Last week’s re-election of Ecuador’s president, Rafael Correa, appears to have put the country on a path towards improving investment conditions for miners who want to extract the country’s copper, gold and silver. The world’s largest copper producer, Chile’s Codelco, is among the companies that has set its sights on the country. But indigenous and environmental groups that have protested mining projects in the past are likely to obstruct future projects.
On February 13, Codelco received approval to start exploration at the Junin copper deposit in the Toisan mountain range, BNamericas reported. The company plans to start drilling in the second half of this year.
Junin has a checkered past. BNamericas notes that in the 1990s, Japan’s Mitsubishi (TSE:8058) carried out initial exploration at the site; the project was then acquired by Canada’s Ascendant Copper, which was later renamed Copper Mesa Mining (OTC Pink:CMMVF). A group opposed to the mining activities took 57 Copper Mesa employees hostage for a week in 2006 on the grounds that the mining concession was in a nature preserve. Protesters have since accused the company of employing armed men to attack protesters, according to a Toronto Star report. The Ontario Court of Appeals rejected that claim in 2011. Meanwhile, Copper Mesa’s licenses were cancelled in 2008 after a government moratorium on mining activities.
Since then, in an effort to attract miners and diversify the country’s economy, Correa has said he plans to reform the mining law so that companies are not taxed before they regain their investments.
“I don’t like mining, and open-pit is even worse, but it’s impossible to think of modern life without mining and it would be irresponsible not to use those resources,” Correa said last week, the Gulf Times reported. “We cannot be beggars sitting in front of a bag of gold,” Correa was then cited by The Australian as saying.
The two most prominent mining deals Correa has reached are an agreement with China’s Ecuacorriente, which will invest $1.6 billion over five years to develop the El Mirador copper mine, and a tentative agreement that would see Kinross Gold (TSE:K,NYSE:KGC) invest $1.2 billion in the Fruta del Norte gold project. That deal is being renegotiated and Kinross has until August 1 to reach a final agreement.
But the government continues to face considerable resistance from indigenous and environmental groups, and has earned the attention of Amnesty International, which said in a 2012 report that it has “received numerous reports that the Ecuadorian criminal justice system is being used to try to stifle protests against the government’s proposed policies and laws around natural resources.”
Meanwhile, this week an Ecuadorian court is expected to rule on Ecuacorriente’s Mirador project, which local communities have claimed would affect local water supplies, The Wall Street Journal reported. The company plans to begin construction of the project this year, with mining to start at the end of 2015. An Ecuacorriente spokeswoman, Laura Zurita, said all legal and environmental regulations are being met and that “advanced technologies” will help protect the environment.
Ecuador’s political uncertainty and local opposition have prompted some companies to leave the country behind. In November, IAMGOLD (TSX:IAG) sold its Quimsacocha gold-copper-silver project to INV Metals (TSX:INV) for $30 million. Further, International Minerals (TSX:IMZ) decided to leave Ecuador, citing “punitive components” of the country’s mining and tax laws, lack of clarity in the implementation of new mining regulations and “increasing political and social/community risks.” It said the company “can better utilize its management and financial resources in other more mining-friendly jurisdictions.” It wants to sell its Rio Blanco gold and silver project and Gaby gold project in the first half of this year, and is taking a $16.8 million hit as a result.
Most recently, Nortec Minerals (TSXV:NVT) terminated an agreement with Fenwick Minerals, formerly Doubloon Exploration, under which Nortec had the option to acquire a 51-percent interest in the gold-silver Ganarin project in Southern Ecuador. The company didn’t name a reason for the termination of the deal.
Codelco is likely to face the very risks identified by International Minerals, with local environmental organization Decoin warning that another round of protests against Junin is inevitable.
“The tragedy is that it is going to cause a lot of social conflict in the meanwhile and eventually it [the project] will fail for cultural, social and … environmental reasons,” a spokesperson for Decoin said, according to BNamericas.
Decoin also said the Junin project approval violates legally binding land use and development plans for the area, as well as the communities’ right to be consulted on any decision that could impact their environment. Moreover, local ordinance designates the region where Junin is located as a protected area.
Codelco has so far spent $4 million on exploration targets in Ecuador and plans to invest between $10 and $30 million over the next four years, Bloomberg reported in October. The Junin project would be a 49-percent/51-percent joint venture with Ecuador’s state mining company, Enami.
That investment plan may seem insignificant to a company that wants to spend almost $20 billion over five years to expand existing mines. But if previous assessments of Junin’s reserves hold true, it could contain “one of the most significant copper deposits in South America,” rivaling Anglo American (LSE:AAL) and Xstrata’s (LSE:XTA) Collahuasi and BHP Billiton’s (ASX:BHP,NYSE:BHP,LSE:BLT) Escondida copper mine in Chile, Santiago Yepez, president of Ecuador’s mining chamber, told Bloomberg last year. Junin’s inferred mineral resource estimate includes 982 million metric tons grading 0.89-percent copper, 0.04-percent molybdenum and 1.9 grams per metric ton silver.
The Ecuador mining chamber estimates that the country’s total metals deposits are worth $220 billion, containing more than 39 million ounces of gold reserves and 8 million metric tons of copper.
And so, even amid the risk, the prospect of being early investors in Ecuador’s nascent, and potentially rich, mining industry is still attracting companies such as Cornerstone Capital Resources (TSXV:CGP) and Ecuador Gold and Copper (TSXV:EGX).
Cornerstone said last year that the Ecuacorriente agreement shows the government is “increasingly welcoming environmentally friendly, socially responsible, sustainable mining development,” while Ecuador Gold and Copper said in a February presentation that the new mining law and the deals with major mining companies indicate continued “de-risking.” To them, at least, the risk appears to be diminishing.
Securities Disclosure: I, Ragnhild Kjetland, hold no investment interest in any company mentioned in this article.
| Updated December 2015
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