Mining, especially large-scale mining, is an emerging industry in Ecuador. The Mining Act was passed in 2009, following approval of the 2008 Constitution of the Republic of Ecuador and the temporary Mining Constitutional Mandate that suspended any new granting of mining concessions, and the expiry of several existing concessions in Ecuador (owing to the lack of activities and environmental impact studies).
Since 2009, Ecuador has adopted a new legal framework under the Mining Act and an enthusiasm for the large-scale mining industry, supported by the government of former President Rafael Correa, which began negotiation processes for the mining exploitation agreements for three of the five strategic projects in Ecuador – Mirador (Ecuacorriente-Chinese), Fruta del Norte (Lundin Gold Inc-Canadian) and Loma Larga (INV Minerals-Canadian).2
During the tenure of the former government, the Mirador and Fruta del Norte contracts were signed, the Loma Larga project was agreed and several of the legal and regulatory reforms discussed later in this chapter were made. The current government also supports the mining industry, especially as a new source of revenue for the country.
The whole of Ecuador is rich in terms of mining. Top-level enterprises have surveyed the country for several years and have discovered gold and copper reservoirs in several provinces, including Azuay, Zamora Chinchipe, Morona Santiago and Imbabura. Ecuador has granted mining concessions to private companies; some of these projects are under exploration and others are coming into the exploitation phase.
In this regard, the state has decided to auction and tender the concession of new mining areas to enterprises that would warrant the best exploration and exploitation practices, considering also the experience, financial and technical capacity and the environmental proposal of the bidders. Those bidders would have the following competitive advantages:
- high mineral-recovery rate;
- low land-clearing ratio (closeness of mineral to surface);
- access to water;
- sufficient electric power at low cost;
- modern road, port and airport infrastructure;
- monetary stability;
- tax stability and incentives; and
- accelerated depreciation of machinery.
The Constitution considers as strategic sectors, among others, energy in all its forms, telecommunications, non-renewable natural resources and those belonging to the state's inalienable and imprescriptible heritage, but may exceptionally be delegated to a private party. Mineral substances belong to the state, but mining concessionaires have the exclusive right to prospect, explore, exploit, benefit, smelt, refine, market and dispose of all mineral substances that may exist and may be obtained in the mining concession area, becoming a beneficiary of the economic returns obtained from said processes.
The Constitution divides the powers of the government into five branches:
- the legislative branch, assigned to the National Assembly;
- the executive branch, headed by the President of the Republic;
- the judicial branch, headed by the National Court of Justice; and
- the newly defined branches:
- the electoral branch, managed by the National Electoral Council, and the Electoral Contentious Tribunal; and
- the transparency and social control branch, represented by six entities: the General State Comptroller, the Banks Superintendency, the Telecommunications Superintendency, the Companies, Securities and Insurance Superintendency, the Ombudsman, and the Citizen Participation and Social Control Council.
In terms of rights, the Constitution is an example of the development of new constitutional theories worldwide. For instance, it acknowledges the rights to a good standard of living, free communication, free information, decent housing, healthcare and labour. It also determines groups that should receive priority rights (for example, indigenous people, disabled people and elderly people), and the rights of the different nationalities and peoples that coexist in Ecuador. Additionally, it considers nature as a rights holder.
ii LEGAL FRAMEWORK
According to the Mining Act, its regulations and directives, in harmony with the constitutional principles mentioned above, all mineral substances are state-owned and can be delegated to private parties through metallic mining concessions (there are also mining concessions for metallic, non-metallic and construction materials but in this analysis we will focus on the metallic concessions), which can be obtained through public tender or auction processes. The public auction processes are for those mining areas that the state decides to delegate to a private party and that have not been subject to prior concession processes, while the process of public tender of mining concessions applies to those concessions that have been expired or have been returned or reverted to the state. There is an exception for public tender or auction processes, which is the right of the national mining company or the foreign state company or its subsidiaries, which can acquire mining concessions directly from the state.
It is important to mention that, according to the Constitution, the state will constitute public enterprises for the management of strategic sectors and the sustainable use of natural resources; and, exceptionally, may delegate these activities to the private sector. The public mining company ENAMI EP owns some mining concessions, but none of them are in the exploitation phase, and the large mining projects currently at the exploration or exploitation phase are entirely within private investors, national or foreign.
Once the mining concession for metallic minerals is granted, it is divided into two lengthy periods: exploration and exploitation. The exploration period is divided into three sub-periods: (1) initial exploration (up to four years); (2) advanced exploration (up to four years); and (3) economic evaluation (two years, renewable for two more years). Under a recent Ministerial Decree, the Ministry of Mines allows exploratory drilling during the initial exploration period (which before was only authorised during the advanced exploration period, which is a positive move). The aforementioned mining periods do not apply to small-scale concessions, as they could carry out exploration and exploitation activities simultaneously.
In addition, mining concessions are divided into large-scale concessions, medium-sized mining and small-scale mining, as per the following conditions:
|Type||Volume (in metric tonnes)||Royalties||Annual patents||Labour profit-sharing||Contract needed|
|Small||300 tm. underground or 1,000 tm. open pit||3 per cent||2 per cent minimum wage||10 per cent workers, 5 per cent state||No|
|Medium||301 to 1,000 tm. underground or 1,001 to 2,000 tm. open pit||5 to 8 per cent||2.5 per cent, 5 per cent and 10 per cent per mining phase I||10 per cent workers, 5 per cent state||No|
|Large||300 tm. underground or 1,000 tm. open pit||5 to 8 per cent||2.5 per cent, 5 per cent and 10 per cent per mining phase||12 per cent workers, 3 per cent state||Yes, services or exploitation contract|
Mining activities are mainly regulated by the Ministry of Mines, the Mining Regulation and Control Agency (ARCOM), the Ministry of Environment and the Water Secretariat (SENAGUA).
The Ministry of Mines is the government body charged with directing the public policies that relate to geological mining, as well as granting, administering and abolishing mining rights. ARCOM is the technical and administrative body responsible for exercising the state's power to supervise, audit, intervene and control the phases of mining activity carried out by all the mining actors. The Ministry of Environment is in charge of drawing up environmental policies and coordinating strategies, projects and programmes for the care of ecosystems and the sustainable use of natural resources. It also approves environmental studies and issues the necessary environmental permits. SENAGUA is the entity that exercises leadership in guaranteeing fair and equitable access to water, in terms of both quality and quantity, through policies, strategies and plans that allow the integrated management of water resources. It also issues authorisations and permits for the access, use and benefit of water.
The National Assembly and the former president denounced the bilateral investment treaties with Argentina, Bolivia, Canada, China, Chile, Italy, Netherlands, Peru, Spain, Switzerland, the United States and Venezuela, but the current government plans to renegotiate.
President Lenin Moreno decided by an Executive Decree to merge the Ministries of Hydrocarbon, Mines and Electricity into one body headed by the current Hydrocarbon minister, Carlos Perez. This process was is under way and must finish by September 2018.
iii MINING RIGHTS AND REQUIRED LICENCES AND PERMITS
As mentioned in Section II, the state has legal title over all the mineral substances and deposits and the preference would be to exploit these natural resources through state-owned companies, but until now no state-owned companies have taken part in exploiting and none are near the exploitation phase.
In addition to the public tender and auction processes mentioned above, mining concession titles can be transferred between private parties, subject to written consent being granted by the Ministry of Mines. Mining concessions can also be the subject of agreements, such as an irrevocable promise to transfer, assignment as security of the mining rights, property such as buildings, or beneficiation, smelting and refinery plants.
In 2016, the Ministry of Mines launched the mining concessions public tender and auction processes after more than eight years of planning, during which time neither existed. During the planning process, several national and international companies demonstrated their interest in acquiring mining concessions (almost 500 petitions, of which 275 have been granted to date) and an investment commitment for the following four years of US$470 million. The President decided to suspend the public tender and auction processes until the government has analysed and defined what would be the best way to reopen the mining cadastre, since the previous processes revealed a number of errors regarding committed investments.
ii Surface and mining rights
Under Ecuadorian legislation, mining rights are independent from surface rights. Mining rights belong to the state and can be delegated to private investors.
The Constitution recognises and guarantees the right to property to public, private, community, state, associative, cooperative or mixed entities. Having said that, mining concessionaires or mining rights title-holders have the right to acquire, buy, rent, lease or lend the surface lands required for the development of a mining project or related infrastructure.
The Mining Act declares the mining industry to be 'of public utility'. Thus, any easements deemed necessary may be agreed with the landowners or imposed by ARCOM for the same term of the mining concession or mining rights within the framework and limits of the law.3
Mining concessions are granted for a term of up to 25 years, which may be renewed for equal periods provided that, prior to expiry, the mining concessionaire has presented a written petition to the Ministry of Mines to that end and favourable reports have previously been obtained from ARCOM and the Ministry of Environment.
Mining concessions are divided into two phases: the exploration phase and the exploitation phase (see Section II for details). In order for the Ministry of Mines to process a phase change application, the mining concessionaire needs to have complied with the minimum operational and investment requirements in the mining concession area during the relevant phase. If the mining concessionaire does not apply for the commencement of the subsequent mining phase, the Ministry of Mines shall declare the mining concession to be terminated.
The aforementioned minimum operational and investment requirements are the annual exploration and investment reports regarding the exploration activities and investments made in the mining concession area during the previous year and an investment plan for the current year. In the event that a mining concessionaire does not comply with the exploration and investment plan, expiry of the mining concession may be avoided by paying an economic compensation equivalent to the amount of the investments not made, provided that investments equivalent to at least 80 per cent of the total have been made.
iii Additional permits and licences
The main permits and licences are the environmental permit or licence granted by the Ministry of Environment and permits granted by SENAGUA (such as human consumption and industrial usage).
Several other permits are required to develop mining activities during each of the phases and periods, including for the use of explosives, special labour shifts, fire department, and construction permits from ARCOM and the municipalities.
iv Closure and remediation of mining projects
The mining concessionaire and other mining rights title-holders (beneficiation plants, smelting and refining plants) should include in their environmental impact studies a closure plan for all activities, as incorporated in the environmental management plan and relevant warranty. The closure plan will be reviewed and updated periodically in relation to the annual programme of work and environmental budget, and in the environmental compliance audits, which should include information regarding investments, estimates of closing costs, activities for closure of a mine, or for partial or total abandonment of mining operations, and the rehabilitation of affected areas.
Within the two years prior to the scheduled completion of a project, the mining concessionaire or mining rights title-holder shall submit a definitive closure plan to the National Environmental Authority for its approval, including rehabilitation of the sector or area, a plan for verification of compliance, the social impact and compensation plan, and the guarantees as updated and specified in the applicable environmental regulations.
IV ENVIRONMENTAL AND SOCIAL CONSIDERATIONS
i Environmental, health and safety regulations
The Mining Activities Health and Safety Regulations establish the standards for application of the Mining Act, to ensure health and safety at work during all phases of mining activity, and include general guidelines for prevention of risks to workers under special mining regimes (artisanal, small-scale, medium and large-scale).
The provisions contained in the 121 ILO Convention, Decision 584 of the Andean Community – Andean Instrument for Safety and Health at Work, and Resolution 957 of the CAN – Regulation of the Andean Instrument of Safety and Health at Work must be observed and complied with.
Mining companies are also required to draw up internal occupational health and safety regulations, which must be approved by the Ministry of Labour and shall contain a health and safety management system.
ii Environmental compliance
Mining rights title-holders and mining concessionaires must prepare and submit environmental studies or documents to prevent, mitigate, monitor and repair the environmental and social impacts of their activities prior to the initiation of activities. The studies or documents shall be approved by the competent environmental authority, which will then award the relevant environmental licence.
The Mining Activities Environmental Regulations set out the requirements and procedures for applying for environmental permits.
For a small-scale mining project, the environmental permit should be granted for simultaneous exploration and exploitation activities, requiring specific and simplified environmental studies.
For a medium-sized or large-scale mining project, approval of an environmental file is required during the initial exploration period,4 an environmental declaration is required during the advanced exploration period, and environmental impact studies are required during the exploitation phase and subsequent phases, which will be changed or updated depending on the results. On the basis of submitted documentation, the corresponding environmental licences shall be issued.
Once a mining rights title-holder or mining concessionaire satisfactorily complies with the requirements of the applicable law, the approval of the documents, studies and environmental licences must be granted at the latest within six months of an application being submitted. If the authorities fail to do so within that period, it shall be understood that there is no opposition or impediment to mining activities being started.5 It is important to mention that in view of the large number of new mining concessions granted, the Ministry of Environment is not complying with this six-month term.
If mining activities are carried out before the required environmental regulatory approval has been granted, certain financial guarantees must be presented, as established in the applicable mining environmental regulations.
A year after an environmental licence has been issued, the mining rights title-holders or mining concessionaires are required to submit an environmental audit of compliance to enable the inspection body to monitor, oversee and verify compliance with the applicable environmental management plans and environmental regulations. Once this has been done, environmental compliance audits will be presented every two years.
iii Third-party rights
The Constitution recognises collective rights, and guarantees communities and indigenous nationalities the right to be consulted in a free and informed way, within a reasonable period of time, regarding any plans or programmes for prospection, exploitation and commercialisation of non-renewable natural resources that are located within their lands and that may affect them environmentally or culturally. This also includes the right to participate in the benefits that these projects generate and to receive compensation for any social, cultural and environmental damage caused to the people.
These consultations are mandatory and should be carried out by the competent authorities and successfully completed in a timely manner. If the consent of the consulted communities is not obtained, the state shall proceed according to the Constitution and the law. In this regard, the Mining Act establishes that the consultation process is intended to promote the sustainable development of mining activities, safeguarding the rational use of mining resources, respect for the environment, social participation in environmental matters and the development of communities located in the areas affected by a mining project. In the event that, following a consultation process, there is opposition from a majority of the relevant community, a decision regarding whether or not to go ahead with the project shall be made by the Ministry of Mines.
Under the Mining Activities Environmental Regulations, the measures for social participation are defined according to the predicted level of impact and environmental risk associated with the mining activity and the level of conflict identified, as detailed below:
- Projects with low impact and environmental risk: the promoter of the mining right must apply the mechanisms of social participation established in the applicable environmental regulations and submit to the competent environmental authority the necessary report and supporting documents.
- Projects with medium impact and environmental risk: the social participation process will be carried out by the promoter of the mining right subject to the guidelines established by the competent environmental authority and the environmental regulations. If necessary, and at the discretion of the competent environmental authority, the consultation process may be carried out by assigning one or more socio-environmental facilitators, in accordance with the environmental regulations.
- Projects with high impact and environmental risk: the competent environmental authority will carry out the social participation process in coordination with the promoter of the mining right, for which the authority will assign one or more socio-environmental facilitators in compliance with the applicable regulations.
v OPERATIONS, PROCESSING AND SALE OF MINERALS
i Processing and operations
With respect to the import of equipment and machinery, there are no general restrictions, except for some specific goods that have special custom duties or restrictions, mainly to protect national providers of such goods. In Ecuador, there is a shortage of local providers of goods for the mining industry, so almost all mining equipment and machinery has to be imported.
As regards the right to exploit, benefit, smelt, refine, market and dispose of all mineral substances obtained within a mining concession area, the mining rights title-holder has the right to freely sell the minerals.
Under the Mining Act, a mining concessionaire has the right to install and operate beneficiation, smelting and refinery plants by virtue of its concession without the need to apply for authorisation from the Ministry of Mines, provided that the plant is only intended to process minerals from the mining concessionaire's concession. The processing of minerals from a third party's concessions requires the relevant authorisation.
A mining concessionaire may freely market its products within or outside Ecuador with no restrictions. However, in the case of gold from small-scale and artisanal mining, the Central Bank of Ecuador will market it directly or through public or private economic agents previously authorised by the Bank.
With regard to foreign workers, a mining concessionaire is required to employ not less than 80 per cent Ecuadorian personnel for carrying out mining activities and shall preferably engage workers resident in the locations and areas near the mining project. It is preferable for specialised Ecuadorian technical personnel to be engaged to fill the remaining percentage of posts. In the event that there are none, foreign personnel may be engaged; however, they must comply with Ecuadorian legislation.
ii Sale, import and export of extracted or processed minerals
As part of the government plan to denounce bilateral investment treaties, the National Assembly approved the Production, Commerce and Investments Organic Code, which contains and recognises several rights for investors, such as:
- freedom to produce and market lawful, socially desirable and environmentally sustainable goods and services, as well as free pricing, with the exception of those goods and services whose production and commercialisation are regulated by the law;
- access to administrative procedures and control actions established by the state to avoid any speculative practices or private monopoly or oligopoly, or abuse of market dominance and other unfair competition practices;
- freedom to import and export goods and services, with the exception of those limits established by current regulations and in accordance with the international agreements to which Ecuador is a party;
- free transfer abroad, in foreign currency, of periodic profits or profits derived from registered foreign investment, once the obligations concerning employee participation, relevant tax obligations and other corresponding legal obligations have been fulfilled;
- non-discriminatory treatment; and
- the right to own property.
iii Foreign investment
The Production, Commerce and Investments Organic Code allows investors to execute an investment protection contract that sets out the conditions for treatment of its investment and incentives granted thereto, and consequently creates a safer environment for the investor. These contracts have a term equal to the mining concession or the mining exploitation agreement term and its extensions. For medium and large-scale metallic minerals mining projects, it can also grant legal (mining legislation) and tax stability. The requirements for executing an investment protection contract are an investment amount exceeding US$100 million and a technical report issued by the competent ministry.
The following is a brief overview of the charges levied against the mining industry:
- Royalties (metallic concessions) are charged at:
- 3 per cent for small-scale mining; and
- between 3 and 8 per cent for medium-scale and large-scale mining.
- The main taxes applicable are:
- income tax (25 per cent);
- VAT (12 per cent);
- capital outflow tax (5 per cent);
- labour profit-sharing (see chart in Section II); and
- sovereign adjustment (not a tax per se, but an economic compensation to the state to fulfil the 50/50 profit distribution between the concessionaire and the state).
The applicable import duties depend on each of the imported goods and the availability of such goods in Ecuador, and the restrictions that the government wants to impose on certain goods in order to protect the local industry.
VII OUTLOOK AND TRENDS
From the date of issuance of the current Mining Act (29 January 2009), which replaced the previous Mining Act of 1991, and its General Regulations issued on 16 November 2009, Ecuador has seen a growing interest by international mining companies in developing large-scale mining projects in our country. As a result of the negotiation processes for exploitation mining agreements and the lessons learned from them, the Ecuadorian state proceeded to carry out certain legal and regulatory reforms, which were approved in July 2013, February, September and December 2014, December 2015 and April 2016. These reforms to the Mining Act have resulted in the following changes to the mining regime:
- simplification of procedures and permits;
- greater control of illegal mining activity, including a maximum 8 per cent royalty (5 per cent minimum) for metallic minerals;
- establishment of a due process in cases of caducity of mining rights and the right to remedy or comply with the non-compliance;
- clarity regarding the ownership of certain assets;
- creation of the medium scale as a mining category, with more favourable economic conditions and without the obligation to enter into an mining exploitation agreement with the state;
- payment of the windfall tax and sovereign adjustment after the recovery of an initial investment;
- inclusion of formulas to calculate and pay the sovereign adjustment;
- reimbursement of VAT paid as of 1 January 2018; and
- legal and tax stability for medium and large-scale metallic mining thanks to the execution of the investment protection agreement.
There have been efforts by the government to improve the investment climate in Ecuador, especially for the mining sector, through reforms that try to provide security to investors by fixing floors and ceilings, formulas for calculations to avoid any subjective parameters, negotiation, legal and tax stability, among others.
1 Rodrigo Borja Calisto is a partner at Lexim Abogados.
2 The other strategic projects are Rio Blanco-Junefield and Panantza San Carlos-Ecuacorriente.
3 Article 15. Public utility. Mining operations in any phases, both within and outside of the mining concession, are of public utility. Thus, any easements deemed necessary may be created, within the framework and limits established in this Act, taking into account the prohibition and exception set out in Article 407 of the Constitution of the Republic of Ecuador.
4 'Environmental file' is a general description of the applicable legal framework, the main activities of the project, work or activities that, according to the national environmental categorisation, are considered low impact; it also describes the physical, biotic and socio-economic aspects of the project and proposes measures through an environmental management plan to prevent, mitigate and minimise the possible environmental impact.
5 Article 78 of the Mining Act.