A new mining province
Ecuador’s recently elected government under president Lenin Moreno is working tirelessly to develop the country’s mining industry, which for historical reasons is at an immature stage relative to other neighbouring countries such as Chile and Peru.
The reforms come on top of moves already undertaken by the previous government, including overhauling the mining tax regime and removing a prohibitive windfall tax on foreign investment.
In a bid to attract $US4.6 billion of foreign investment over the next four years, the government has also embarked on wider economic reforms including more flexible labour laws and investment in new infrastructure, including ports, hydro projects and roads.
In 2017 these efforts were recognised on an international stage with Ecuador winning Latin America Country Award for 2017 at Mines & Money Americas in Toronto and Most Innovative Country at Mines & Money London.
Legislation in Ecuador, specifically in the mining sector, has made great strides in recent years as the Government’s preference for state-led investment has become increasingly open. Nevertheless there remains room for further progress and this is reflected in frequent proposals for various reforms to current legislation. A brief chronology of some of the major changes is set out in the Appendix together with some additional information.
Mining in Ecuador is principally governed by the Mining Act (“MA”), issued on January 29, 2009 and the General Regulation of the Mining Act (“GRMA”), issued on November 16, 2009, which regulates activity as a whole. The MA and GRMA recognise, regulate and classify mining activities depending on production levels namely large-scale mining, medium-scale mining, small-scale mining and artisanal mining. There are also specific regulations on safety in mines, small-scale and artisanal mining, environmental issues, as well as the mining of particular minerals, among others.
Pursuant to Executive Decree 578, published in Official Gazette No. 448 of February 28, 2015, the mining industry is administered principally by the Ministry of Mining (“Ministry”) and its Mining Regulation and Control Agency (“ARCOM” for its acronym in Spanish). Also involved in the mining industry are the National Institute of Geological, Mining and Metallurgical Research, the National Mining Company, and the Municipalities to a certain extent.
The Ministry has a duty of general oversight of mining activity in the country and, most notably, it is the entity that grants, administers, and extinguishes all mining rights. ARCOM is the specialised technical entity in charge of supervising all phases of mining activity.
Pursuant to the MA, there is general freedom of reconnaissance in Ecuador, which means that any person or entity, domestic or foreign, may conduct reconnaissance activity in search of mineral deposits within the territory of the Republic, except in protected areas, those areas within the boundaries of mining concessions, urban areas, populated areas, archaeological areas, assets declared to be of public utility and Special Mining Areas.
In order to undertake mineral exploration it is necessary as a first step to obtain a mining concession. The mining concession is an administrative act that grants a mining title to a person who has the exclusive right to prospect, explore, exploit, beneficiate, smelt, refine, market and sell all existing minerals obtained within a particular area. Once issued, the mining title must be registered in the respective mining registry managed by ARCOM. The term of a mining concession is 25 years, renewable for similar periods upon the request of the concession holder.
In ENSA’s Cascabel project case the concession expires on April 26, 2035.
MINING ACTIVITIES ARE DIVIDED INTO FOUR PHASES:
Phase 1: Initial Exploration (4 years).
Once the mining concession is granted, exploration may be conducted for a four-year term, identified as the initial exploration period. Following completion of this term the holder of the concession may apply to the Ministry of Mining for a further four year term identified as the Advanced Exploration phase, provided it has met its self-declared operational and investment requirements in its concession area during the Initial Exploration period according to article 37 of the MA. These minima are declared by the company in its investment plan which has to be submitted annually to the Ministry. A failure to meet the declared expenditure may result in a termination of mining rights.
The application to advanced exploration requires the company to relinquish a certain portion of its concession. It is up to the concession holder to propose what land it intends to relinquish and this is subject to the approval of the Ministry of Mining. ENSA relinquished 21 hectares in its application for Advanced Exploration for Cascabel. For a large mining venture such as is envisaged here the annual cost of the licence or conservation patent during this phase of the project is 2.5% of one consolidated basic remuneration per hectare of concession. The Consolidated Basic Remuneration is the minimum basic wage that the employer must pay and is reviewed by the government every year. In 2017 the minimum basic remuneration is USD $ 375.
Phase 2: Advanced Exploration (4 years).
ENSA´s Cascabel concession is in year 2 of this phase which will end in August 2018. According to the MA, payment of mining concession patents must be made every year before March, 31 is generally made for value before the end of March. ENSA has to continue reporting its activities to the Ministry of Mining and the Ministry of the Environment. The annual cost of the concession patents during this phase is 5% of the minimum basic wage per hectare. In the current year (2017) the minimum basic wage is US$375 that brings the cost of the licence of 4,979 ha to US $93,356.25.
Phase 3: Economic Evaluation of the Deposit (2 years):
Once the advanced exploration term expires the holder of the concession has two years to make an economic evaluation of the mineral deposit and request authorisation from the Ministry to begin the exploitation. The law permits a two year extension of the economic evaluation phase under exceptional circumstances which, in the event, are defined by the company.
The annual cost is again 5% of the consolidated basic remuneration per hectare during the first two years. In the event that the economic evaluation of the deposit is authorized a premium of 50% is added to the cost.
Phase 4: Exploitation:
If the company’s request to commence the exploitation phase is accepted by the Ministry an administrative resolution is issued declaring its initiation.
Within six months from the resolution the concession holder must sign a Mining Exploitation Contract with the State, through the Ministry. The contract covers the terms, conditions and time periods for the stages of mine development, plant and infrastructure construction, mining, ore beneficiation, transportation and sale of the minerals obtained within the boundaries of the mining concession. In addition an Environmental License and certain guarantees have to be submitted and approved.
Exploitation Contract is not needed in Small and Medium Scale Mining.
Finally, it is necessary to clarify that according to the MA the mining phases explained above does not apply for the small-scale mining regime. In this regime it is possible to carry on simultaneously exploration and exploitation activities.
INDIGENOUS PERSONS AND LANDOWNERS
Rights of Indigenous persons and entities and holders of native title
The mining legislation does not establish requirements for ownership by indigenous entities or persons. However, both the Constitution and the MA establish the obligation to consult local and indigenous communities with regard to the exploration and exploitation of minerals in their territories when such activities may affect their interests.
Rights to use the lands and relations with the land owners
Pursuant to the MA the holder of a mining concession has an easement over the surface land in order to duly exercise its mining rights. The rights emanating from this easement include, among others, the right to occupy certain areas for construction required for mining activities as well as all associated infrastructure. The easement must be registered in the mining registry managed by ARCOM.
The owner of the surface land is entitled to receive payment from the holder of the mining concession for the easement granted. In certain cases the easement rights, including terms and conditions, are expressly agreed and set out in contracts executed between the holder of the concession and the owner of the surface land. If no agreement is reached ARCOM may order the creation of the easement and determine the mandatory payments due to the owner of the land. The holder of the concession has no rights of expropriation over the land.
The holder of a mining concession must obtain an environmental registry or license before initiating mining activities depending on its mining phase. According the MA, for all the mining phases different to initital exploration, it is necessary to have an environmental license to carry on mining activities. Thus, for initial exploration, it is required an environmental registry. The environmental registry is relatively simple because it does not requires the environmental impact assessment and environmental management plan. On the contrary, in the process of obtaining an environmental license, the mining concessionaire must submit, among other requirements, environmental studies demonstrating how it intends to prevent, mitigate, control and repair the environmental impact resulting from its activities. These studies must be submitted to the Ministry of the Environment for approval and the consequent grant of an environmental license.
In the environmental licensing process and once all the requirements including the approval on the environmental impact assesment and the environmental management plan are met, the mining concessionaire must issue an environmental guarantee in favour of the Ministry of the Environment as a compliance guarantee of the environmental management plan. The amount might vary but it is usually the 100% of the total cost of the environmental management plan plus administrative fees. All those fees are set out in the relevant environmental legislation and regulations. ENSA’s current environmental guarantee is $143, 812.50.
In addition, one year after the issuance of the environmental license, the concession holder is required to submit an environmental compliance audit that allows environmental authorities to supervise and confirm the environmental management plan. ENSA satisfactorily completed such an audit last year for Cascabel. After the first year, the environmental compliance audits need to be submitted every two years.
The environmental studies and reports completed by the holders of mining concessions are obliged to include a description of the plans prepared for the closure of the mines and the rehabilitation and remediation of any environmental damage caused.
In addition, two years before mining operations cease, the holder of the mining concession must submit, for the approval of the Ministry of the Environment, an Operations Closure Plan detailing rehabilitation and remediation measures to be undertaken and a process to verify compliance, a compensation plan for social impacts and as well as all the guarantees required by environmental regulations.
The Operations Closure Plan must include measures to avoid water contamination, provide for reforestation, avoid land contamination, conserve flora, fauna and the ecosystem, and waste disposal management.
TAXES AND ROYALTIES
1. Income tax levied at a rate of 22 per cent of the profits obtained. The investor may choose to accelerate the depreciation rate to between 5 to 10 years to increase its tax shield in the early years.
2. Labour profit sharing tax levied at a rate of 15 per cent (of which 12 per cent goes to the State and 3 per cent to the employees in the case of large-scale mining, and 10 per cent and 5 per cent respectively in the case of medium-scale and small-scale mining).
3. Value added tax (IVA) levied at a rate of 14 per cent.
4. Other municipal taxes and contributions and social security contributions. In 2015 the former amounted to approximately US$33,000 and social security to a little less than US$360,000 based on the number of employees.
5. Annual conservation patent fee that the holder of the concession shall pay, for each mining hectare, by March each year as explained above.
6. Windfall or Extraordinary Gains tax.:
a) Applied under a clear and transparent formula.
b) Only applies after the company has recouped its full capital investment prior to commercial operation. To the extent that operations may be expanded in stages the capital expenditure applicable to each stage and the excess profits generated by that stage are treated independently.
c) Presidential Decree 475 defines the calculation such that the tax applies only to profits generated from commodity prices that exceed by one standard deviation the average prices of the previous ten years.
In addition to the taxes outlined above the concession holder of a large scale mining venture must pay the State a royalty of no less than 5 per cent of the value of all sales and no more than 8 per cent for the specific case of gold, silver and copper. For medium scale mining the royalty is 4 per cent and for small-scale mining the royalty is 3 per cent respectively of the value of all sales, while artisanal mining is not subject to royalties.
A brief chronology of mining legislation and the “windfall tax”
1. Article 408 of The Constitution of the Republic of Ecuador (2008) established the concept of "Sovereign Adjustment" which defined the participation of the Ecuadorian state represented by the Government in the benefits of exploitation of natural resources. That participation was to be not less than that of the company exploiting the resource.
2. In January 2009 the "Mining Act" was approved under the constitution, a process applicable to all other laws.
3. In November 2009 the "General Regulations to the Mining Act”, a document subordinate to the Mining Act, was approved
4. In July 2013 the "Organic Reformatory Law to the Mining Act and Others", which clarifies the concept of “extraordinary profit” linked to the windfall tax, was approved. Article 30 of this Law replaced Article 165 of the "Tax Law of Ecuador" (Ley Reformatoria de Equidad Tributaria) and explains what is meant by "extraordinary profit”. It also made clear that all investment made prior to the achievement of commercial production may be recovered before the windfall tax is applied.
5. In October 2014, recognising that changes were necessary to attract investment into the mining sector and based on recommendations put forward by Wood Mackenzie as advisors to the Government, the General Regulation of the Mining Act was reformed by Presidential decree. In the decree seven articles were introduced to the General Regulations explaining the calculation of the windfall tax and the application of the Sovereign Adjustment approved in the constitution. The Sovereign Adjustment is determined using the net present value of the cumulative benefits of the project after escalating the value of capital expenditure to recognise the investor’s required rate of return.
6. 6. In December 2014 a new “Law to Incentivise Production” introduced the concept of “Fiscal Stability” for large-scale mining contracts. This allows mining contracts to be negotiated with tax and royalty rates fixed for the duration of the fifteen year contract.
7. In December 2015 the Government approved a new law to encourage public-private and foreign investments (Ley Orgánica de Incentivos para Asociaciones Público-Privadas y la Inversión Extranjera (APP)). Much of that law is applicable to the mining industry but most relevant for large-scale mining is that VAT will be recoverable as from January 2018.
8. In light to the previous above said amendments, in 2016, the Government approved the Ley de Plusvalía in which clarify that the mining concessionaire has 4 years after recovering its investment to pay the windfall profit tax.
The contents of this page has been prepared using reasonable endeavours to ensure that any information contained in it is true, accurate, complete and not misleading in any material way. Nevertheless SolGold and ENSA do not warrant that any information contained in it is true, accurate, complete and not misleading in any material way.