, a year with looming difficulties

due to the country’s elections.

Ever since the promulgation of the Mining Mandate in 2008, no metallic mining

concession has been issued for industrial mining, due largely in part to the legal

requirement for a bidding process to issue new concessions, which is atypical to traditional

mining jurisdictions. The current mining authorities, led by Minister Javier Cordova, have

put forth great efforts to foster the granting of new areas to individuals, navigating the

difficulties and limitations of the Ecuadorian regulatory system. The process being carried

out by the Mining Ministry has received overwhelming acceptance on the market, as more

than 1,900,000 mining hectares have been reserved, of which 650,000 hectares have been

granted, representing committed investments for more of US$ 120,000,000 for initial

exploration 2.

Regarding legal aspects, there were two legal matters in 2016 that were really important for

investors. In order of importance, in my opinion, they are: The official demise of the

Mining Mandate on April 6, 2016. Through Ruling No.002-16- SAN-CC, the Constitutional

Court handed down a sentence in two cases of non-compliance, which resolved that

Constitutional Mandate Nº 6 (otherwise known as the Mining Mandate), published in

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1 Cesar ZUMARRAGA is a partner of Tobar ZVS Spingarn and the leader of the Natural Resources, Energy and

Infrastructure Unit (REI). He has extensive experience in national and international transactions, primarily focused

on the energy, natural resources and infrastructure industries. He is a member of the International Bar Association

(IBA), Rocky Mountain Mineral Law Foundation RMMLF and the PDAC (Prospector and Developers Association of

Canada). Due to his history, he has been mentioned continuously in publications, such as Chambers Latin America,

The Latin Lawyer and Who’s Who Legal in Mining. czumarraga@tzvs.ec @cesarzumarraga

2 Information getting from the Mining Ministry, updated February 13, 2017.

Official Gazette Nº 321, dated April 22, 2008, was left null and void as of the promulgation

of the Mining Law issued on January 29, 2009. This judicial and official acknowledgement

of the repeal of the Mining Mandate is essential for the development of the industry, as

there was never legislation to repeal it, whatsoever, and there were individuals in the public

sector that claimed that its standards remained in effect. We must remember that the

Mining Mandate, issued by the Constitutional Assembly in 2008, extinguished the mining

rights of more than 2,000 concessions for causes that were not included in mining

legislation at the time, thereby creating a standstill that pushed the industry to the brink of

collapse. The ruling by the Constitutional Court is a key piece in the development of an

environment with juridical security, as demanded by any foreign investor.

More news that must be mentioned is the reimbursement of VAT for mineral exporters.

In my opinion, this is one of the most important amendments for the mining industry in

recent times. Mineral exporters were impeded from recovering the VAT paid during the

production process, as permitted for all exporters of any other industry, due to a tax

standard that was originally created for the petroleum industry and subsequently included

for the mining industry. Through the reforms introduced by the Organic Law of Incentives

for Public-Private Associations and Foreign Investment (APP), mineral exporters can now

recover VAT paid during operations as of January 1, 2018. Despite the future date for

application of this benefit, there is no doubt that this will make investments more attractive

in small-, medium- and large-scale projects in our country.

Nevertheless, there is still a lot of work to be done. Essentially, the true interest of the State

attempting to prevent concessions from falling into the hands of those who are not willing

to perform activities in the concessions is not achieved by ignoring the realities of the

industry, but rather by fostering conditions that attract the best, serious, responsible

miners, and this is achieved by treating them as partners, understanding their needs and

acknowledging their legitimate interests in the law. This is how mining is carried out in

Chile, Canada and Peru.

Additional measures must be taken in the future to improve and amend the rules of the

game and the economic conditions in Ecuador, in an attempt to make mining investments

more attractive. For example, there must be modifications to the Mining Law in order for

mining rights to be deemed a real right, as is the case in all countries where this industry is

developed, and not a personal right, as is the case in Ecuador. The bidding and auction

process must be eliminated, which is not successful in any mining jurisdiction. Additionally,

the cost of conservation patents must be reduced to amounts that are competitive within

the region. Finally, the maximum term for exploration and other phases must be

eliminated, as this is contrary to the logic of all mining projects, which cannot be

dependent upon timelines set forth in a law, but rather are based on the geological

conditions of the area and the international market of the commodities.

The fiscal model for the industry must be flexible. It is necessary, for example, to eliminate

the windfall profit tax and the recently created capital gains tax, as these are additional

burdens on an already excessive tax system, which are not even comparable with the

parameters of the region when dealing with mining. I admit that the government has made

efforts to mitigate the impact of the windfall profit tax and the sovereign adjustment;

however, due to the complexity of the applicable formulas, investors have concerns

regarding the effectiveness of the model.

Timely reforms and various derogatory provisions (a few pages of text) would be enough

to get rid of these obstacles. If the new government believes that mining is the only means

of attracting large amounts of foreign investment, which are essential for an economy

based on the Dollar and with low oil prices, I am sure that we can replicate and even

surpass the positive progress we had in 2016. Hopefully this comes to fruition.