CHICAGO (ResourceInvestor.com) -- Canadian explorers and miners focused on Ecuador have been slammed since Friday’s announcement by the leftist government that some 500-plus mining concessions had been revoked for failure to pay certain fees. The news sent shares of some explorers like Ascendant Copper [TSX:ACX] down as much as 20% in an initial reaction, before rebounding.

While it’s still not entirely clear which firms have been the target of the government, it now appears that the government has mostly targeted very small firms, many of which had staked claims that they had then failed to properly maintain and pay for.

Although pending news on the country’s mining law reform has kept things in flux, it now appears that many of the major operators in country have been doing an excellent job of maintaining relations with the government – and stand a good chance of success at developing their deposits.

Timing of Mining Laws

While smaller scale explorers may not have the lobbying heft or oversight to properly steer conversations with the Ecuadorian government, miners such as Aurelian Resources [TSX:ARU], Corriente Resources [TSX:CTQ] and IAMGOLD [NYSE:IAG; TSX:IMG], don’t appear to be in any serious jeopardy of running afoul of the country’s socialist government. While country risk certainly remains, of course, one could argue that this should be discounted as a risk more in line with that typically found in other emerging markets – and not as much as the risk found in Venezuela.

While the establishment of a new mining law in Ecuador is a frustrating process – in as much as it’s unclear where exactly the government will make decisions on windfall taxes and other terms – such a code will ultimately ensure that the rights of major potential operators in the country will be protected. For their part, the smartest are working diligently with the government to ensure they don’t get worked over – and are modifying plans that may appear to offend locals (such as IAMGOLD’s probable decision to develop its massive Quimsacocha deposit as an underground mine so as to avoid the ugly visual associated with open-pit mining).

Indeed, the very fact that defaulted concessions were cancelled may be a signal of an upcoming release of a mining code – and positive news. A similar cancellation happened in 2001 as a necessary step toward releasing the country’s current mining law a few months later.

For all its environmental and anti-imperialist bravado against mining, the government of Ecuador doesn’t find itself in the massively energy-rich situation of Venezuela – and as a country desperately in need of capital will not have the luxury of systematically kicking out a legion of foreign operators.

Where to Target

Chances are that producers with solid deposits are the best bets, as many of these are overly discounting the risk of operating in Ecuador. Aurelian’s Fruta Del Norte (FDN) deposit is one of the best gold finds in recent years – with nearly 14 million inferred ounces of gold and 22 million inferred ounces of silver. With the clarity of a new mining law (hopefully by mid-year), it’s quite probable that a senior will look to take the company out.

According to analysts at Dundee Capital Markets, for example, Aurelian’s NPV with FDN at a 5% discount rate is about C$16.50 – with long-term gold price only projected at $600. Given the firm’s current trading range of about C$8, this is one gamble that is probably worth taking.

While IAMGOLD is a more diversified operator, the concerns about its sizeable Quimsacocha project are one of the factors that have held the miner back in the past year-plus, and left it as one of the cheapest mid-tier producers on the market. Given that Quimsacocha is one of IAMGOLD’s flagship growth assets going forward, any clarity on the regulatory front could be the trigger to propel the shares higher – and get acquisition minded seniors like Kinross Gold [NYSE:KGC; TSX:K] and Barrick Gold [NYSE:ABX; TSX:ABX] potentially interested.

We’d favour IAG and ARU over Corriente Resources, simply because of a desire to avoid excess copper exposure at this point in the cycle. However, if you’re looking for base metal exposure, investors in Corriente shouldn’t have much to worry about. The company already has several properties in development, has been in Ecuador for many years, and has been able to get strong government support in the past (witness the recent approval of the company’s Environmental Impact Assessment report for a new port operation for shipping copper concentrate).

Remaining Sceptical

The biggest risks in Ecuador remain in the junior exploration companies. While most of these will likely survive, and some will ultimately prosper, it’s quite probable that one or two have seriously run afoul of some miniscule government regulation, or not lobbied the right people enough, or will find that a marginal deposit has been made uneconomic by new tax regulations.

While it’s almost impossible to say which companies these will be, it’s scary enough to lead a relatively conservative investor to shy away. As we’ve seen with past mining law changes in emerging markets around the world, the smallest exploration companies – those with not fully delineated deposits, or potential capital raising problems – are typically those that bear the brunt of potentially adverse government actions.