Mining opportunities in Ecuador
Jaime Zaldumbide and Raúl de la Torre
Pérez Bustamante & Ponce
Quito
Jaime Zaldumbide (Bio)
Raúl de la Torre (Bio)
Ecuador's administration has expressed its political commitment to develop mining in accordance to environmental and socially responsible policies. Ecuador is a very attractive place for mining activities, especially because the economic and political scenarios have become very stable in recent years.
The Mining Law (the Law) establishes a new legal framework for mining activities and was enacted on January 29 2009. The new Law sets forth the following mining stages or phases:
(i) prospecting;
(ii) exploration, which in turn includes initial exploration, advanced exploration and economic evaluation of the deposit; and
(iii) exploitation, comprising processing, smelting, refining and commercialisation.
The Law specifies minimum amounts of investment that the concessionaire must necessarily make during each stage. The mining title is recognised the character of a security by the Law, and it considers that an assignment is a guarantee of the rights deriving from a mining title. The Law allows pledging movable property destined for the operations or the material extracted from the deposit. There are no provisions in this Law allowing mortgages.
As a general rule, the sector ministry must call a public auction for a metallic mining concession and only exceptionally can the participation in the mining sector be delegated by means of concessions. At all events, any natural or juridical person, Ecuadorian or foreign, may hold mining rights. In the case of foreign natural or juridical persons, it is necessary that they have legal domicile in Ecuador. It is necessary to execute a contract with the State for the exploitation phase. The Law specifies two contractual systems for that phase: (i) the service contract; and (ii) the mining exploitation contract.
The Law provides that royalty payments will amount to no less than 5% of mineral sales. Additionally, 25% income tax as well as 15% labor profit sharing, 70% tax on windfall income, and 12% value added tax must be paid. The sector ministry may cancel the concession ex officio or upon request of another ministry, or if denounced by a third party.
Authorisations prior to performing mining activities
The Law states that alongside the approval of an Environmental Impact Survey, authorisations from the following bodies will be required in order to perform mining activities:
(i) the Municipal Council; (ii) the Ministry of Transportation and Public Works; (iii) the National Telecommunications Secretariat; (iv) the Ministry of Defense; (v) the Water Authorities; (vi) the Hydrocarbon Regulation and Control Agency; (vii) the Civil Aviation Directorate; (viii) the Ministry of Electricity and Renewable Energy; and (ix) the National Cultural Heritage Institute.
Part of the incumbent Government's policy is to encourage mining activities with due respect to environmental impact. Thus, the Environmental Mining Regulations establish the following obligations for the concessionaire, among others:
(i) to have an environmental license;
(ii) to submit a guarantee for the activities included in the environmental management plan;
(iii) to take out third party insurance;
(iv) to submit an annual environmental management progress report; and
(v) the obligation to repair and reclaim in the event of environmental damages (this provision is in keeping with nature's right to reparation recognised by the Ecuadorian Constitution).
The Mining Exploitation Contract
Regarding royalties, the contractual model establishes that 5% of the net income actually obtained is the amount to be delivered to the State for royalties as consideration for the concession granted by the State for exploitation of minerals belonging to it.
It's important to mention that, regarding disputes, the model contract establishes the following procedure:
(i) direct negotiations;
(ii) optional mediation;
(iii) arbitration.
As regards arbitration, the parties are subject to the law under UNCITRAL (United Nations Commission on International Trade Law) rules administered by the Permanent Arbitration Court sitting at The Hague. Arbitration will take place in Chile and the arbitral tribunal will comprise three arbitrators of nationalities other than those of the parties. In this same connection, the parties expressly waive arbitration under the mechanism created by ICSID (International Centre for Settlement of Investment Disputes).
Finally, any disputes deriving from a declaration of cancellation of the concession or any tax matters cannot be submitted to arbitration. To this effect, those matters must be submitted to the competent courts of the Republic of Ecuador.