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(Updates with details and comments from Mining Undersecretary).

QUITO -(Dow Jones)- The Ecuadorian government could establish royalties for mining companies of 3% to 8%, according to a draft of a new mining law seen by Dow Jones Newswires.

According to the draft, which is being reviewed by President Rafael Correa, the mining companies should pay a "variable and progressive" royalty that will fluctuate from 3% to 8% on production.

There are currently no royalties on mining output, although mining companies pay between $16 and $32 per hectare held under concession.

Mining Undersecretary Jose Serrano told Dow Jones Newswires on Monday that the Mining and Oil Ministry has studied several options for royalties but that "we think that ... best are ... royalties on production because it allows us to have better control."

In additional to the royalties, according the current tax law, companies should pay a 70% tax on windfall revenue, according to a benchmark price using criteria similar to those employed in oil contracts.

The new mining-sector law may also establish a minimum level of investment and a maximum area of 5,000 hectares for each concession in the exploitation stage.

For the initial exploration period of four years, companies would have to invest a minimum of $50 for each hectare.

Companies could extend the exploration period for another four years with a minimum investment of $100 per hectare.

Companies will also have to comply with environmental regulations.

Serrano said that Correa could introduce changes to the law "because it is only a draft."

According Serrano, the mining law will be sent to the Constituent Assembly after the Sept. 28 referendum in which Ecuadorians will vote on the draft constitution.

In April, Ecuador's Constituent Assembly passed a law that froze mining-sector activity by revoking around 80% of mining concessions and by suspending the other 20% for 180 days.

Local units of Corriente Resources (ETQ), Aurelian Resources Inc. (ARU.T), International Mineral Corp. (IMZ.T), Iamgold Corp. (IAG), Spirit Exploration Inc. (SPXP), Mariana Resources Ltd. (MARL.LN), among others, currently have mining concessions in Ecuador.

-By Mercedes Alvaro, Dow Jones Newswires; 5939-9728-653; mercedes.alvaro@dowjones.com

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(END) Dow Jones Newswires

09-08-08 1232ET

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