- 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?
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, over the past five years two very large deposits were found in the Ecuadorian Amazon region: a gold deposit (Aurelian-Kinross) and a copper deposit (Ecuacorrientes, 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.
In connection with these two projects, negotiations for development and exploitation contracts have started already with Ecuacorrientes and other companies holding smaller projects.
- 2.Describe the legal and regulatory framework. What laws establish and grant authority to the mining authorities?
A new Mining Law was enacted in January 2009. The General Regulations to the Mining Law, the Environmental Mining Regulations, and the Regulations for Small-Scale Mining were issued in November 2009.
The Minister of Non-Renewable Natural Resources is the authority responsible for mining planning. 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 Non-Renewable Natural Resources is in charge of negotiating the service 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 taken into account within the general business development strategy of the concessionaries.
- 3.Describe the investment regime applicable to foreign company involvement in mining projects.
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 tender is the US dollar and there is a free exchange market in Ecuador. Remittances abroad are permitted and are subject to 2 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 the external debt.
- 4.Is your country a party to international investment treaties applicable to mining projects undertaken or sponsored by foreign companies?
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.
Pursuant to the principles enshrined in the new Constitution approved in 2008, the Ecuadorian 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.
- 5.What in general terms is the mining exploration and exploitation permit or concession regime? What is the licensing regime?
The Ecuadorian state, through the Ministry of Non-Renewable Natural Resources, 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.
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 e taxes as established in the relevant laws. Those contracts pertain to all minerals comprised in the concession area.
- 6.What types of duties, royalties and taxes must be paid by the mining project company as a condition to obtaining or continuing a mining concession? What remedial actions are available to the granting authority when such levies are unpaid?
Mining concessionaires are required to pay the so-called ‘conservation patent’ for each mining hectare. For the initial exploration period, the conservation patent is equivalent to 2.5 per cent of one basic unified salary (US$270). For the advanced exploration and economic evaluation periods, the conservation patent is equivalent to 5 per cent of the basic unified salary. For the exploitation period, the conservation patent is 10 per cent thereof. As concerns royalties, the law provides that they cannot be less than 5 per cent of sales.
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.
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 exploration and 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
- 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?
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 or other water management mechanism been introduced.
- 8.What in general terms is the surface rights regime?
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.
- 9.What is the availability of power for remote mining facilities? May mining facilities generate their own power?
In remote areas, electric power is not always available. The companies may therefore generate their own power.
- 10.What are the grounds for lawful termination of rights under a mining concession, water rights or surface rights or power rights? What remedies are available to the concessionaire if rights are wrongfully terminated?
The grounds for termination of mining rights are basically failure to pay royalties to the state, failure to comply with work and investment plans, and environmental damage. 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 arbirtration through UNCITRAL rules as described above.
- 11.Describe the extent to which the legal and regulatory regime is conducive to the installation or provision of essential infrastructure.
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 Ecuadorian coasts, but not necessarily located near the exploitation areas. (ie, the Ecuacorrientes project involves the construction of an export port).
- 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 in concession rights, water rights, surface rights, related easements, permits, licences, land and bank accounts. Are there any limitations to the ability to transfer such rights to a successor owner/operator of the mine?
Generally, mining rights may be assigned or transferred upon 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 the its General Regulations.
- 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?
There are no precedents in Ecuador in this connection. It will be advisable to notify the authorities of any negotiations that are being carried out with the holders of mining titles so that they will become known.
- 14.What means of enforcement are available to creditors in connection with collateral security interests in mining rights?
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, and future contracts committed as security.
- 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 to be made directly to owners or creditors outside the jurisdiction?
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.
- 16.Describe any requirements related to the use of domestic and foreign labour, suppliers and contractors.
Ecuador’s laws provide that 80 per cent of the labour must be Ecuadorian nationals.
- 17.Can any liabilities extend beyond the mining project company to its owners, mortgagees, or creditors?
Liabilities do not extend to the company’s owners or creditors. However, labour and tax liabilities extend to the company’s legal representative.
- 18.Describe any other relevant legal considerations related to financing of mining projects in your jurisdiction.
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 process 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 conccesion contract.
- 19.In recent times, several governments have mandated concession renegotiation, or revisited royalty and taxation regimes in light of increased commodity values. Has there been any such activity in your jurisdiction?
At present, the current Mining Law already provides for a windfall profit tax in case of variations of commodity prices. This event will be included in the new exploitation contracts currently under negotiation with mining companies or to be negotiated in the near future and that are expected to provide the bases for a long juridical life, so it is expected that renegotiations will not be necessary.
- 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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