ANALYSIS-Nascent Ecuador mining sector to survive freeze

Tue May 6, 2008 7:59pm BST

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By Alonso Soto

QUITO, May 6 (Reuters) - Ecuador's freeze on mining exploration and seizure of concessions has taken a heavy toll on the nascent sector but is unlikely to kill an industry that could be worth billions of dollars to the poor nation.

Ecuador plans to allow the biggest foreign projects to go ahead, even after President Rafael Correa shocked investors and hurt companies stock by revoking concessions and halting exploration until a new mining law is approved in six months.

Some companies lost nearly half of their market capital in only a few days, hurting their chances of raising investment needed to explore for cooper and gold, industry analysts say.

Still, despite moving against the companies as he seeks to increase state control over the economy, Correa says he backs an industry that should benefit his leftist government with hefty revenues stemming from record-high commodities prices.

"We will try to have a new legal framework ready as soon as possible ... We welcome foreign investment," said Correa during a radio show last month after the mining freeze was approved by his allies in an assembly rewriting the constitution.

Correa, a former economy minister and ally of socialist Venezuelan President Hugo Chavez, has pushed oil and cell phone companies to give up more revenue to the state from deals he says were unfair to the OPEC member.

"This (decree) is definitely a delay to get Ecuador in the leagues of Peru and Chile," some of the world's largest metal producers, said a senior mining official in Ecuador who asked not to be named according to his company's policy.

Ecuador has little precious metals output. But dozens of Canadian companies including Aurelian Resources (ARU.TO: Quote, Profile, Research), Corriente Resources (CTQ.TO: Quote, Profile, Research) and Iamgold Inc. (IMG.TO: Quote, Profile, Research) have found what analysts say are some of the largest deposits of gold and silver to be discovered in recent years. Continued...

Correa's mining freeze also came against the background of threats by his close ally, Alberto Acosta, the head of the assembly, that the government could ban open-pit mining he says would ruin the environment, especially the Amazon jungle.

But in a further sign Ecuador may avoid choking off foreign mining investment, Acosta, who is considered Correa's mentor and mastermind of the mining move, said he will accept what the government's majority decides about the sector.

"I oppose large-scale, open-pit mining, and I have said that over and over again, but I'm a democratic person and I will accept what is decided for the best interest of the nation," Acosta said in a telephone interview.

"The decree was to stop all the abuse from these companies ... This is their big chance to show that they have learned their lesson," he added.

Companies currently pay a concession fee of $16 per hectare annually or less and no royalties if they do produce metal.

"A new mining code will likely strike an acceptable compromise for the government and mining companies, which should be able to resume operations after the law has been approved," said Patrick Esteruelas, an analyst with Eurasia group in New York.

Deputy Minister Minister Jose Serrano said the freeze was needed to "put the house in order," and said companies will be allowed to participate in bids to regain lost concessions.

"Nobody will be excluded from the (bidding) process," he told Reuters as a handful of jittery foreign mining executives waited outside his Quito office after the decree was passed.

HOSTILE ENVIRONMENT Continued...

Despite the government's efforts to soothe fears, mining companies hoping to do business in Ecuador also face a series of challenges from taxes to politics to hostile environmental groups.

Some industry officials say uncertainty will linger with a government that has shown can make sudden sweeping policy changes.

And a presidential election later this year has raised fears Correa will campaign by hardening popular stances to boost state control over natural resources.

Companies also fear a newly created windfall tax could take away a big chunk of their profits. The tax will force companies to share 70 percent of their revenues generated above a set price for the metal they extract.

Companies also face strong opposition to mining in the metal-rich southern provinces by some communities and environmentalists who said the activity will pollute rivers and corrupt Indian cultures living near mines.

Environmentalists have vowed to stop the development of large mines, and some have engaged in violent clashes with miners and police near exploration sites.

"Our position is for the minerals to stay where they are," Lina Solano, an environmentalist leader, wrote in a letter to supporters in other organizations. "It's crucial for us to keep up the fight against the mining problem." (Editing by Christian Wiessner)