– Despite Constituent Assembly approval of a 70 percent windfall tax on non-renewable resource extraction, MMP Minister Galo Chiriboga reiterated President Rafael Correa’s support for the mining industry and announced a dialogue with firms regarding the drafting of a new mining law.


“We will begin a mining dialogue in the next few weeks to gather proposals for the mining law reform, in order to allow
the state to participate in a better way, which would lead to a renegotiation of mining concessions. Also, we will bring a Canadian expert to ease this dialogue..,” newswire EFE reported yesterday.

Chiriboga declined to comment on the windfall tax issue based on the fact that his ministry did not initiate the new tax law, which was entirely drafted by the Internal Revenue Service, a Chiriboga aide told EMN.

Two weeks ago, Chiriboga told Reuters that the 70 percent windfall tax is non-negotiable and that it will apply to mining companies. Nevertheless, Art. 169 of the recently approved tax law specifies that the windfall tax will only be paid by firms having contracts with the government. Mining companies in Ecuador operate under exploration and exploitation concessions.

If the new mining law – yet to be drafted – requires firms to sign contracts, the windfall tax “will take away potential big profits that some investors are looking to make from these companies. Mongolia is the only country I found that has this
kind of tax for the mining industry, and no Latin American country has it. This is not good news for the industry,” said Mark Turner, Peru-based analyst for Hallgarten &
Company.

In addition to firms’ potential need to negotiate contracts with the government, Ecuador will impose royalties on mining companies and eliminate the current system that charges
per-hectare fees ranging from $1 to $16.

In contrast to windfall taxes, royalties are more familiar to the
industry. Turner suggests creating a 5 percent royalty, which he considers an acceptable level, and certainly preferable to a windfall tax. “[Royalties of this level] won’t take away the blue sky in the mind of the investor. A royalty won’t stop a share from going very high, if metal prices go up,” he added.

In Latin America, mining royalties range from 1 to 6 percent. In Peru, they vary from 1 to 3 percent, depending on the size of the project, with larger deposits paying more. Chile’s royalties are between 3 and 5 percent, Bolivia’s about 6 percent, and Mexico charges no royalties.

Ecuador’s new mining law, to be discussed in early 2008, will remove uncertainty and thus quell some investors’ fears. It will also clarify the windfall tax’s affect – if any – on the mining industry since one law may supersede another.

Still, some investors are finding it difficult to deal with
uncertainty. “The greatest enemy of private investors is uncertainty. Mining is a very risky business, and in order to fund these ventures investors need potential windfall profits, simply to offset losses in other ventures. The success ratio in mining, particularly exploration, is very low. Who would
choose to invest under that particular cloud [windfall tax] when there are more favorable jurisdictions, such as Mexico, with a long history of equitable treatment?” This question was posed to EMN by Richard [last name withheld], a Vancouver investor with holdings in three different mining companies in Ecuador.

Windfall taxes are more common in the crude oil industry. Ecuador recently increased by executive decree its
extraordinary income tax from 50 to 99 percent for oil companies. This is especially harmful since many of these contracts were signed with base prices of just US $25 per barrel, compared with today’s record prices of $100 per barrel. For oil firms operating under such elevated tax contracts, the new 70 percent windfall tax seems a relief. Specifically in regard to the effect it may have
on oil profits, the new windfall tax of 70 percent earned praise from the Quito Chamber of Commerce. However, the chamber president generally criticized the law, arguing that businesses operating in Ecuador are overtaxed. See YouTube
video

Turner, the analyst, believes that the windfall tax might have been created especially for oil companies, “and mining ones are just suffering the collateral damage. This 70 percent is not
fantastic for oil firms, but it’s reasonable. It just doesn’t work for mining companies, especially the ones in Ecuador that are only in the exploration stage spending an awful amount of money.”

The 130-member Constituent Assembly plans to approve about 30 different laws during the six to eight months it is convened. The legislative body is replacing Congress and has been operating since mid-November. It will rewrite the
Constitution last, after its 13-member legislative commission approves all laws that President Correa considers most critical, including the mining law.