The Mining Law Review: Ecuador

I OVERVIEW

Since colonial times, the exploitation of mineral deposits under small-scale and artisanal mining regimes has been an activity executed in limited geographic areas of the country. However, prior to 2009, when a new Mining Law was enacted, mining itself had not had major economic significance in the country's economic development.

Over the past 10 years, significant deposits have been found, especially in the northern and southern parts of the country, including two large-scale mining projects that started production in 2019: (1) the Fruta del Norte Project, a gold deposit owned by the Canadian company Lundin Gold; and (2) the Mirador Project, a copper deposit owned by Ecuacorrientes SA, a company with Chinese capital. Both projects allowed Ecuador to officially become a mining country.

Both companies entered into mining contracts with the Ecuadorian government, committing substantial investments. Public announcements relating to the Fruta del Norte Project stated that the operation of the mine would bring an investment of approximately US$960.6 million.

According to Central Bank information, after the commencement of production in both projects, Ecuador's mining exports in 2020 represented 4.4 per cent of the total amount of local exports and US$430 million were collected from taxes related to the mining industry. Mining now constitutes approximately 1.65 per cent of Ecuador's GDP.

Another relevant development in this industry is reflected in the US$374 million foreign direct investment attracted by the third quarter of 2020. Based on this data, mining is becoming the industry attracting the largest amount of foreign direct investment (41.73 per cent of the national total).

In addition to these two projects, there are some other relevant projects characterised by the Ecuadorian government as first-generation projects, such as San Carlos Panantza, Cangrejos, Loma Larga, Río Blanco, and second-generation projects, such as Cascabel, Llurimagua, La Plata, Curipamba, Cangrejos and Ruta de Cobre.

Until 2017, the Ecuadorian government had granted several mining concessions to national and foreign investors. Most concessions and projects are in the exploration phase, and some second-generation projects are starting the economic evaluation of the deposit.

The Ecuadorian Mining Cadastre remains closed, making associations and joint ventures the best manner to participate in mining projects related to previously granted concessions. Exploration companies are continuing operations, and some interesting big players are contracting with mining concessionaires to conduct mining activities. It is expected that following the inauguration of Guillermo Lasso's new pro-investment and business-oriented government on 24 May 2021, this cadastre will be reopened, thereby allowing mining companies to participate in new auctions of mining areas for exploration.

ii LEGAL FRAMEWORK

A new Mining Law was enacted in January 2009. General Regulations to the Mining Law, Environmental Mining Regulations, and Regulations for Small-Scale Mining were issued in November 2009. Thereafter, minor modifications have been included, except for one major modification: the prohibition for state-owned companies to directly obtain mining concessions. Those companies were formerly entitled to do so.

The Ministry of Energy and Non-Renewable Natural Resources (the Ministry of Energy) is the authority responsible for mining planning and policy execution. The Non-Renewable Natural Resources Control Agency (the Agency) is the administrative entity responsible for supervising mining activities. Last year, three energy sectors – oil and gas, mining, and electricity – were consolidated under the control of the Agency. There have been recent announcements by the national government in relation to a potential split of the Agency to restore it to its previous way of operating.

The Mining Law created the state-owned Mining Enterprise (ENAMI EP), an entity governed by public law that may carry out mining activities either by itself or under associations or strategic alliances.

The Ministry of Energy oversees the process of granting mining exploration concessions and negotiating, approving and executing contracts for exploitation of minerals.

Provincial or municipal authorities do not overlap with national regulations, although they do have political influence on exploration and exploitation areas. Therefore, they must be considered within the concessionaires' general business development strategy.

In 2009, under the left-wing government of Rafael Correa, Ecuador withdrew from the International Centre for Settlement of Investment Disputes (ICSID) and terminated the existing bilateral investment treaties with other countries, which were declared unconstitutional by the former Constitutional Court. Due to this withdrawal, the Ecuadorian National Assembly enacted relevant regulations, such as the Production Code and the Law on Investment Promotion, guaranteeing tax stability and the possibility to submit disputes related to major investments to international arbitration under a law that aimed to promote and guarantee investments.

The Mining Law only recognises the validity of arbitration proceedings carried out in Latin America. The existing oil and mining contracts provide for arbitration proceedings in Chile under UNCITRAL rules. Ultimately, after almost 12 years, the new government of President Lasso signed the appropriate documents for Ecuador's return to the ICSID, thereby ratifying the government's intention to promote foreign investment and efficient commercial relations.

iii MINING RIGHTS AND REQUIRED LICENCES AND PERMITS

i Title

The subsoil is the exclusive property of the Ecuadorian state. The state issues a 'mining title' (a formal document equivalent from a juridical standpoint to a concession) through the Ministry of Energy, which enables the holder to carry out exploration activities. Exploration and exploitation of minerals are open both to the state and to private parties.

The initial exploration period may last up to four years upon prior authorisation from the Ministry of Environment, Water and Ecological Transition (the Ministry of Environment), which initially issues an environmental permit. Once the company enters the advanced exploration phase, an environmental licence is required (which is granted after approval of an environmental impact study and management plan). Thereafter, the advanced exploration phase may last for four additional years and the economic evaluation phase may last for two years, extendable for the same period.

If the programmes and investments are accomplished, the holder of the mining title has the exclusive right to pass to the next mining phase. For exploitation activities, an exploitation contract must be entered into by the state and the concessionaire.

Under exploitation contracts, contractors assume the risk and must make investments on their own and pay royalties and taxes as established in the relevant laws. The exploitation contract pertains to all minerals found in the concession area and establishes the legal framework for development, construction and operation of the mine. It lasts 25 years, extendable for a similar period.

ii Surface and mining rights

Mining rights are independent of the title to the land on which the concession is located. Easements may be established for access, construction of camps, electric line routes and others. The term of such easements must be concurrent with the concession period (a maximum of 25 years, if not extended).

Ecuadorian or foreign individuals or corporations, whether state-owned, mixed-economy or private, or associations or community-based and self-managed enterprises (Article 18, Mining Law) may obtain mining concessions over new areas included in the mining land registry or concessions surrendered to the state or declared by the state as lapsed. The maximum area per concession is 5,000 hectares (Article 35, Mining Law). New mining concessions are not currently available. The Ministry of Energy is working on a new cadastral system to provide certainty and efficiency to the process of granting mining concessions.

Public auction proceedings (Article 29, Mining Law) (subasta and remate)

The Ministry of Energy – specifically the Vice Minister of Mines – calls a public auction referred to as remate to award metallic mining concessions on concession areas that have lapsed or have been surrendered to the state.

The Vice Minister of Mines calls an auction referred to as subasta in cases involving new areas made available by the state according to Article 29 of the Mining Law and regulated by the Instructions for Awarding Mining Concessions for Metallic Minerals ('Instructions for Awarding').

In both cases, applicants must submit their bids in accordance with the procedure established in the applicable regulations.

Associations

Association with ENAMI EP

ENAMI EP may participate in mining activities in association with private parties and may implement any type of ventures with Ecuadorian or foreign, state-owned or private companies in accordance with Ecuadorian law (Article 316, Constitution of Ecuador; Article 12, Mining Law; Article 35, Organic Law on Public Enterprises).

Association with third parties

Potential mining concessionaires may enter into associations with, or obtain total or partial assignments of mining rights from, private third parties that have already obtained mining concessions.

In Ecuador, mining rights are transferable. The requirements for a transfer are set forth in the General Regulations to the Mining Law and the Instructions for Authorisation of the Assignment and Transfer, and Collateral Assignment, of Mining Rights approved by the Ministry of Energy by Resolution No. 2016-039.

iii Additional permits and licences.

Pursuant to the current laws, mining companies must first obtain an authorisation for the use of water from the Ministry of Environment.

In addition, mining concessionaires need to obtain an environmental registration for the initial exploration phase, and an environmental licence for advanced exploration and exploitation activities.

The initial exploration phase commences only after the mining concessionaire has obtained the above-mentioned permits.

Usually, permits are granted for the duration of the mining project. Maintaining of rights is subject to payment of annual water use fees. There are no current desalination plant projects for treatment and self-supply of water and no other water management mechanisms are being introduced.

iv Closure and remediation of mining projects

According to the Environmental Regulations for Mining Operations, prior to the closure and abandonment of a mining property, the contractor or concessionaire must conduct an environmental audit including the environmental liabilities found in the property and the remediation work intended to be conducted, including social works.

A performance bond needs to be provided to secure compliance of the remediation works, which performance bond must be submitted to the Ministry of Environment for approval.

iv ENVIRONMENTAL AND SOCIAL CONSIDERATIONS

i Environmental, health and safety regulations

According to the Ecuadorian Constitution, the Environmental Code, its Regulations, and other secondary provisions, an environmental licence is required for advanced exploration and exploitation phases. During the performance of mining activities, environmental management plans and environmental audits must be performed by independent environmental auditing firms.

According to the Ecuadorian Constitution, any extractive industry is forbidden in the territories included in the National Protected Areas System (which includes national parks, natural reserves, indigenous territories and protected forests, among others).

Currently, Ecuador is an Extractive Industries Transparency Initiatives (EITI) implementing country and the Ministry of Energy is implementing the National Plan for the Development of the Mining Industry (2020–2023).

Yes, there are specific regulations related to health and safety in the mining industry under local law and one of the purposes of the National Plan for the Development of the Mining Industry is achieving 'environmental and social sustainability', which means that the government promotes the adoption of good environmental, labour and occupational health practices in the mining industry by harmonising relations between the various mining actors through mechanisms for participation and dialogue.

ii Environmental compliance

An environmental assessment is mandatory prior to the execution of any mining activity.

The process for approval of the Environmental Impact Assessment (EIA) may be summarised as follows:

  1. preparation of terms of reference for the EIA and approval thereof by the competent authority;
  2. obtaining from the Ministry of Environment an intersection certificate evidencing that the area does not interfere with the National Protected Areas System;
  3. approval of the EIA, which must include public consultations and submission of the EIA, an environmental management plan and a contingency plan for the communities within the area of impact of the project;
  4. once the EIA is approved by the competent authority or the Ministry of Environment, the environmental licence is issued by the Ministry of Environment; and
  5. finally, a third-party liability insurance policy must be provided by the concessionaire to protect third parties from any consequences resulting from the mining activities that may affect them, along with a performance bond guaranteeing compliance with the environmental management plan.

Permits are required prior to the commencement of any mining project, including its exploration phase. Depending on the project, it may take a few or several months to obtain the environmental licence.

The preparation of the EIA must include a public consultation process to seek feedback and comments from the community within the area of influence of the project. NGOs are also entitled to participate in the consultation process.

Public consultation is a key element prior to approval of the EIA.

iii Third-party rights

A social participation process in connection with the activities intended to be conducted (which is part of the process of obtaining an environmental licence) is mandatory before commencing any activity. Non-compliance with this requirement may lead to the suspension of mining activities, including cancellation of the exploitation contract.

Previous consultation is an exclusive right granted to indigenous communities, afro-Ecuadorian or Montubio groups. This type of consultation is mandatory, but not binding, according to the International Labour Organization (ILO) 169 Convention and the precedents set by the local Constitutional Court in recent case law.

iv Additional considerations

A very important consideration relates to the social licence that is implicitly needed to conduct mining operations in rural areas. Although the public consultation is mandatory, people's comments and observations are not binding; however, in practical terms, it will be very difficult to conduct mining activities in any territory if there is strong opposition from its inhabitants.

v OPERATIONS, PROCESSING AND SALE OF MINERALS

i Processing and operations

There are no limitations on imports of equipment and machinery for the mining industry or the processing of extracted minerals.

The acquisition of tangible goods, such as industrial plants, machinery and equipment, as well as their spare parts is a form of investment admitted under the relevant legal framework. Therefore, this mechanism may be used for projects including these costs.

In the context of Latin America's fight against illegal mining, the Ministers of the Andean Community who convened at the 35th meeting of the Andean Council of Foreign Affairs Ministers on 30 July 2012 signed the Policy to Combat Illegal Mining whereby the states undertook to control and supervise the import, export, transport, distribution and sales of machinery, its parts and accessories, equipment, and chemical and hydrocarbon inputs that may be used in illegal mining.

Pursuant to these guidelines, in February 2016, the Ministers of Mining, Environment and Transport jointly signed a decree establishing the following obligations for the importation of machinery:

  1. the Ministry of Transportation will keep a registry and records of the machinery used in mining activities; and
  2. companies selling machinery and heavy-duty equipment for mining activities must have satellite tracking devices installed on the machinery or equipment delivered to buyers, and must ensure that it is registered with, and provided with licence plates furnished by, the Ministry of Transportation. If any mining companies import their machinery directly, they must comply with this provision before starting operations.

In addition, the General Regulations to the Mining Law establish that scheduled investments in machinery must be included by mining title holders in their reports to the mining authority.

Although mineral processing is a permitted activity under exploitation contracts, a new environmental licence is required to process the extracted minerals. For this purpose, an EIA and an environmental management plan must be approved.

Additionally, by means of Resolution No. 2020-0043 of 15 July 2020, the Ministry of Energy issued Instructions for Approval of Tailings Storage Facility Design, Construction, Operation and Maintenance Projects for Medium and Large-Scale Mining. This document contains the technical guidelines that are to be observed by mining concessionaires that intend to use tailings storage facilities for mineral processing.

There is no prohibition against hiring foreign labour and services; however, the Mining Law states that the holders of mining rights are obliged to employ Ecuadorian personnel in a proportion of not less than 80 per cent for the conduct of their mining operations. For the remaining percentage, Ecuadorian specialised technical personnel will be preferred; if there is none, foreign personnel will be hired (Article 75, Mining Law). Also, the law provides that all mining concessionaires must preferably hire workers residing in the localities and areas surrounding their mining projects and must maintain a human resources and social welfare policy that integrates the workers' families. Finally, citizens of the Andean Community member countries and of MERCOSUR countries are deemed non-foreign personnel for purposes of this restriction.

Additionally, the Amazon Law enacted in 2018 establishes the obligation of mining concessionaires operating in the Amazon Region to hire not less than 70 per cent of employees residing in those areas, to participate in the operations. If no qualified personal is available, this mandate should not apply.

ii Sale, import and export of extracted or processed minerals

Sale is one of the phases of the mining activity regulated by the Mining Law. In general, the law states that '[t]he holders of mining concessions may freely sell their production inside or outside the country'. However, it establishes the obligation of the holders of mining concessions to register their sale contracts with the Mining Registry and to obtain an exporter's certificate from the Agency (Article 49, Mining Law).

If sale and export activities are carried out by a natural or legal person other than the holder of a mining concession, this person must obtain a marketing licence from the Ministry of Energy after completing the relevant administrative process and complying with the established requirements.

iii Foreign investment

Foreign investment in the mining sector is permitted. No previous authorisation is required. Foreign nationals have the same rights and obligations as Ecuadorian nationals. Ecuador's legal currency is the US$, and there is a free exchange market in Ecuador.

Money remittances abroad are permitted and are subject to a 5 per cent tax on the remitted amount. There is a free export market and companies are entitled to receive and retain the foreign currency obtained from export sales or to directly service a foreign debt.

A transfer of shares in a mining company does not require any authorisation from the mining authority, but a transfer of the mining concession (transfer of mining rights) does.

The acquisition of mining companies operating in Ecuador by foreign companies does not have any restrictions. Foreign companies may be shareholders of local companies holding mining concessions.

A transfer of shares may be freely carried out but must be duly notified to, and registered with, the Mining Registry in accordance with the Mining Law. In 2014, the Mining Law was amended to establish that direct or indirect transfers of 10 per cent or more of the shares or equity interests in mining concessionaires must be registered with the Mining Registry.

On the other hand, a transfer of mining rights may be carried out without a transfer of shares in the company. In practice, a transfer of mining rights is more common than an acquisition of assets and liabilities but requires prior authorisation from the Ministry of Energy and registration with the Mining Registry.

Concurrently with the execution of the exploitation contract, it is common (not mandatory) for companies to execute an investment protection agreement with the Ministry of Production whereby legal stability and investment protection clauses are included.

vi CHARGES

Mining concessionaires are required to pay the 'conservation patent' for each mining hectare. For the initial exploration phase, the conservation patent is equivalent to 2.5 per cent of a basic unified salary (currently around US$400). For the advanced exploration and economic evaluation phases, the conservation patent is equivalent to 5 per cent of a basic unified salary. For the exploitation phase, the conservation patent is 10 per cent thereof. In relation to royalties, the law provides that they cannot be less than 5 per cent of mineral sales (net smelter return).

Fifteen per cent of the company's profits must be distributed as follows: 3 per cent to the workers and the remaining 12 per cent to the state, which will invest it through local entities in social projects in the area where the mining project is located.

i Royalties

The mining concessionaire must pay a royalty according to the rates established in the Mining Law or the concession contract. This may not be lower than 5 per cent of mineral sales or greater than 8 per cent of the net smelter return for principal and secondary minerals. The rate is determined based on the criteria of progressiveness, volume of production, type and price of the minerals.

Sixty per cent of the royalties received by the state must be allocated to social investment projects, primarily to cover unsatisfied basic needs and territorial or productive development, and a fraction of this percentage may be distributed to the governing bodies of indigenous communities located in the area of influence affected by the mining activity.

In some cases (depending on specific technical, economic or social circumstances), the government may negotiate the payment of advance royalties before the commencement of the exploitation phase. This payment will be deducted from future royalty obligations.

ii Taxes

The tax regime applicable to the mining industry is governed, in general terms, by the common legal regime, namely, the Constitution of the Republic, Tax Code, Production Code, tax laws and regulations, and the General Mining Law and its Regulations.

Furthermore, taxpayers holding large-scale mining exploitation concessions must apply the Accounting Regulations for Large-Scale Metallic Mining Applicable to Mining Exploitation Contracts issued in 2012 for that segment of the industry as complementary rules for accounting and taxation purposes. In respect of matters not set forth in those regulations, International Financial Reporting Standards (IFRS) must be applied. Accounting must be kept separately for each mining contract or concession in US$ and in accordance with the accrual and double entry principles.

In general terms and for tax purposes, a foreign company is deemed to have a permanent establishment in Ecuador when it has fixed locations or centres for economic activity in the country, such as mines, mineral deposits, or quarries, among others. Income obtained from mining activities carried out in Ecuadorian territory is deemed to derive from an Ecuadorian source.

Collection of taxes, patents and royalties applicable to the mining industry is in the charge of the Internal Revenue Service (SRI), a governmental entity that also has powers to determine and resolve tax matters and to sanction taxpayers.

The Ecuadorian state's share in the profits obtained from useful recovery of mining resources consists of the amounts collected for the following fiscal obligations pursuant to Article 408 of the Constitution:

  1. income tax;
  2. mining royalties;
  3. employee–state profit sharing: 15 per cent; and
  4. sovereign adjustment (if applicable).

As mentioned before, to attract private investment and provide fiscal stability, the Ecuadorian government is currently offering the option of entering into an investment protection agreement providing tax stability during its term, whereby the state guarantees the conditions, rules and obligations agreed upon by the parties.

iii Duties

Mining concessionaires are obliged to submit annual exploration and exploitation reports (Article 38, Mining Law). These reports must contain a description of the progress achieved in the immediately preceding year during initial exploration and advanced exploration activities. Reports must be filed by 31 March of each year.

An investment plan for the current year must also be submitted together with the annual report. The plan must specify the amounts intended to be invested during that period. Those amounts are mandatory for the concessionaire.

In respect of exploitation activities, the concessionaire must obligatorily submit a production report every six months. The required contents of that report are listed in the Agency's Technical Guidelines (Article 42, Mining Law).

Non-payment of mining patents or royalties or failure to submit reports may result in cancellation of the mining concession.

iv Other fees

In those cases where the state has received profits from exploitation of a mining concession in an amount that is lower than the profits obtained by the holder of the concession that conducts mineral exploitation, a sovereign adjustment will be calculated and paid by 31 March of each fiscal year (Article 408, Constitution).

Accrued profits obtained during the whole term of the mining exploitation contract, and not only the base used for each fiscal year, must be considered for this calculation:

  1. income tax;
  2. mining royalties;
  3. employees' profit sharing and state's share, 15 per cent; and
  4. sovereign adjustment, if applicable.

Before executing an exploitation contract, the applicable rate will be determined to update annual income and cash flows to their present value corresponding to the year of calculation, which will be used to update state profits as well as those of the mining concessionaire.

vii OUTLOOK AND TRENDS

i Amended Instructions for Exploration and Exploitation

In December 2020, the Instructions for Exploration and Exploitation of mining concessions were amended. As a result, the effective duration of each stage of mining activities will be calculated from the date on which the necessary environmental permits are obtained. In practice, this will ensure that exploration phases will not be unfairly reduced.

ii Model mining agreement

The Ministry of Energy and Non-Renewable Natural Resources is currently working on a model mining agreement that contemplates international negotiation standards to attract foreign investment to the industry.

iii EITI implementation

Ecuador became the 55th country to implement EITI standards.

EITI implementation will require public disclosure by the government of Ecuador of information on contracts, beneficial owners and how mining revenues are distributed.

iv Mining public policy

The President of the Republic is currently working on an executive decree that will contain an action plan for the mining industry. This plan will include measures to reopen the mining cadastre and start new processes to grant mining concessions.


Footnotes

1 Jaime P Zaldumbide is a partner and María Isabel Aillón is a director at Pérez Bustamante & Ponce.

The Law Reviews content