I OVERVIEW

Mining, especially large-scale mining, is an emerging industry in Ecuador. In 2009 the Mining Law was passed, after the approval of the 2008 Constitution and the temporary Mining Constitutional Mandate that suspended any new granting of mining concessions, and the expiration of several of the concessions in Ecuador (owing to the lack of activities and environmental impact studies).

Since 2009, under the Mining Law Ecuador has faced a new legal framework and enthusiasm for the large-scale mining industry, supported by the government of the former president Rafael Correa, through the commencement of the three negotiation processes for the mining exploitation agreements for the three strategic projects in Ecuador (three out of five strategic projects),2 Mirador (Ecuacorriente-Chinese) in production to this date, Fruta del Norte (Lundin Gold Inc.-Canadian) will be in production in fourth quarter of 2019, and Loma Larga (INV Minerals-Canadian) suspended due to an anti-mining local consultation process.

The previous government strongly supported the mining industry in Ecuador, during which period the two contracts mentioned above were signed and the third contract (Loma Larga) was agreed and several of the legal and regulatory reforms that will be explained later in this chapter were made. The current government also supports the mining industry, especially as a new source of revenues for the country.

The whole of Ecuador is rich in terms of mining. For several years now, top-level enterprises have surveyed the country and discovered gold and copper reservoirs in Azuay, Zamora Chinchipe, Morona Santiago, Imbabura and other provinces. Ecuador has granted mining concessions to private companies. Some of those projects are under exploration and other are coming into the exploitation phase. These projects are known as second generation projects and include: Cascabel-Solgold, Llurimagua-Codelco with ENAMI, Cangrejos-Lumina, La Plata, Curipamba among others.

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. The 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 other branches: the electoral branch, managed by the National Electoral Council; the Electoral Contentious Tribunal; and the transparency and social control branch, represented by six entities, the General State Comptroller, the Superintendencies, and 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, labour; it also determines groups that should receive priority rights (for example, indigenous people, disabled people and the elderly) as well as 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 regulations and directives of the Mining Law, 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 companies or their 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 that the large mining projects under the exploration or the exploitation phases 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 Mines Ministry allowed exploratory drilling within the initial exploration period (before only authorised within the advanced exploration period, which is positive. The aforementioned mining periods do not apply to small scale concessions, since such concessions 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 need
Small 300 tm. underground or 1000 tm. open pit 3 per cent 2 per cent minimum wage 10 per cent workers, 5 per cent state No
Medium 301–1000 tm. underground or 1001–2000 tm. open pit 4 per cent 2.5 per cent, 5 per cent and 10 per cent per mining phase 1 10 per cent workers, 5 per cent state No
Large
scale
300 tm. underground or 1000 tm. open pit 5–8 per cent (Au, Ag, Cu) 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 Energy and Non-Renewable Natural Resources, the Mining Regulation and Control Agency (ARCOM), the Ministry of Environment and the Water Secretariat (SENAGUA).

The Ministry of Energy and Non-Renewable Natural Resources is the governmental body in charge of exercising the rectory of the public policies of the geological mining area, as well as granting, administering and extinguishing the mining rights. The ARCOM is the technical and administrative body responsible for the exercise of the state's power to supervise, audit, intervene and control the mining activity phases carried out by all the mining actors. The Ministry of Environment is in charge of designing 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 respective environmental permits. The SENAGUA is the entity in charge of exercising the rectory to guarantee the fair and equitable access to water, in quality and quantity, through policies, strategies and plans that allow an integrated management of the water resources, and it also issues authorisations and permits for access, use and benefit of water.

iii MINING RIGHTS AND REQUIRED LICENCES AND PERMITS

i Title

As mentioned in Section II, the state has legal title over all the mineral substances and deposits and the preference is to exploit such natural resources through the state-owned companies, but up until now no state-owned companies have taken part in exploiting (or are near to the exploitation phase).

In addition to the public tender and auction processes mentioned above, the mining concession titles can be transferred between private parties, with previous written consent granted by the Ministry of Energy and Non-Renewable Natural Resources. Also, the mining concessions can be the subject of agreements, such as an irrevocable promise to transfer; assignment as security of the mining rights; property such as buildings; 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 in planning, a period in which neither existed. Within this process, several national and international companies demonstrated their interest in acquiring mining concessions (almost 500 petitions, 275 granted up to date) and an investment commitment for the following four years of US$1.157 bmillion. The president decided to stop the public tender and auction processes until they analyse and define what would be the best way to reopen the mining cadastre, since the previous processes revealed some errors regarding the process and the committed investments.

Surface and mining rights

Under Ecuadorian legislation, mining rights are independent from the surface rights. The 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 titleholders have the right to acquire, buy, rent, lease or lend the surface lands required for the development of the mining projects or related infrastructure.

The Mining Law 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 term may be renewed for equal periods provided that, prior to its expiration, the mining concessionaire has presented a written petition to the Ministry of Energy and Non-Renewable Natural Resources to that end and favourable reports have previously been obtained from ARCOM and the Ministry of Environment.

The 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 Energy and Non-Renewable Natural Resources to process the phase change application, the mining concessionaire shall 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 Energy and Non-Renewable Natural Resources shall declare the termination of the mining concession.

The minimum operational and investment requirements mentioned in the previous paragraph 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, the expiration of the mining concession may be avoided by paying economic compensation equivalent to the amount of the investments not made, provided that investments equivalent to at least 80 per cent have been made.

Additional permits and licences

The main permits and licences are the environmental permit or licence granted by the Ministry of Environment and the SENAGUA permits (human consumption, industrial usage and others).

There are several other permits required to develop the mining activities under each of the phases and periods, among others: explosives use, special labour shifts, fire department, construction permits from ARCOM and the municipalities, etc.

Closure and remediation of mining projects

The mining concessionaire and other mining rights titleholders (beneficiation plants, smelting and refining plants) should include in their environmental impact studies of the closure plan its activities, incorporated in the environmental management plan and their respective warranty. The closure plan will be reviewed and updated periodically in the annual programmes and environmental budgets, and in the environmental compliance audits, with information on investments, estimates of closing costs, activities for the closure or partial or total abandonment of mining operations and the rehabilitation of affected areas.

Within two years prior to the scheduled completion of the project, the mining concessionaire or mining rights titleholder shall submit to the National Environmental Authority for its approval the definitive closure plan including definitive recovery of the sector or area, a plan for verification of compliance, the social impact and compensation plan and the guarantees 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 establishes the standards for the application of the Mining Law, in order to ensure the safety and health at work in all phases of the mining activity and includes the general guidelines to prevent the labour risks under the mining special regimes (artisanal, small-scale, medium and large-scale).

The provisions contained in the 121 and 169 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.

With regard to the specific internal regulations that the mining companies are required to have duly approved we can mention the following.

  1. Internal work regulations and occupational health and safety regulations duly approved by the Ministry of Labour.
  2. Internal work and occupational health and safety regulations are duly approved by the Ministry of Labour, which shall contain a health and safety management system.

Environmental compliance

The mining rights titleholders or mining concessionaires shall 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, studies or documents that shall be approved by the competent environmental authority, with the awarding of the respective environmental licence.

The Mining Activities Environmental Regulations establishes the requirements and procedures for the application of the environmental permits.

For the small-scale mining regime, the environmental permit should be granted for simultaneous exploration and exploitation activities, requiring specific and simplified environmental studies.

For the medium- and large-scale mining regimes, within the initial exploration period the approval of an environmental file will be required;4 for the advanced exploration period, an environmental declaration will be required; while for the exploitation phase and subsequent phases will require environmental impact studies, which will be changed or updated depending on the results. On the basis of these instruments, the corresponding environmental licences shall be issued.

Once the mining rights titleholders or mining concessionaires satisfactorily comply 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 its submission. If they fail to do so within that period, it shall be understood that there is no opposition or impediment to the beginning of mining activities.5 It is important to mention that due to the large number of new mining concessions granted, the Ministry of Environment is not complying with such term.

The mining activities before the respective environmental regulatory approval require the presentation of certain financial guarantees established in the applicable mining environmental regulations.

The mining rights titleholders or mining concessionaires are required to submit, the year after the environmental licence has been issued, an environmental audit of compliance to enable the inspection body to monitor, overlook and verify the compliance with environmental management plans and environmental regulations applicable. Following this, environmental compliance audits will be presented every two years.

Third-party rights

The Constitution recognises collective rights and guarantees communities and indigenous nationalities the right to be consulted in a prior, free and informed way, within a reasonable time, of any plans and 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 the social, cultural and environmental damages caused to the people.

The consultation to be carried out by the competent authorities shall be mandatory and accomplished 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 sense the Mining Law establishes that the consultation process is intended to promote the sustainable development of the mining activities, safeguarding the rational utilisation of mining resources, the respect for the environment, the social participation in environmental matters and the development of communities located in the areas of influence of a mining project. In the event that, following a consultation process, there is a majority opposition within the respective community, the decision regarding whether or not to develop the project shall be taken by the Ministry of Energy and Non-Renewable Natural Resources.

Under the Mining Activities Environmental Regulations the mechanisms for social participation will be defined considering the level of impact and environmental risk predicted for the mining activity and the level of conflict identified, as detailed below:

  1. Projects of 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 respective report and supporting documents.
  2. Medium impact and environmental risk projects: 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.
  3. High impact projects 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 established in 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 the national providers. In Ecuador there is a lack of local providers to provide goods for the mining industry, so almost all of the mining equipment and machinery has to be imported.

As per the right to exploit, benefit, smelt, refine, market and dispose of all mineral substances obtained within the mining concession area, the mining rights titleholders have the right to freely sell the minerals.

Under the Mining Law, the mining concessionaires have the right to install and operate beneficiation, smelting and refinery plants by virtue of their concessions without the need to apply for the authorisation from the Ministry of Energy and Non-Renewable Natural Resources, provided that such plant is only intended to process minerals from the mining concessionaire's concession. The processing of minerals from the third party's concessions requires the respective authorisation. The mining concessionaires may freely market their products inside 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 and private economic agents previously authorised by the Bank.

With regard to foreign workers, the mining concessionaires are required to employ not less than 80 per cent Ecuadorian personnel for the development of the mining activities and shall preferably engage workers resident in the locations and areas near to their mining projects. As for the remaining percentage, specialised Ecuadorian technical personnel shall be preferred; in the event there are none, foreign personnel may be engaged, who must comply with Ecuadorian legislation.

ii Sale, import and export of extracted or processed minerals

The Production, Commerce and Investments Organic Code contains and recognises several investors' rights such as:

  1. freedom of production and marketing of 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;
  2. 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 practices of unfair competition;
  3. 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;
  4. 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;
  5. non-discriminatory treatment; and
  6. the right to own property.

Foreign investment

The Production, Commerce and Investments Organic Code allows the investors to execute an investment protection contract that sets the conditions for the 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. Also for medium and large-scale metallic minerals mining projects it can grant legal (mining legislation) and tax stability. The requirements to execute the investment protection contract are an investment amount exceeding US$100 million, and a technical report issued by the competent ministry.

vi CHARGES

Below is a brief overview of the charges levied against the mining industry:

  1. royalties (metallic concessions);
    • 3 per cent for small-scale mining;
    • 4 per cent for medium-scale mining; and
    • 3–8 per cent for large-scale mining (for gold, silver and copper); and
  2. the main taxes applicable to the mining industry are the following:
    • income tax (25 per cent);
    • value added tax (VAT) (12 per cent);
    • capital outflow tax (5 per cent);
    • windfall tax (this tax was derogated);
    • labour profit sharing (see chart in Section II); and
    • sovereign adjustment (this is not a tax per se, but it is an economic compensation to the state to fulfil the 50:50 profit distribution among the concessionaire and the state).

Duties

The applicable import duties depends on each of the imported goods and the availability of such goods in Ecuador and the restrictions that the government wants to impose over certain goods in order to protect the local industry.

vii OUTLOOK AND TRENDS

From the date of issuance of the current Mining Law, 29 January 2009, which replaced the previous Mining Law of 1991, and its General Regulations issued on 16 November 2009, Ecuador has seen the interest of international mining companies in developing large-scale mining projects in our country. As a result of the negotiation processes of the 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 of 2014, December 2015, April 2016 and August 2018. In the reforms to the Mining Law the following changes were made to the mining regime:

  1. simplification of procedures and permits;
  2. greater control of illegal mining activity; including a maximum 8 per cent royalty (5 per cent minimum and 8 per cent maximum) for metallic minerals;
  3. establishment of a due process in the cases of caducity of mining rights and the right to remedy or comply with the non-compliance;
  4. clarity regarding the ownership of certain assets;
  5. creation of the medium scale as a mining category, with more favourable economic conditions and without the obligation to enter into a mining exploitation agreement with the state;
  6. payment of the sovereign adjustment after the recovery of the initial investments;
  7. inclusion of formulas to calculate and pay the sovereign adjustment;
  8. reimbursement of VAT paid as of 1 January 2018;
  9. legal and tax stability for medium and large-scale metallic mining with the execution of the investment protection agreement; and
  10. derogation of the windfall tax.

There have been efforts by the government to improve the investment climate in the country, especially for the mining sector, through reforms that try to provide security to the investors by fixing floors and ceilings, formula of calculation to avoid any subjective parameters negotiation, legal and tax stability, derogation of certain taxes, among others.


Footnotes

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 all phases, both within and outside of the mining concession, are declared to be of public utility. Thus, any easements deemed necessary may be created within the framework and limits of this Law, taking into account the prohibition and exception set out in Article 407 of the Constitution of the Republic of Ecuador (protected and intangible areas).

4 Environmental File describes in a general way, the applicable legal framework, the main activities of the projects, works or activities that according to the national environmental categorisation, are considered of low impact; it also describes its environment in the physical, biotic and socio-economic aspects and proposes measures through an environmental management plan to prevent, mitigate and minimise the possible environmental impact.

5 Article 78 of the Mining Law.