Use the Lexology Getting The Deal Through tool to compare the answers in this article with those from other jurisdictions.

Mining industry

Standing

What is the nature and importance of the mining industry in your country?

The quality and quantity of Ecuadorian mineral resources is very similar to that of its neighbours, such as Chile and Peru, who have managed to develop their mining potential. However, most of Ecuadorian territory is still unexplored. In fact, according to the Financial Times, Ecuador has some of the most attractive gold, silver and copper deposits in Latin America, nevertheless, production has been almost non-existent. There are many reasons for the delay in developing this industry, but if we have to choose the main reason, we would point to erred public policy regarding the mining industry and the absence of legal security, owing to legislation largely inspired by the oil industry. In terms of the mining industry’s importance in Ecuador, considering current oil prices and given the fact that traditionally Ecuador is an oil-dependent country, we do not see any industry other than mining capable of attracting investments to develop the country.

Target minerals

What are the target minerals?

Currently, the target minerals in Ecuador are gold, silver and copper. However, there is a huge potential in other minerals such as lithium, rare earth, potash, iron, uranium and coal. Ecuador has a much wider geological potential but, to an extent, the minerals targeted depend on global trends and the interest of individual companies. There is no material development on renewables so far, but experts predict that the current industry is moving towards more efficient ways of generating energy in the next five to 10 years.

Regions

Which regions are most active?

The most important gold and copper deposits discovered to date are located in the south-east of Ecuador, principally in Zamora Chinchipe, Morona Santiago, Azuay and El Oro provinces. However, it is also important to consider Imbabura province in the north of Ecuador since there is also considerable mining potential in this area.

Legal and regulatory structure

Basis of legal system

Is the legal system civil or common law-based?

The Ecuadorian legal system is civil law-based.

Regulation

How is the mining industry regulated?

According to the Constitution, the state owns all minerals and non-renewable natural resources within the national territory. These minerals and resources are considered as strategic sectors, which are managed, regulated, controlled and governed by the state. The state can, on an exceptional basis, delegate the development of extractive sectors to individuals or entities by granting mining concessions for a term of 25 years. Thus, the concessionaire will have the exclusive right to explore, exploit, process and sell any metallic minerals within the concession. When a project is considered in the range of large-scale mining, prior to the commencement of the exploitation phase, the concessionaire must first sign an exploitation contract with the Ecuadorian state. This contract is not needed when a project is in the range of artisanal, small or medium-scale mining.

The Mining Act defines artisanal mining as that which is carried out for the subsistence of family units through the use of manual equipment or portable devices.

The daily production ranges for artisanal mining are:

  • for metallic minerals: up to 10 tonnes in underground mining and up to 120 cubic metres in alluvial mining;
  • for non-metallic minerals: up to 50 tonnes; and
  • for construction materials: up to 100 cubic metres in alluvial deposits and 50 tonnes for hard rock open-pit mining.

The daily production ranges for small-scale mining are:

  • for metallic minerals: up to 300 tonnes in underground mining, up to 1,000 tonnes in open-pit mining and up to 1,500 cubic metres in alluvial mining;
  • for non-metallic minerals: up to 1,000 tonnes; and
  • for construction materials: up to 800 cubic metres for alluvial terrace mining and up to 500 tonnes for open-pit mining.

The daily production ranges for medium-scale mining are as follows:

  • for metallic minerals: 301-1,000 tonnes in underground mining, 1,001-2,000 tonnes in open-pit mining and 1,501-3,000 cubic metres in alluvial mining;
  • for non-metallic minerals: 1,001-3,000 tonnes; and
  • for construction materials: 801-2,000 cubic metres for alluvial terrace mining and 501-1,000 tonnes for hard rock open-pit mining (quarries).

Any range that exceeds those established for medium-scale mining is considered as large-scale mining.

What are the principal laws that regulate the mining industry? What are the principal regulatory bodies that administer those laws? Were there any major amendments in the past year?

There are several legal provisions regarding the mining industry within the Constitution. Added to that, there is the Mining Act that was enacted on 29 January 2009, further modified by the amendment passed on 16 July 2013 as well as the General Mining Regulations and the Small-Scale and Artisanal Mining Regulations that were promulgated on 4 November 2009. There is also the Mining Environmental Regulations for Mining Activities promulgated on 27 March 2014.

The principal regulatory body that regulates and controls the industry is the Mining Ministry, created in February 2015, which replaced the former Ministry of Non-Renewable Natural Resources (MNRNR). The other relevant bodies are the Ministry of the Environment, the Mining Regulation and Control Agency (ARCOM) and the National Geological Mining Investigation Institute (INIGEMM). In addition, with the Mining Act, the national mining company (ENAMI-EP) was created, which is responsible for developing state mining projects by itself or in association with private or public companies, or both.

In this regard, there is no doubt that the government of Ecuador has redoubled its efforts to recover lost time and draft a more appropriate legal framework in order to attract local and foreign investment in the mining sector. Undoubtedly, these changes were accelerated with the creation of the Mining Ministry in February 2015, which further indicates the importance this industry has for the government - the work done by the new Mining Ministry has certainly been significant and positive.

The closing of the mining cadastre

In December 2017, the mining cadastre was temporarily closed owing to state internal planning activities. The government expects to reopen the cadastre in June 2018.

On 1 March 2016, the Mining Ministry issued Ministerial Agreement No. 2016-002, which contains the Guidelines for Granting Metallic Mining Concessions. This was good news for the mining industry, because the mining cadastre was then reopened after eight years of being closed following the devastating effects of the Mining Mandate, enacted in April 2008. The process being carried out by the Mining Ministry received overwhelming acceptance on the market. It can be summarised as follows:

  • 275 mining concessions granted to date;
  • US$4,600 million investment commitments until 2021;
  • 25,000 new jobs until 2021;
  • more confidence in the Ecuadorian market; and
  • the country recognised as a mining hotspot.

Classification system

What classification system does the mining industry use for reporting mineral resources and mineral reserves?

On 17 March 2016, the Mining Regulation and Control Agency (ARCOM) enacted the Mineral Resources and Reserves Regulations, which are based on the Australian Joint Ore Reserves Committee, the Canadian National Instrument NI 43-101, the UK Reporting Code and the South African Code for Reporting of Mineral Resources and Mineral Reserves.

Mining rights and title

State control over mining rights

To what extent does the state control mining rights in your jurisdiction? Can those rights be granted to private parties and to what extent will they have title to minerals in the ground? Are there large areas where the mining rights are held privately or which belong to the owner of the surface rights? Is there a separate legal regime or process for third parties to obtain mining rights in those areas?

The state owns the non-renewable natural resources within the national territory. The state can, on an exceptional basis, delegate the development of extractive sectors to individuals or entities by granting mining concessions for a term of 25 years where the concessionaire will have the exclusive right to explore, exploit, process and sell any metallic minerals within the concession (see question 5).

Once the mining concession has been granted, in large and medium-scale mining the concessionaire is subject to the following phases and terms:

  • up to four years of initial exploration;
  • up to four years of advanced exploration; and
  • up to two years of economic evaluation of the deposit, which can be extended for an additional two-year period.

During the final phase, the concessionaire must apply for the commencement of the exploitation phase of the project. Within six months of beginning the exploitation phase, the concessionaire, in the large-scale mining category, must sign a mining exploitation contract with the Ecuadorian government, although negotiations may begin during the economic evaluation phase. As indicated, artisanal, small- and medium-scale mining operations do not need to sign a mining exploitation contract with the Ecuadorian government.

It should be noted that ownership of mining concessions is distinct from ownership of the surface land.

According to the Mining Act, in order to obtain a new mining concession, applicants must participate in a public tender process in accordance to the Guidelines for Granting Metallic Mining Concessions. If a concessionaire wishes to transfer an existing concession to a third party, authorisation from the mining authorities must first be obtained. However, it is important to consider that a new mining concession cannot be transfer, at least for two years, from granting date. ENAMI and state-owned companies of the international community have the right to access new mining concessions in any free area of the country without participating in a public tender process.

As noted in question 6, the mining cadastre is temporarily closed owing to state internal planning activities, and it was announced by the government it expects to reopen it in June 2018. Therefore, at the time of writing, it is not possible to apply, reserve or grant new concessions for mining companies. Some amendments to the current regulations in the concessions-granting process have been announced by the authorities.

Publicly available information and data

What information and data are publicly available to private parties that wish to engage in exploration and other mining activities? Is there an agency which collects mineral assessment reports from private parties? Must private parties file mineral assessment reports? Does the agency or the government conduct geoscience surveys, which become part of the database? Is the database available online?

ARCOM keeps a register of all the concessions that exist in the country (mining cadastre). To this end, a reference map of the location of mining concessions can be accessed online at http://geo.controlminero.gob.ec.

According to the Mining Act, all mining concessionaires should submit annually exploration reports and investment plans in order to have their concessions in good standing.

ARCOM and the National Geological Mining Investigation Institute are the government agencies responsible for carrying out geoscience surveys and technical analyses of national geological information and collecting information for the national database. This information is public, but unfortunately not all is available online.

Acquisition of rights by private parties

What mining rights may private parties acquire? How are these acquired? What obligations does the rights holder have? If exploration or reconnaissance licences are granted, does such tenure give the holder an automatic or preferential right to acquire a mining licence? What are the requirements to convert to a mining licence?

Individuals or corporations may acquire mining concessions, which are granted by the Mining Ministry following a public tender process. The Mining Act recognises four mining categories: artisanal, small-scale, medium-scale and large-scale. Production ranges for each category were noted in question 5.

Existing mining concessions can be transferred, provided that prior authorisation from the mining authorities has been obtained.

The main obligations of mining rights holders are:

  • to pay annual mining conservation patent fees;
  • to present annual exploration reports and investment plans;
  • to present biannual production reports;
  • to pay mining royalties to the state when in the exploitation phase;
  • to obtain an environmental licence prior to commencing activities;
  • to obtain administrative authorisations prior to commencing activities;
  • to ensure at least 80 per cent of its workforce are Ecuadorian;
  • to comply with the environmental management plan;
  • to comply with the regulatory and the mining title duties and obligations;
  • to train their personnel; and
  • to maintain information regarding their operations, etc.

Renewal and transfer of mineral licences

What is the regime for the renewal and transfer of mineral licences?

According to article 36 of the Mining Act, a mining concession is granted for up to 25 years and may be renewed for an equal period upon a written application by the mining concessionaire to the Mining Ministry. It is possible to transfer the mining rights prior authorisation from the Mining Ministry. This authorisation is based on a technical report prepared by ARCOM and an environmental report prepared by the Ministry of the Environment. As noted above, a new mining concession cannot be transferred for at least for two years from the granting date (see question 8).

Duration of mining rights

What is the typical duration of mining rights?

A mining concession is granted for up to 25 years subject to renewal for an equal period upon a written application by the mining concessionaire to the Mining Ministry (see question 11). There is no specific condition that needs to be meet in order to renew the mining concession.

It is important to bear in mind that the Mining Ministry may exercise its legal authority and consequently declare the mining rights terminated in cases where the concessionaires have rendered themselves liable to such termination, for the reasons laid down in articles 69, 79, 81, 93 and 125 of the Mining Act. Throughout any termination procedure, the right to due process shall be guaranteed. This includes the basic guarantees enshrined in article 76 of the Constitution. The process of declaring termination may be officially instigated by the Mining Ministry or be initiated in response to a complaint by a third party that has been duly investigated by the Mining Ministry, or be initiated at the request of other ministries with a connection to mining activity. The administrative procedure shall be subject to the terms of the Mining Act and its General Regulations.

Acquisition by domestic parties versus acquisition by foreign parties

Is there any distinction in law or practice between the mining rights that may be acquired by domestic parties and those that may be acquired by foreign parties?

Domestic and foreign parties are equally entitled to acquire mining rights in Ecuador.

Protection of mining rights

How are mining rights protected? Are foreign arbitration awards in respect of domestic mining disputes freely enforceable in your jurisdiction?

According to Ecuadorian legislation, mining is considered to be of public interest, which means it is in a special category and is granted more protection than other private interests, including land ownership. If a concessionaire suffers any form of disruption as a result of a third party’s actions, concessionaires can file an administrative relief action in ARCOM, which can take either direct or indirect preventive measures.

The Mining Act specifically states that, in the event of a dispute arising out of an exploitation contract made between the Ecuadorian state and a mining concessionaire, such a dispute can either be resolved by the local courts or may be submitted to international arbitration. However, the dispute can only be submitted to international arbitration if arbitration provisions are included in the contract. The seat of arbitration must be a Latin American country as required by the Constitution. Foreign international awards are fully enforceable in Ecuador.

Surface rights

What types of surface rights may mining rights holders request and acquire? How are these rights acquired? Can surface rights holders oppose these requests?

Private parties may acquire any form of surface rights, from ownership of the surface area to leases, usufructs, easements, etc. If a mining concessionaire wishes to acquire an easement over a surface area in order to develop its mining operations, it can either enter into an agreement with the surface owner or request that ARCOM impose an easement. It should be noted, however, that foreigners (individuals or corporations) cannot acquire any surface rights within border zones considered to be an area within 20 kilometres of the national border (see question 48). Surface rights holders cannot oppose these requests since, as said above, mining rights are considered of public interest.

Participation of government and state agencies

Does the government or do state agencies have the right to participate in mining projects? Is there a local listing requirement for the project company?

According to article 315 of the Constitution, the state may participate in the development and management of natural resources through public companies such as ENAMI-EP or through mixed public-private companies in which the state should be the majority shareholder. ENAMI-EP may also participate in partnership or in association with other entities, public or private (see question 22).

Government expropriation of licences

Are there provisions in law dealing with government expropriation of licences? What are the compensation provisions?

The Constitution guarantees the right to private property and prohibits any kind of confiscation. On an exceptional basis, the Constitution declares that the expropriation of property - including mining concessions - for reasons of public benefit or social interest may be declared, at a fair value, restitution and payment. However, there are no specific rules for valuation and compensation to determine how much a private individual could receive due to the expropriation of a mining concession.

Protected areas

Are any areas designated as protected areas within your jurisdiction and which are off-limits or specially regulated?

In Ecuador, there are various areas that are considered protected, mainly for environmental conservation. The referendum held in February 2018 amends the Constitution and establishes that the extraction of non-renewable resources, including logging, in protected areas and urban areas is prohibited under any circumstance.

Notwithstanding the above, it is important to clarify that within protected forests mining activities can be carried out once an environmental authorisation has been obtained. The specific environmental authorisation will depend on the mining phase of the concession.

Duties, royalties and taxes

Duties, royalties and taxes payable by private parties

What duties, royalties and taxes are payable by private parties carrying on mining activities? Are these revenue-based or profit-based?

The Constitution provides that the state is entitled to receive a share of the benefits resulting from the exploitation of non-renewable natural resources, which is not to be less than that received by the concessionaire carrying out the exploitation. The Mining Act more specifically establishes that the state’s share consists of various duties, taxes and royalties, including annual patent fees, income tax, VAT, 15 per cent of the concessionaire’s profits (this is distributed to the concessionaire’s employees), windfall profit tax in the case of large-scale mining and royalties depending of the category of the mining title.

Added to the items mentioned above, the Guideline for Granting Mineral Mining Concessions establishes that in order to file a request for a new mining concession, it is necessary to pay a fee equivalent to five times the current minimum wage per application. This amount is not subject to reimbursement if the interested party is not awarded the mining concession after going through the tender process established in the Mining Act and the Guideline. If a party is awarded a mining concession, it needs to pay a fee equivalent to twice the current minimum wage in order to register the minute award and the amount of one current minimum wage to register the mining title with ARCOM.

Duties

More specifically, mining concessionaires have a number of financial obligations under the Mining Act, including the requirement to pay annual conservation patent fees, except in the artisanal mining category. The conservation patent fees payable for concessions are calculated as follows:

  • for small-scale mining: a sum equivalent to 2 per cent of the current minimum wage, multiplied by the number of hectares in the concession;
  • for medium-scale mining: a sum equivalent to 2.5 per cent of the current minimum wage, multiplied by the number of hectares in the concession and regardless of the mining phase; and
  • for large-scale mining:
  • initial exploration phase: a sum equivalent to 2.5 per cent of the current minimum wage, multiplied by the number of hectares in the concession;
  • advanced exploration phase: a sum equivalent to 5 per cent of the current minimum wage, multiplied by the number of hectares in the concession; and
  • exploitation phase: a sum equivalent to 10 per cent of the current minimum wage, multiplied by the number of hectares.

The minimum wage for 2018 is US$386.00.

In addition, mining concessionaires are required to pay additional fees for the use of water. These fees are set out in the Water Act and the Authorisation for the Use of Water Resolution granted by the National Water Secretariat. The Ministry of the Environment also sets fees with regard to the environmental licence.

Taxes

Mining concessionaires are also required to pay various taxes, both direct and indirect. Direct taxes include income tax, which is currently 22 per cent and payable on income less expenses. In large-scale mining, the mining concessionaire must pay 3 per cent of their profits to their employees and 12 per cent of their profits to the state, as part of the benefits share system, whereas in medium-scale mining is 5 per cent to the employees and 10 per cent to the state and in small-scale mining is 10 per cent for employees and 5 per cent to the state. Finally, if mining concessionaires send money abroad, a 5 per cent currency exit tax is payable.

As for indirect taxes, VAT at a rate of 12 per cent is payable on goods purchased and services rendered. The amendments introduced in December 2015 allow mineral exporters to recover VAT as of 1 January 2018. Finally, the same amendment permits all gold acquisitions by individuals or holders of mining concessions to also have a zero per cent VAT rate as of 1 January 2018.

Customs duties and other charges imposed by customs are payable when importing goods to Ecuador.

In addition, a windfall profit tax of 70 per cent is payable only after 48 months after pre-production investments in the mining project have been recuperated. To calculate the windfall profit tax, metal prices are equal to their 10-year rolling average plus one standard deviation. For reference, the average price of gold over the past 10 years (plus one standard deviation) was US$1,435 per ounce and the current price of gold is US$1,231 per ounce. As mentioned, this tax only applies in the large-scale mining category.

Further, with regard to municipal taxes, liability for the following taxes should be borne in mind:

  • municipal patent: the maximum annual tax that can be paid, calculated according to a concessionaire’s assets, is US$5,000;
  • municipal tax equivalent to 0.15 per cent of the concessionaire’s assets; and
  • rural land tax.

Concessionaires are also required to pay a contribution to the Superintendency of Companies, which is currently set at 0.1 per cent of the concessionaire’s real assets.

Capital gains tax is also a variable on this section (see question 23).

Royalties

Finally, with regard to royalties, the Mining Act states that during the exploitation stage, mining concessionaires must pay a royalty depending on the mining category. Artisanal miners do not have to pay any royalty at all. Small-scale mining is required to pay a royalty equivalent to 3 per cent of the sales of the principal and secondary minerals, medium-scale mining is required to pay a royalty equivalent to 4 per cent of the sales of the principal and secondary minerals and large-scale mining is required to pay a royalty not less than 5 per cent and not higher than 8 per cent of the sales of the principal and secondary minerals. The General Mining Regulations provide more detail, stating that the royalty is calculated on the gross income, less refining and transport costs.

On the other hand, the percentage of royalties payable by concessionaires carrying out non-metallic mining activities is calculated according to production costs.

Tax advantages and incentives

What tax advantages and incentives are available to private parties carrying on mining activities?

Companies that reinvest their profits in the country are entitled to a 10 per cent reduction in the income tax payable on the amount reinvested in production assets, provided the assets are to be used to purchase new machinery or equipment that are used as part of their production activities, such as the purchase of goods related to investigations or technology to improve their productivity, generate production diversity and to increase employment. Further, deductions can be made when activities are carried out in economically depressed areas or frontier zones and citizens resident in such areas are employed.

Tax stablisation

Does any legislation provide for tax stabilisation or are there tax stabilisation agreements in force?

Overall, article 82 of the Constitution guarantees the principle of legal certainty, recognising clear, ex-ante legal rules that shall be respected by all the state authorities. Further, after the promulgation of the Organic Code of Production the state allows the possibility of signing ‘investment protection agreements’ with both domestic and foreign investors, in order to provide tax stability and other related incentives.

On 29 December 2014, the government enacted an amendment to the law, which opens up the possibility to investors investing over US$100 million to negotiate and execute a Legal and Tax Stability Agreement, thereby allowing investors to stabilise the regulations during the term of the agreement.

Carried interest

Is the government entitled to a carried interest, or a free carried interest in mining projects?

According to article 315 of the Constitution and article 16 of the Ecuadorian Mining Act the state may participate in mining projects through public or mixed public-private companies in which the state should be the majority shareholder.

With the enactment of the current Mining Act the national mining company ENAMI-EP was created in order to manage mining activity for the sustainable use of mining resources. The company may carry out its duties independently, or in partnership or association with other entities, public or private, in accordance with the legal provisions.

Transfer taxes and capital gains

Are there any transfer taxes or capital gains imposed regarding the transfer of licences?

The National Assembly of Ecuador enacted, under the Organic Law for Production Incentives and Prevention of Tax Fraud, various amendments to Ecuador’s Income Tax Code, including the introduction of the taxation of capital gains, effective as of 29 December 2014. This law includes provisions for a capital gains tax on the profits derived from the direct or indirect sale of shares by companies either domiciled or with permanent establishments in Ecuador.

Further amendments to the law were enacted under Decree No. 580, which came into force on 13 February 2015, which amended or clarified the previous law. Decree No. 580 established a threshold whereby the indirect taxation does not apply to holders of shares of a non-resident company if the real value of the rights representing the capital of the company resident in, or with a permanent establishment in, Ecuador is less than 10 per cent of the real value of the company that is not a resident of Ecuador. Decree No. 580 also established a threshold whereby the indirect taxation does not apply if the cumulative annual sale of shares for an individual is less than US$3.4 million.

Distinction between domestic parties and foreign parties

Is there any distinction between the duties, royalties and taxes payable by domestic parties and those payable by foreign parties?

Domestic and foreign parties are required to pay the same duties, royalties and taxes (see question 19).

Business structures

Principal business structures

What are the principal business structures used by private parties carrying on mining activities?

While foreign companies could open a branch in Ecuador, this idea is not often used, as not only is there a risk that the foreign parent company may be held accountable for any of the branch’s liabilities, but also it is more expensive and takes longer to set up a branch than to incorporate a local company. In addition, local companies can have broader corporate objects, whereas the corporate object of a branch must be exactly the same as that of the parent company.

As for joint ventures and trusts, although these structures are permitted in accordance with Ecuadorian legislation, they are not often used.

As such, the most common business structure is to incorporate an Ecuadorian company. There are many forms of company, the most common being corporations and limited liability companies. In many ways the forms of company are very similar; for example, they must have at least two shareholders. However, the principal differences between the two are that, in the case of limited liability companies, the maximum number of shareholders is 15 and a shareholder may only transfer shares if the prior consent of all the other shareholders is obtained. Although it depends on the needs of each interested party, as such restrictions do not apply to corporations, this is the most common form of business structure used. In the event of a joint venture, this structure can be reflected in the share ownership of the local company.

Local entity requirement

Is there a requirement that a local entity be a party to the transaction?

Any foreign entity is required by law to be domiciled in Ecuador. In addition, for tax planning reasons, it is quite often advantageous to incorporate a local company.

Bilateral investment and tax treaties

Are there jurisdictions with favourable bilateral investment treaties or tax treaties with your jurisdiction through which foreign entities will commonly structure their operations in your jurisdiction?

Ecuador has signed agreements for the promotion and protection of investments with Argentina, Bolivia, Canada, Chile, China, Cuba, El Salvador, Finland, France, Germany, Honduras , Italy, the Netherlands, Nicaragua, Paraguay, Peru, Romania, Spain, Sweden, Switzerland, the UK, the US, and Venezuela.

Additionally, Ecuador has entered into double taxation treaties with Argentina, Belgium, Brazil, Canada, Chile, China, France, Germany, Italy, Mexico, Romania, Singapore, South Korea, Spain, Switzerland, Andean countries and Uruguay. If foreign entities wish to use jurisdictions that are considered to be tax havens, it should be noted that Ecuador imposes punitive taxes.

It is important to bear in mind that the National Assembly approved the denunciation of foreign investment protection treaties. Consequently, the government of Ecuador has terminated these treaties. Note that all investments and commitments to invest made by Canadian investors prior to the termination of the Canada-Ecuador Foreign Investment Protection Agreement (FIPA) are protected for a period of 15 years from the date of termination.

Financing

Principal sources of financing

What are the principal sources of financing available to private parties carrying on mining activities? What role does the domestic public securities market play in financing the mining industry?

Financing for mining operations generally comes from abroad as direct investment as there are very limited local financial sources since financial entities such as banks consider mining activities to be high-yield investments. In addition, there are no government financing sources for mining activities. The mining industry, therefore, relies heavily on direct foreign investment, either by entrepreneurs, international investment banks, private equity funds or trusts.

Direct financing from government or major pension funds

Does the government, its agencies or major pension funds provide direct financing to mining projects?

Although government agencies and pension funds are permitted to provide direct financing to mining projects, historically, this has not occurred. Currently, in Ecuador, financing for mining projects is entirely private and, due to the lack of experience in mining, government agencies do not have any interest in providing funds for this type of project.

Security regime

Describe the regime for taking security over mining interests.

The personal nature of mining rights contradicts several norms of the Mining Act, which treat the said rights as if they were property rights. However, because they are personal rights, suitable guarantees can be set up for lenders to a mining project.

Although whether it is possible to pledge the mining rights arising from a mining concession is open to question, it is feasible to establish an industrial pledge over a mining concessionaire’s assets. A mining concessionaire could, therefore, grant a number of distinct and independent security interests, one over the mining rights arising out of the mining concession and the other over the buildings, machinery, tools, etc, located in the mining concession, in accordance with the terms of article 576 and onwards of the Ecuadorian Commercial Code.

Both the mining rights arising from a mining concession and the contractual rights stemming from the exploitation contract can be pledged as guarantee assignments to parties lending to a project. Pursuant to the Civil Code, any right can be waived or assigned and, thus, property, personal, litigation and inheritance rights, among others, can be assigned.

The following conditions must be met to ensure that a guarantee assignment is an effective guarantee for parties lending to a mining project:

  • first, a financial entity, not domiciled in the country or qualified as a subject entitled to mining rights must be allowed to be an assignee of mining rights; and
  • second, the authorisation for the guarantee assignment and any other requirement needed for the formalisation thereof should be in place at the time said assignment is granted so that if the mining concessionaire defaults, the financial entity can automatically step into the project without needing any other kind of procedure or authorisation.

In addition to the above-mentioned guarantees, a pledge over the shares held by the holding company in the company operating the mining project would be another option. The holding company could also place its shares in a guarantee trust in favour of the lenders to the projects.

Finally, the guarantee system also allows for an industrial pledge on the minerals obtained from the deposit, as well as on the current and future cash flows from the sale of said minerals.

Restrictions

Importation restrictions

What restrictions are imposed on the importation of machinery and equipment or services required in connection with exploration and extraction?

There are no restrictions regarding such importation but there are different alternatives for these procedures, which will depend on the business structure, budget and needs of a particular party.

Standard conditions and agreements

Which standard conditions and agreements covering equipment supplies are used in your jurisdiction?

There are no specific standards used in the Ecuadorian jurisdiction to cover equipment supplies but the Ecuadorian market is absolutely friendly with the supplier and buyer of industrial equipment used for the mining sector. In terms of dispute resolutions, usually, the parties prefer to include international arbitration clauses in the equipment supply agreements rather than litigate in domestic courts.

Mineral restrictions

What restrictions are imposed on the processing, export or sale of minerals? Are there any export quotas, licensing or other mechanisms that prevent producers from freely exporting their production?

There are no restrictions regarding the processing, export or sale of minerals obtained from mining operations. The principle of free trade is enshrined in current legislation and minerals can be freely exported, provided all of the relevant taxes have been paid (see question 19).

Import of funds restrictions

What restrictions are imposed on the import of funds for exploration and extraction or the use of the proceeds from the export or sale of minerals?

Ecuador does not impose any form of restriction regarding the importation of funds to be used for mining operations, nor on the use of proceeds resulting from the sale or exportation of minerals.

Environment

Principal applicable environmental laws

What are the principal environmental laws applicable to the mining industry? What are the principal regulatory bodies that administer those laws?

The principal environmental laws that apply to the mining industry are the Constitution, the Mining Environmental Regulations, the Unified Text of Secondary Environmental Legislation, the Water Act and the Environmental Act, which entered into force in April 2018 and encompasses all the environmental legislation in one single body of law.

The regulation and control bodies are the Ministry of the Environment and its regional environmental offices and, with regard to water resources, the National Secretariat of Water.

Environmental review and permitting process

What is the environmental review and permitting process for a mining project? How long does it normally take to obtain the necessary permits?

Through amendments to the Mining Law introduced on 16 July 2013, the process for obtaining the environmental permits was simplified. With the new regulations, environmental permits can be summarised as follows:

  • for artisanal mining: environmental factsheets must be approved;
  • for small-scale mining: environmental licences allow concessionaires to carry out exploration and exploitation activities simultaneously; and
  • for medium- and large-scale mining:
  • environmental factsheets must be approved for the initial exploration stage, which is a different and much simpler process than the environmental impact assessments required in the past;
  • an environmental declaration will need to be approved for the advanced exploration stage, instead of the more complicated environmental impact assessment; and
  • an environmental licence will need to be approved for the exploitation on the basis of an environmental impact assessment.

When the concessionaires have completed all the requirements for the approval of the environmental licence, this must be granted within six months of the presentation of the required documentation. Should the competent authority fail to respond within this time frame, this shall be taken as tacit agreement to the commencement of mining activities. In other words, the law establishes positive administrative silence for the approval of environmental licences.

Closure and remediation process

What is the closure and remediation process for a mining project? What performance bonds, guarantees and other financial assurances are required?

All environmental impact studies must contain an environmental management plan, which in turn must contain a plan for the partial or total closure of the mining operations. Among other details, the plan must contain details regarding the dismantling of facilities, remediation and rehabilitation of affected areas, etc. The concessionaire must provide an annual budget for these closure activities, approved by the environmental authorities.

With regard to guarantees, the concessionaire is required to provide a bank guarantee or take out an insurance policy, which must remain in force until the total closure of mining operations, in order to guarantee compliance with the environmental management plan.

Restrictions on building tailings or waste dams

What are the restrictions for building tailings or waste dams?

There are no restrictions for building tailings or waste dams. Nevertheless, according to the Environmental Act, it is necessary to have an environmental licence prior benefiting from tailing ponds and waste piles. Added to that, the mining concessionaire must comply with the regulations and technical specifications contained in the Mining Act and the Unified Text of Secondary Environmental Legislation (see question 40). The company in charge of the operation and management of dam waste must demonstrate technical evidence and credentials to support its experience in this kind of infrastructure. Inspections of mining projects by local authorities are really common, especially since 2016. An alarm system is not mandatory, but according to the legal framework it is advisable to prevent environmental disasters; it is a common practice within private mining companies operating in Ecuador. In terms of responsibilities for a dam failure, the immediate action is to prevent any human/infrastructure loss, thus, the government will use all their resources in that line. There is a specific government entity that deals with any kind of natural disaster. As a common practice, companies must also provide all the necessary support to the above-mentioned end.

Health & safety, and labour issues

Principal health and safety, and labour laws

What are the principal health and safety and labour laws applicable to the mining industry? What are the principal regulatory bodies that administer those laws?

The principal legal provisions regarding health and safety, as well as labour laws are set out in international agreements to which Ecuador is a party, including the International Labour Organization (ILO), the Constitution and various Ecuadorian laws and regulations, including the Labour Code and the General Labour Risks Insurance Regulations, among others. Labour law in Ecuador is complex and biased in favour of employees; the rights granted to employees by legislation cannot be waived or challenged. The Labour Code regulates the forms of labour contracts, holidays, minimum wages, bonuses and other benefits, maternity leave, unions and collective contracts, strikes and compensation, among other matters. The Social Security Act governs social security benefits and all companies must affiliate their employees to the Ecuadorian Social Security Institute (IESS).

The IESS and the Ministry of Labour, together with its labour inspectors, are responsible for ensuring compliance with labour and social security legislation.

Management and recycling of mining waste

What are the rules related to management and recycling of mining waste products? Who has title and the right to explore and exploit mining waste products in tailings ponds and waste piles?

According to article 43 of the Mining Act, mining waste products in tailing ponds and waste piles are part of the mining concession, therefore, the mining concessionaire has the right to freely exploit and benefit from them. However, according to the Mining Act and the Environmental Act Regulations, it is necessary to acquire an environmental licence prior to exploiting and benefiting from mining waste products in tailing ponds and waste piles. The mining concessionaire must follow the regulations contained in the Mining Act, Environmental Management Act Regulations and the Unified Text of Secondary Environmental Legislation.

Use of domestic and foreign employees

What restrictions and limitations are imposed on the use of domestic and foreign employees in connection with mining activities?

The Mining Act states that no more than 20 per cent of a mining company’s employees can be foreign. Further, preference should always be given to Ecuadorian specialised technical personnel, and only if there are none should foreign personnel be contracted. Any foreign employees must have a work visa and comply with all applicable labour and immigration requirements, including the obligation to train Ecuadorian personnel in their field of expertise.

In addition, when hiring, mining companies must favour workers living in the area of influence of the project and have policies regarding the integration of employees’ families in place.

Social and community issues

Community engagement and CSR

What are the principal community engagement or CSR laws applicable to the mining industry? What are the principal regulatory bodies that administer those laws?

All mining activities must respect the principle of sumak kawsay, an indigenous principle enshrined in the Constitution in order to ensure that everyone live in a healthy and economically sustainable environment. Therefore, Ecuadorian legislation contains many provisions regarding these matters. There are a series of legal provisions regarding CSR in various pieces of legislation, including the Constitution, the Mining Act, the Environmental Act and the Citizen Participation Act, among others. Additionally, international CSR principles such as the ILO 169 Convention, the UN Global Compact and other UN guidelines are applied within mining operations in Ecuador.

Rights of aboriginal, indigenous or disadvantaged peoples

How do the rights of aboriginal, indigenous or currently or previously disadvantaged peoples affect the acquisition or exercise of mining rights?

In Ecuador, the collective rights of indigenous communities, nationalities and peoples are recognised in the Constitution and the various international human rights agreements, protocols, declarations and other principles (see question 42).

Indigenous communities, nationalities and peoples must be consulted, freely and with sufficient information, regarding any plans or programmes to explore, exploit or sell non-renewable natural resources located within their land and which could affect them, either environmentally or culturally, or affect their property rights. Further, they have the right to receive a share of the benefits generated by these projects and to receive compensation for any social, cultural or environmental damage caused as a result. The consultation referred to above is mandatory and must be carried out by the competent authorities on a timely basis. It is important to point out that according to international standards and conventions, the result of the consultation process is not legally binding.

It is prohibited to carry out extractives activities in lands belonging to aboriginal people who voluntarily choose to remain isolated.

International law

What international treaties, conventions or protocols relating to CSR issues are applicable in your jurisdiction?

Ecuador is party to a number of international treaties, the principal ones being the Universal Declaration of Human Rights, the International Convention on the Elimination of All Forms of Racial Discrimination, the UN Covenant on Civil and Political Rights, the International Covenant on Economic, Social and Cultural Rights, the Additional Protocol to the American Convention on Human Rights in the Area of Economic, Social and Cultural Rights, the ILO 169 Convention on Indigenous and Tribal People in Independent Countries and the UN Declaration on the Rights of Indigenous People.

According to the current Constitution, these international agreements are binding and, within them, the provisions of the human rights agreements prevail over the Constitution itself. In addition, the government has developed laws and regulations to protect the right to prior consultation of indigenous communities. It is also important to note that, in the light of a 2012 decision of the Inter-American Court of Human Rights, Ecuador should adopt legislative measures in order to fully facilitate the right of indigenous peoples to prior consultation, and should also modify those laws that may restrict its free and informed exercise.

Anti-bribery and corrupt practices

Local legislation

Describe any local legislation governing anti-bribery and corrupt practices.

With regards to the Ecuadorian legislation on anti-bribery and corrupt practices, it is important to consider the principles enshrined in the Constitution, as well as in the Criminal Code, the Organic Law on Transparency and Social Control and the Organic Law on Transparency and Access to Public Information. The Constitution, along with the aforementioned legislation, develops a very strict legal framework to regulate, control and sanction anti-bribery and corrupt practices.

Foreign legislation

Do companies in your country pay particular attention to any foreign legislation governing anti-bribery and foreign corrupt practices in your jurisdiction?

Considering that there is a strict legal framework regarding anti-bribery and corrupt practices in Ecuador, companies have strict rules on compliance and disclosure. To this regard, article 417 of the Constitution ratifies that all international instruments and treaties endorsed by Ecuador are part of the domestic legal system. Commonly, companies follow the regulations contained in the Inter-American Conventions against Corruption and the UN Convention against Corruption, among others.

For instance, US and Canadian companies include in their contracts the reference of the Foreign Corrupt Practices Act and Convention on Combating Bribery of Foreign Public Officials in International Business Transactions of the Organisation for Economic Co-operation and Development.

Disclosure of payments by resource companies

Has your jurisdiction enacted legislation or adopted international best practices regarding disclosure of payments by resource companies to government entities in accordance with the Extractive Industries Transparency Initiative (EITI) Standard?

In 2009, the Inter-American Development Bank and the FARO Group signed an agreement to develop the ‘Transparency in the Extractive Industry in Ecuador’ project, focused on achieving the active participation of public and private companies linked to extractive industries, particularly in the oil sector (idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=35400790). The initiative’s main objective is the application of the minimum level of the agreed-upon standards, which allow for the transparent handling of information within the sector. Added to that, the Ecuadorian government joined the Extractive Industries Transparency Initiative in 2018 that seeks good governance and public disclosure of information within oil, gas and mining industries.

In accordance with both initiatives, the Constitution allows for the civil society to participate throughout different levels of government decision-making processes. The right to transparent information is recognised within the Constitution.

As per local legislation, the Organic Law on Transparency and Access to Public Information allows citizens to access public information and that is closely related to the aforementioned initiatives.

Foreign investment

Foreign ownership restrictions

Are there any foreign ownership restrictions in your jurisdiction relevant to the mining industry?

The Constitution incorporated the prohibition of land (surface rights) acquisition by foreigners in border areas, which extends to 20 kilometres from the border. This prohibition does not apply to mining concessions. However, if an area is located within the border zone, it is necessary to obtain a prior authorisation from the Ministry of Defence, in accordance with article 41 of the Homeland Security Law.

International treaties

Applicable international treaties

What international treaties apply to the mining industry or an investment in the mining industry?

Ecuador had double tax treaties with Argentina, Belgium, Brazil, Canada, Chile, China, France, Germany, Italy, Mexico, Romania, Singapore, South Korea, Spain, Switzerland, the Andean countries and Uruguay. However, as mentioned in question 27, the National Assembly approved the denunciation of foreign investment protection treaties including the FIPA entered into by Ecuador and Canada.

Relevance of the Canada-Ecuador FIPA

The Canada-Ecuador FIPA expressly provides for the right of a party to terminate the treaty by giving one year’s advance notice. Once termination becomes effective, that is one year after the termination notice is delivered - the effective termination date - all of the articles of the treaty (except for article XVIII, which sets out the termination provision) remain in full force and effect for a period of 15 years for ‘investments’ or ‘commitments to invest’ made prior to the effective termination date. Investments or commitments to invest made after the effective termination date will not be eligible for FIPA protection and will have to rely on domestic legislation for protection. Ecuadorian legislation provides for investment agreements, a form of protection discussed at the end of this question.

The termination provisions can be found in article XVIII(2) of the Canada-Ecuador FIPA, as follows:

This Agreement shall remain in force unless either Contracting Party notifies the other Contracting Part in writing of its intention to terminate it. The termination of this Agreement shall become effective one year after notice of termination has been received by the other Contracting Party. In respect of investments or commitments to invest made prior to the date when the termination of this Agreement becomes effective, the provisions of Articles I to XVII inclusive of this Agreement shall remain in force for a period of fifteen years.

Based on the express wording found in the Canada-Ecuador FIPA, the interpretation rules found in the Vienna Convention on Law of Treaties, and relevant international law authorities and jurisprudence, article XVIII(2) of the Canada-Ecuador FIPA will allow the investor the right to assert claims under the treaty for a period of 15 years following the termination of the treaty, so long as these claims arise out of ‘investments’ or ‘commitments to invest’ made prior to the date on which the termination of the treaty becomes effective - the effective termination date.

Furthermore, in our view, the unconditional consent provided by Ecuador to the submission of a dispute to international arbitration in accordance with the provisions of this article XIII of the Canada-Ecuador FIPA will permit a Canadian investor who has made investments or commitments to invest within the requisite period, the right to invoke the arbitration mechanism for a period of 15 years following the termination of the treaty, notwithstanding any statement or notice by Ecuador withdrawing such consent. In other words, the investor’s submission of a dispute to arbitration including the concurrent consent for arbitration, required from the investor, need not be provided in advance of the effective termination of the Canada-Ecuador FIPA (or prior to the date of the giving of notice by Ecuador to the government of Canada, seeking to terminate the treaty).

In order to exercise its right to seek arbitration, the investor would be able to initiate the proceeding pursuant to article XIII at any time within the 15-year survival period, provided it meets the requirements for submitting the dispute to arbitration and providing its consent.

Update and trends

Update and trends

What were the biggest mining news events over the past year in your jurisdiction and what were the implications? What are the current trends and developments in 2017 in your jurisdiction's mining industry (legislation, major cases, significant transactions)?

The international awards that Ecuador received in the past year confirm the success of the mining industry in Ecuador. The Mines & Money Americas Outstanding Achievement Awards 2017 handed out awards for the Best Country of the Year to Ecuador; Best Explorer in Latin America to SolGold; and CEO of the Year to Nick Mather, CEO of SolGold. Additionally, Mines & Money gave an award to Ecuador as the Most Innovative Country, in London in December 2017. On top of that, the Mining Journal included the name of the former Minister of Mining, Javier Cordova, as one of the most influential people in mining around the world.

These awards are not a coincidence. They are the combination of adequate government decisions and the extraordinary results of mining companies, which has placed Ecuador in the sights of investors.

As of the creation of the Mining Ministry in December 2016, the Ecuadorian government has spearheaded various initiatives, including the signing of an exploitation contract with Lundin for the development of the Fruta del Norte project, the opening of the mining cadastre and the start of the construction of the Mirador and the Rio Blanco projects.

According to the Mining Ministry, from the opening of the mining cadastre on 1 March 2016 to December 2017, 275 mining concessions were granted, equivalent to 3.72 per cent of the national territory, with committed exploration investments during the first four years of approximately US$1.3 billion. These figures are impressive for a country that during the past 10 years was not on the radar of the international investment community. Additionally, there is the arrival in some cases, and the return in others, of various experienced companies, such as BHP Billiton, Anglo American, Newcrest and Fortescue, among others.

However, the most important mining news is without a doubt the extraordinary results of the Cascabel project of Australian company SolGold, which indicate the existence of a world-class porphyry copper-gold deposit that, according to experts, is only discovered once every 10 years around the world.

According to SolGold, the investment required to develop the Cascabel project is projected (using a conceptual economic model with a processing capacity of 40MTPA using the block cave mining method) at US$3 billion capital expenditure, comprising one-third equity and two-thirds debt. An investment of this magnitude would surely affect the GDP of Ecuador, creating new jobs and fostering economic growth, especially in the provinces of Imbabura and Carchi, where the project is located, and in the province of Esmeraldas, home to the port used for exporting the mineral.

Ecuador has worked hard to regain the trust of the international community after the disastrous Mining Mandate of 2008. Trust is built daily, but it can also be lost very easily.

Nevertheless, there are some worrying signs for the industry. Although President Moreno has publicly expressed his support for mining, as long as it is environmentally responsible, the inclusion of a specific question in the recent referendum resulted in anti-mining groups demanding that the government issue additional prohibitions to impede the development of projects in areas that are currently subject to exploration, including those where concessions have been granted to companies by means of public tender processes.

Additionally, while companies understand that the mining cadastre should be closed to allow for new mining planning, authorities were unable to inform the public with regards to the reasons behind closing the mining cadastre, which in turn was interpreted as a measure taken owing to pressure from indigenous and anti-mining groups that supported President Moreno during the referendum.

However, the most concerning news for the industry is the decision by the Mining Ministry to eliminate areas reserved by mining companies from the cadastre, which is a blow to the trust that had been rebuilt recently between mining authorities and private industry. Likewise, understanding that the Mining Ministry is responsible for defining the areas subject to tenders, the sensitive information about areas that companies have identified as being of prospective interest is now public knowledge. It can be imagined that, when the cadastre is reopened in the future, there will be a fight to apply for such areas with reserves, knowing ahead of time the interest of the most well-known exploration companies.

It is to be hoped that this cloud of uncertainty passes soon, and that there is no damage to the credibility and seriousness of the country, as mining is the only industry capable of attracting large amounts of investment in upcoming years, which without a doubt would be good for the Ecuadorian economy.