Mining

Last verified on Tuesday 25th July 2017

Ecuador

Jaime P Zaldumbide and Raúl de la Torre
Pérez Bustamante & Ponce and Perez Bustamante & Ponce
  1. 1.

    Provide an overview of the mining industry in your country. What significance does the mining industry have as a component of the national economy?

  2. Although Ecuador has been a mining country since colonial times, the exploitation of mineral deposits has not had major economic significance in the country’s economic development.

    Fortunately, in recent years two very large deposits were found in the Ecuadorian Amazon region: a gold deposit (Aurelian-Lundin) and a copper deposit (EcuaCorriente, Tongling Nonferrous Metals Group Holdings Co and China Railway Construction Corp). They involve international projects and, according to the holders of the mining concessions, require substantial investments in the mining sector.

    After several months of negotiation with various interested parties, Kinross Gold Corporation transferred Fruta del Norte Project to Fortress Minerals Corp, a company controlled by the Lundin family. Afterwards, and following several months of negotiations with the Ecuadorian government, in December 2016 Lundin concluded its negotiations and signed the exploitation contract.

    In connection with these two projects, negotiations for development and exploitation contracts have concluded with EcuaCorriente and with Aurelian (Lundin). Ecuacorriente is already working on the development of the project and Aurelian is starting its development in the second semester of 2017.

    In addition, there are other copper deposits with great potential called Cascabel and Llumiragua. The concessionaires for the first project – SolGold and Cornerstone – announced the commencement of negotiations to enter into an exploitation contract, wheras CODELCO, is conducting exploration activities in Llumiragua.

  3. 2.

    Describe the legal and regulatory framework. What laws establish and grant authority to the mining authorities?

  4. A new Mining Law was enacted in January 2009 and amended in July 2013. The General Regulations to the Mining Law, the Environmental Mining Regulations and the Regulations for Small-Scale Mining were issued in November 2009. 

    Until February 2015, the Minister of Non-Renewable Natural Resources was the authority responsible for mining planning. In February 2015 the Ecuadorian government created the Ministry of Mines due to a desire of encouraging the country’s mining sector.

    The Minister of Mines took over the responsibility and planning powers for the mining sector. The Mining Regulation and Control Agency is the administrative entity responsible for supervising mining activities. 

     The new law created the National Mining Enterprise, an entity governed by public law that may carry out mining activities either by itself or under associations or strategic alliances.

    The Ministry of Mines is in charge of negotiating service contracts for exploration and exploitation of minerals and to grant concession contracts for the same purpose.

    Provincial or municipal authorities do not overlap with national regulations, although they do have political influence on exploration and exploitation areas.

    On 24 May 2017, Lenin Moreno took office as the new President of Ecuador. He belongs to the same political party as the outgoing President.

    The new President has stated that he would promote mining. The previous administration’s Mining Minister, Javier Córdova, has remained in office, which is indeed a further indication that the new President intends to continue to develop the Ecuadorian mining industry.

  5. 3.

    Describe the investment regime (specifically or generally) applicable to foreign company involvement in mining projects.

  6. Foreign investment in the mining sector is permitted. No previous authorisation is required. Foreigners have the same rights and obligations as Ecuadorean nationals. Ecuador’s legal tender is the US dollar and there is a free exchange market in Ecuador. This 5 per cent tax is not applicable to the remittance of profits and the payment of loans’ capital and interests. Remittances abroad are permitted and are subject to a 5 per cent tax on the amount remitted. There is a free export market and companies are entitled to receive and retain the foreign currency obtained from export sales or for directly servicing their external debt.

  7. 4.

    Is your country a party to international investment treaties applicable to mining projects undertaken or sponsored by foreign companies?

  8. In the past, Ecuador has entered into investment treaties with different countries, whereby it intended to protect the investments of nationals of the signatory countries. Under such treaties, international arbitration was the selected dispute resolution mechanism. Nevertheless, based on political decisions, the National Assembly has recently repealed all these investment protection treaties. According to declarations from the former government, the idea is to renegotiate all these treaties specially changing the dispute resolution clause to accommodate them to the new Constitution of 2008 as explained below.

    Pursuant to the principles enshrined in the new Constitution approved in 2008, the Ecuadorean state cannot submit its disputes to a foreign jurisdiction; therefore, all the treaties providing for international arbitration are being terminated. The Mining Law only recognises the validity of arbitration proceedings carried out in Latin America (eg, in Chile) under UNCITRAL rules.

  9. 5.

    What in general terms is the mining exploration and exploitation permit or concession regime? What is the licensing regime?

  10. The Mining Law provides that the award of new mining concessions must be subject to a bidding proceeding or an auction.

    In March 2016, the national government invited interested parties to “reserve” mining areas wherein they may be interested in performing their activities. 

    Following the reservation of areas, the government invited interested parties to participate in a bidding processes for the purpose of procuring the largest investments.

    Since this is the first time this type of process is undertaken, some problems have arisen for which solutions have been devised over time. More than 280 mining titles have been granted by the government for the exploration of mining concessions.

    A second call is expected to occur in mid-2017.

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

    Since 2014 the Mining Law classifies mining activity into artisanal, small-scale, medium-scale and large-scale mining. The fundamental criterion for this division is production capacity. This division has effects with regards to authorisations prior to the granting of permission to develop mining activities, method of implementation, and contributions to be paid to the state.

    The initial exploration period may last up to four years upon the prior authorisation of the Ministry of Environment through the issuance of an environmental licence (granted after approval of an environmental impact study and management plan). Thereafter, the advanced exploration period may last four additional years and the economic evaluation period may last two years.

    If the programmes are met, the holder of the mining title has the exclusive right to pass to the next mining phase. 

    In order to carry out exploitation activities, a service contract or exploitation contract must be entered into. 

    Under service contracts, contractors only receive a compensation or fee from the government for the services performed. In our opinion, although there are no antecedents in the mining area regarding this type of contracts, this payment may be received in cash or in kind (with the same mineral). The subsoil is the exclusive property of the state.

    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. Those contracts pertain to all minerals within the concession area.

  11. 6.

    What types of duties, royalties and taxes must be paid by the mining project company as a condition to obtaining or continuinga mining concession? What remedial actions are available to the granting authority when such levies are unpaid?

  12. A) Mining concessionaires are required to pay the "conservation patent" for each mining hectare.

    Payment of the conservation patent differs according to the type and phase of mining activities.

    a. Artisanal mining: exempt from payment.

    b. Small-scale mining: must pay 2 per cent of one Consolidated Basic Remuneration (US$354) for both the exploration and exploitation phases.

    c. Medium-scale mining: must pay the same rate as large-scale mining (described below).

    d. Large-scale mining: 

    - must pay 2.5 per cent of one Consolidated Basic Remuneration (US$366) in the initial exploration phase.
    - 5 per cent of one Consolidated Basic Remuneration (US$366) in the advanced exploration and economic evaluation phase.
    - 10 per cent of one Consolidated Basic Remuneration (US$366) in the exploitation phase.

    B) Fifteen per cent of company profits must be distributed as follows: 3 per cent among the workers and the additional 12 per cent must be delivered to the state, which will invest it through sectoral entities for social projects in the area where the mining project is located. For small-scale mining, 10 per cebt of profits are delivered to the workers, and 5 per cent is delivered to the state.

    It should be mentioned that in April 2016 the central portion of the Ecuadorian coastal region suffered an earthquake of great magnitude which resulted in substantial human and economic losses. To support the reconstruction of the affected regions, the national government ordered that the companies must contribute with an additional 3 per cent of their profits during 2016. This problem is currenlty being overcome through state and domestic and international private sector participation.

    C) Mining contractors must pay a royalty on sale prices of minerals to the state, related to the “base price” established or agreed in the contract.
    For the principal mineral and secondary minerals the percentage does not exceed 5 per cent, and for copper and silver it does not exceed 8 per cent.  

    D) Finally, a legal provision currently in force establishes a tax on windfall profits obtained by companies that have entered into contracts with the state for exploitation of non-renewable natural resources. For the purposes of such tax, windfall profits are deemed to be those earned by the contracting companies from sales of minerals at higher prices than agreed upon or provided for in the respective contracts. The windfall tax rate is 70 per cent.

    By virtue of an amendment to the Mining Law in July 2013 and amendments to the Tax Equity Law, windfall profits are understood to be solely those that are earned 48 months after the month in which pre-operational investments for preparation and development have been completely recovered from a financial perspective.

  13. 7.

    What in general terms is the water rights regime? What is the availability of water for mining facilities? What techniques or activity have you seen in your jurisdiction to address limited or shared water resources?

  14. Pursuant to the current laws, mining companies must first obtain an authorisation for the use of water. Such authorisation is granted by the National Water Secretariat. Usually permits are granted for the duration of the mining project. Maintenance of rights is subject to payment of yearly water use fees. There are no current projects for desalination plants for treatment and self-supply of water, and no other water management mechanism has been introduced.

  15. 8.

    What in general terms is the surface rights regime (use and occupation of surface; access routes; pipeline and electric line routes; roadways or railways for product transport)?

  16. 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 shall be concurrent with the concession period.

  17. 9.

    What is the availability of power for remote mining facilities? May mining facilities generate their own power?

  18. In remote areas, electric power is not always available. The companies may therefore generate their own power.

  19. 10.

    What are the grounds for lawful termination of rights under a mining concession, water rights or surface rights or power (generation or transmission) rights? What remedies are available to the concessionaire if rights are wrongfully terminated?

  20. The grounds for termination of mining rights are basically failure to pay to the state (conservation patents or royalties), failure to comply with work and investment plans, environmental damage and voluntary surrender of mining rights.

    The Mining Law provides for the termination procedure in which the holder of the mining title is entitled to submit such evidence for its defence as it may deem appropriate. Dispute resolution mechanisms may involve international arbitration through UNCITRAL rules as described above.

    As to the possibility to voluntary surrender mining rights and to disinvest in mining concessions, the Ministry has published some important guidelines. If the concessionaire decides to renounce with respect to mining hectares in concessions or projects, the partial or total surrender must be duly approved by the Ministry of Mining.

    In case of total surrender, the investment compromise must be complied with in proportion to the time where the surrender is requested.

    For partial surrender of mining hectares in concessions, if bidder decides to partially surrender the awarded area, the commitment to comply with the entire amount of the investment for the first four years will remain in place and, at the time of application, at least with the minimum investment committed for each year.

    For partial surrender of mining hectares in projects, the amount of the investment committed for four years must be met in the project, regardless of the area to which the investment of the economic bids submitted has been allocated. If the bidder decides to surrender hectares that are part of a project, bidder must comply with the minimum amount of the investment during the years elapsed and of the current year at the time of such surrender.

    Surrender will mean 50 per cent decrease of the investment commitment corresponding to the areas to be surrendered. A formula has been established to calculate the investment commitment after surrender: Final commitment for the project = Final commitment for the project – [(initial commitment for the project)] x (percentage of hectares granted that are being reduced) x 50 per cent].

  21. 11.

    Describe the extent to which the legal and regulatory regime is conducive to the installation or provision of essential infrastructure.

  22. Road and electric power infrastructure is good throughout the country.

    However, the largest mineral deposits are located in remote mountain regions where infrastructure is scarce and where, in most cases, self power generation must be installed. Export port facilities are good along the Ecuadorein coastline, but not necessarily located near the exploitation areas. (ie, the EcuaCorriente project involves the construction of an export port).

  23. 12.

    Please provide a description of the collateral security arrangements permitted in your jurisdiction, relating particularly to the mining project’s ability to grant to creditors a perfected security interest (whether by mortgage, pledge, trust, etc) in concession rights, water rights, surface rights, related easements, permits, licences (including environmental), land and bank accounts. Are there any limitations to the ability to transfer such rights to a successor owner/operator of the mine?

  24. Generally, mining rights may be assigned or transferred upon a prior authorisation from the Mining Regulation and Control Agency, and are freely transferrable in the event of death. Irrevocable promissory agreements for assignment or transfer of rights and actions on mining titles or, generally, any other mining rights may be entered into. Pledges, security assignments and other types of security arrangements provided for in the laws may be entered into in accordance with the provisions and requirements established in the Mining Law and its General Regulations.

  25. 13.

    Is it accepted practice for creditors financing a mining project to enter into an agreement with the mining authority in connection with the creation, perfection or acknowledgement of the collateral security interests granted to the creditors in mining projects, including to facilitate the transfer of such rights to a successor owner/operator? Is there any requirement, benefit or limitation to such agreements?

  26. Yes, our legislation provides the figure of the “assignment of rights in guarantee” granted by concessionaire in favour of creditors an assignment of the mineral rights to the creditors will occur in case of concessionaire’s default to comply with it credit obligations. This contract requires the prior approval from the Ministry of Mining. In addition, creditors (as assignees) are also entitled to request the signature of a “direct contract” with the Ministry of Mining whereby the latter is obliged to notify the former in case of concessionaries’’ default in the compliance of its contractual obligations and to guarantee “step in” rights to fulfil the concessionaire’s defaults under the exploitation contract.

  27. 14.

    What means of enforcement are available to creditors in connection with collateral security interests in mining rights?

  28. The Ecuadorian legal system permits judicial enforcement of pledges; no out-of-court auctions are permitted. All types of guarantees provided for in Ecuadorian laws may be used, including pledges of mining rights, shares or assets, pledge of assets, mortgages on real state and future contracts committed as security.

  29. 15.

    What insurance must be placed with domestic insurance companies? Can insurance be placed abroad? Can claims be paid directly offshore? Are there restrictions with respect to obtaining reinsurance outside the country, and obtaining assignments or cut‑through endorsements to permit claims (and payment) to be made directly to owners or creditors outside the jurisdiction?

  30. Under Ecuador’s laws, insurance policies covering risks which are to be covered pursuant to the law (eg, environmental risk insurance) must be taken out in Ecuador; however, nothing prevents companies from taking out international insurance to protect their concessions in Ecuador. In practice, insurance is often procured abroad and an insurance company authorised to operate in Ecuador provides fronting insurance.

  31. 16.

    Describe any requirements related to the use of domestic and foreign labour, suppliers and contractors.

  32. Ecuador’s laws provide that 80 per cent of the labour must comprise Ecuadorian nationals except in the case of employment of Mercosur nations, including Chilean and Bolivian citizens, where such citizens are considered Ecuadorians for the calculation of this percentage.

  33. 17.

    Can any liabilities extend beyond the mining project company to its owners, mortgagees, or creditors?

  34. Liabilities do not extend to the company’s owners or creditors. However, labour and tax liabilities extend to the company’s legal representative.

  35. 18.

    Describe any other relevant legal considerations related to financing of mining projects in your jurisdiction. Describe any trends in the types of financings recently closed or under discussion for mining projects in your jurisdiction.

  36. A fundamental issue to be considered in dealing with financing mining activities is the social and environmental issues deriving from the current legal framework that must be observed in order to conduct mining activities. Social consultation processes on the activities to be conducted, together with the requirement to obtain an environmental licence before entering into any activity are fundamental elements that must be complied with by companies and financial institutions involved in these projects. Non-compliance with these two requirements may lead to suspension of mining activities, including cancellation of the concession contract.

    There are no new trends in the types of financing recently closed or under discussion for mining projects in Ecuador.

  37. 19.

    In recent times, several governments have mandated concession renegotiation, revisited royalty and taxation regimes, failed to renew favourable exemptions, or passed legislation introducing significant requirements for projects under ongoing permitting and regulatory processes, in light of increased commodity values. Has there been any such activity in your jurisdiction?

  38. At present, the current Mining Law already provides for a windfall profit tax in case of variations of commodity prices and that has been duly and properly regulated. This event was included in the exploitation contracts executed with EcuaCorriente and Aurelian that are expected to provide the bases for a long juridical life, so it is expected that renegotiations will not be necessary. Regarding payments of royalties, the government has requested an upfront payment of royalties, even without production. The argument is that such royalties will be used in the area of influence of the project to benefit infrastructure and social programmes in such areas, which will help persuade people of the benefits of the mining industry.

    From July 2013, amendments were introduced into several Ecuadorian laws, in particular the tax laws and mining law. The main amendments were: 

    Regarding the 70 per cent windfall tax, it was recently established through regulations that windfall income will be considered solely as that received after the 48 months after pre-operational investments for preparation and development in the mining contract area or concession, undertaken exclusively before the commencement of production, as declared by the competent body, have been completely recovered from a financial perspective. 

    In November 2014, amendments to the General Regulations to the Mining Law were issued. These amendments established the definition of windfall profit and the method for determining the tax base thereof; how to determine the “base price” on which said tax will be calculated; how to determine the “benefits for the state” and how this figure is reached; and the method for calculating contractor profits. A specific formula for its calculation was included in the exploitation contracts.

  39. 20.

    Please provide electronic links to any of the principal statutory and regulatory compilations referred to in your answers to the foregoing questions, including items such as Mining Law, foreign investment regime applicable to mining and environmental law and regulation.

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Questions

  1. 1.

    Provide an overview of the mining industry in your country. What significance does the mining industry have as a component of the national economy?


  2. 2.

    Describe the legal and regulatory framework. What laws establish and grant authority to the mining authorities?


  3. 3.

    Describe the investment regime (specifically or generally) applicable to foreign company involvement in mining projects.


  4. 4.

    Is your country a party to international investment treaties applicable to mining projects undertaken or sponsored by foreign companies?


  5. 5.

    What in general terms is the mining exploration and exploitation permit or concession regime? What is the licensing regime?


  6. 6.

    What types of duties, royalties and taxes must be paid by the mining project company as a condition to obtaining or continuinga mining concession? What remedial actions are available to the granting authority when such levies are unpaid?


  7. 7.

    What in general terms is the water rights regime? What is the availability of water for mining facilities? What techniques or activity have you seen in your jurisdiction to address limited or shared water resources?


  8. 8.

    What in general terms is the surface rights regime (use and occupation of surface; access routes; pipeline and electric line routes; roadways or railways for product transport)?


  9. 9.

    What is the availability of power for remote mining facilities? May mining facilities generate their own power?


  10. 10.

    What are the grounds for lawful termination of rights under a mining concession, water rights or surface rights or power (generation or transmission) rights? What remedies are available to the concessionaire if rights are wrongfully terminated?


  11. 11.

    Describe the extent to which the legal and regulatory regime is conducive to the installation or provision of essential infrastructure.


  12. 12.

    Please provide a description of the collateral security arrangements permitted in your jurisdiction, relating particularly to the mining project’s ability to grant to creditors a perfected security interest (whether by mortgage, pledge, trust, etc) in concession rights, water rights, surface rights, related easements, permits, licences (including environmental), land and bank accounts. Are there any limitations to the ability to transfer such rights to a successor owner/operator of the mine?


  13. 13.

    Is it accepted practice for creditors financing a mining project to enter into an agreement with the mining authority in connection with the creation, perfection or acknowledgement of the collateral security interests granted to the creditors in mining projects, including to facilitate the transfer of such rights to a successor owner/operator? Is there any requirement, benefit or limitation to such agreements?


  14. 14.

    What means of enforcement are available to creditors in connection with collateral security interests in mining rights?


  15. 15.

    What insurance must be placed with domestic insurance companies? Can insurance be placed abroad? Can claims be paid directly offshore? Are there restrictions with respect to obtaining reinsurance outside the country, and obtaining assignments or cut‑through endorsements to permit claims (and payment) to be made directly to owners or creditors outside the jurisdiction?


  16. 16.

    Describe any requirements related to the use of domestic and foreign labour, suppliers and contractors.


  17. 17.

    Can any liabilities extend beyond the mining project company to its owners, mortgagees, or creditors?


  18. 18.

    Describe any other relevant legal considerations related to financing of mining projects in your jurisdiction. Describe any trends in the types of financings recently closed or under discussion for mining projects in your jurisdiction.


  19. 19.

    In recent times, several governments have mandated concession renegotiation, revisited royalty and taxation regimes, failed to renew favourable exemptions, or passed legislation introducing significant requirements for projects under ongoing permitting and regulatory processes, in light of increased commodity values. Has there been any such activity in your jurisdiction?


  20. 20.

    Please provide electronic links to any of the principal statutory and regulatory compilations referred to in your answers to the foregoing questions, including items such as Mining Law, foreign investment regime applicable to mining and environmental law and regulation.


Other chapters in Mining

  • Ecuador
    Pérez Bustamante & Ponce Perez Bustamante & Ponce
  • Mexico
    Creel Abogados, S.C.
  • Panama
    Arias, Fábrega & Fábrega
  • Peru
    Gallo Barrios Pickmann, Abogados (Lima)