This chapter is taken from Lexology GTDT’s Practice Guide to Mining, examining key themes topical to the international mining community.
This chapter will cover the following:
- property of non-renewable natural resources, including multiple conceptions and different approaches;
- constitutional provisions regarding non-renewable natural resources;
- regulations and granting of mining rights;
- challenges of the mining industry in Ecuador; and
- exploration activity by foreign entities in Ecuador.
Property of non-renewable natural resources
In order to analyse the legal nature of mining rights in Ecuador, it is necessary to define the property of such resources under the Ecuadorian legal framework. The Ecuadorian legal system is based on civil law and, in accordance with the Constitution, the state owns all minerals and non-renewable natural resources within national territory. In this regard, article 408 of the Constitution states the following:
Non-renewable natural resources and, in general, products coming from the ground, mineral and petroleum deposits, substances whose nature differs from that of the land, including those that are located in areas covered by territorial sea waters and maritime zones, as well as biodiversity and its genetic heritage and the radio-electric spectrum, are the unalienable property of the State, and are not subject to a statute of limitations or seizure. These assets can only be produced in strict compliance with the environmental principles set forth in the Constitution.
In light of the above, non-renewable natural resources are categorised by the Constitution as ‘strategic sectors’. To understand the scope of strategic sectors, article 313 of the Constitution defines them as follows:
Strategic sectors, which come under the decision making and exclusive control of the State, are those that, due to their importance and magnitude, have a decisive economic, social, political or environmental impact and must be geared toward ensuring the full exercise of rights and the general welfare of society. The following are considered strategic sectors: energy in all its forms, telecommunications, non-renewable natural resources, oil and gas transport and refining, biodiversity and genetic heritage, the radio-electric spectrum, water and others, as established by law.
Strategic sectors are managed, regulated, controlled and governed exclusively by the state. Nevertheless, the state can, on an exceptional basis, in accordance with article 316 of the Constitution and article 30 of the Mining Law, delegate the development of such sectors to individuals or entities. In the case of the mining industry, the state grants mining concessions for a term of 25 years.
The State may, on an exceptional basis, delegate the exercise of these activities to private enterprise and the social and solidarity sector of the economy, in the cases set out by law.2
Mining concessions. The State may exceptionally delegate its participation in the mining sector by way of concessions.3
Regarding article 316 of the Constitution, the highest court of interpretation of constitutional provisions in Ecuador, the Constitutional Court, handed down a ruling in sentence No. 001-12-SIC-CC, dated 5 January 2015, confirming that the state can, on an exceptional basis, delegate the development of strategic sectors to individuals or entities. In this particular scenario, according to article 30 of the Mining Law, the concessionaire will have the exclusive right to explore, exploit, process and sell any metallic minerals within the concession.
Another important element to consider within the scope of non-renewable natural resources property in Ecuador is that mining is considered to be of public interest, according to article 15 of the Mining Law. This means that mining has a special category and more protection than other private interests, including land ownership. For instance, if a concessionaire suffers any form of disruption as a result of actions by a third party, they have the right to file an administrative relief action with the Mining Regulation and Control Agency (ARCOM), which can take either direct or indirect preventive measures.
Public utility. Mining operations, in all phases, inside and outside of mining concessions, are of public utility. Thus, any easement deemed necessary may be created, within the framework and limits established herein, taking into account the prohibitions and exceptions set out in Article 407 of the Constitution of the Republic of Ecuador.4
A third and final element to be considered for this analysis, which is related to property, is the difference between mining rights and surface rights. Unlike other jurisdictions, in Ecuador, ownership of mining concessions is different to the ownership of surface land. Overall, private parties may acquire any form of surface rights, from ownership of the surface area to leases, usufructs and easements, etc. Moreover, 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 owner of the surface area, or request that the ARCOM impose an easement. In the latter case, holders of these surface rights cannot oppose such requests since, as said above, mining rights are considered of public interest. Regarding ownership of land surface rights, foreigners (individuals or corporations) cannot acquire any surface rights within border zones that concern an area within 20 kilometres of national borders.
To summarise, regarding non-renewable natural resources property in Ecuador, the following must be taken into consideration: mining is considered to be of public interest, the state owns all minerals and non-renewable natural resources within national territory, and mining rights and surface rights are different.
Constitutional and legal provisions regarding non-renewable natural resources
Having addressed the ownership of non-renewable natural resources in Ecuador – particularly the right of the state to said resources, the concept of public utility, and the difference between mining rights and property rights – we will reference the main constitutional and legal provisions regarding non-renewable natural resources, and contextualise the above concepts within the local legislation.
Overall, the regulations regarding non-renewable natural resources, particularly those related to the mining industry, are contained in the following regulatory bodies:
- the Constitution;
- the Mining Law;
- the General Mining Regulation;
- the Small-Scale and Artisanal Mining Regulations;
- the Environmental Act;
- the Environmental Regulations for Mining Activities;
- the Organic Law of Hydrological Resources, Uses, and Exploitation of Water; and
- the Hydric Resources Regulations.
The main constitutional provision regarding ownership of non-renewable natural resources within the Constitution is article 408, which states the following:
Non-renewable natural resources and, in general, products coming from the ground, mineral and petroleum deposits, substances whose nature differs from that of the land, including those that are located in areas covered by territorial sea waters and maritime zones, as well as biodiversity and its genetic assets and the radio-electric spectrum, are the unalienable property of the State, and are not subject to a statute of limitations or seizure. These assets can only be produced in strict compliance with the environmental principles set forth in the Constitution. The state shall receive profits stemming from the exploitation of these resources, in an amount that is no less than the profits earned by the company producing them. The State shall guarantee that the mechanisms for producing, consuming and using natural resources and energy conserve and restore the cycles of nature, and foster living conditions marked by dignity.
Apart from the undisputed ownership of non-renewable natural resources, article 408 emphasises the obligation to develop such resources in strict compliance with the environmental principles enshrined in the Constitution. Thus, the Constitution includes non-renewable natural resources as part of the strategic sectors. As briefly explained, the state reserves the right to administer, regulate, monitor and manage strategic sectors.
The State reserves the right to administrate, govern, monitor and manage strategic sectors, following the principles of environmental sustainability, precaution, prevention and efficiency. Strategic sectors, which come under the decision making and exclusive control of the State, are those that, due to their importance and magnitude, have a decisive economic, social, political or environmental impact and must be geared toward ensuring the full exercise of rights and the general welfare of society. The following are considered strategic sectors: energy in all its forms, telecommunications, non-renewable natural resources, oil and gas transport and refining, biodiversity and genetic heritage, the radio-electric spectrum, water and others, as established by law.5
The role of the state is clear regarding strategic sectors, and particularly non-renewable natural resources, owing to their importance and magnitude. Undoubtedly, developing non-renewable natural resources has a decisive economic, social, political and environmental impact on the national economy. However, developing non-renewable natural resources in such a mega-diverse country as Ecuador is not an easy task. Therefore, one of the innovations of the Constitution is the incorporation of the rights of nature. To this end, article 317 of the Constitution expands of this concept:
Non-renewable natural resources are part of the inalienable heritage of the State and are not subject to a statute of limitations. As part of managing these resources, the State shall prioritize the responsibility between generations, conservation of nature, collection of royalties or other non-tributary contributions and corporate shares; and shall minimize the negative impacts of an environmental, cultural, social and economic nature.
Overall, the constitutional concept of non-renewable natural resources and their development are well described in the Constitution. Its principles are well developed and its interrelation with other fundamental rights, such as the rights of nature, are correctly detailed. Nevertheless, considering the topic of this chapter, one of the main issues regarding the legal nature of mining rights in Ecuador – not on a constitutional level but on a legal level – is contained in the Mining Law, and is the concept of mining rights as personal rights.
In this regard, article 30 of the Mining Law states the following:
Mining concessions. A mining concession is an administrative act that grants a mining title, to which the owner shall have a personal right, and which may be transferred once the Sectorial Ministry has mandatorily assessed the suitability of the assignee of the mining rights.
This chapter will expand on this particular issue in the section related to the challenges of the mining industry in Ecuador, but for now it is important to consider this particular issue as the most critical challenge to the mining industry. Unlike other countries in the region, this ‘innovation’ is creating lots of problems for mining concessionaires in Ecuador, which will increase as soon as the projects advance in their exploration, and once the corporations initiate capital raising for the development of a potential mine.
Finally, on 15 May 2018, the President, Lenín Moreno Garcés, issued Executive Decree No. 399 in order to merge the hydrocarbons, electricity and mining ministries into one single entity. The reason for this Decree is to reduce bureaucratic costs within the executive branch owing to the economic crisis affecting the country. There is confidence that the new minister will give the mining sector the importance it deserves as a crucial industry for the economic development of the country.
Regulations and granting of mine rights
Unlike other countries in the Andean region and the continent, Ecuador has a very particular way of granting mining concessions. In accordance with the Mining Law and its general regulation, to access a mining concession in Ecuador, individuals or corporations must participate in a public tender process where the determining factor to be awarded a mining concession is the economic offer of the interested party.
On 1 March 2016, the Energy and Non-Renewable Natural Resources Ministry (formerly the Mining Ministry) issued Ministerial Decree No. 2016-002, subsequently amended by Ministerial Decrees Nos. 2016-014 and 2016-030, which contains the Guidelines for Granting Metallic Mining Concessions.
With this background, and considering the purpose of this particular analysis, based on the legal nature of mining rights and with the aim of understanding the difference between the way in which mining rights are granted in Ecuador and other mining jurisdictions in the region, this section will refer to two other countries with a mining industry much more developed than that of Ecuador’s.
Granting of mining rights
In Chile, private parties may acquire several mining rights. As Rodrigo Muñoz from Núñez Muñoz & Cía mentions in his chapter on Chile for Getting the Deal Through: Mining 2018, the mining rights that private parties may acquire are as follows:
mining claims (mining exploitation concessions under constitution process), mining petitions (mining exploration concessions under constitution process), mining exploration concessions (reconnaissance licences) and mining exploitation concessions (mining licence).
As he also points out in the chapter: ‘All of these different kinds of mining rights are acquired on a first-come, first-served basis.’
Regarding the nature of mining rights in Chile, Muñoz mentions the following: ‘Mining concessions are considered as real immovable rights, having the same legal status of a property, but only regarding the mineral substances.’ This particular conclusion is completely opposed to what was mentioned in the previous section of this chapter regarding the legal nature of mining rights in Ecuador.
As for Canada, John Turner and Michael Bourassa from Fasken mention in their chapter of Getting the Deal Through: Mining 2018 that ‘Prospectors can explore “open” Crown lands (or in Quebec, lands that are privately owned), with a prospecting permit, and can “stake” the mineral rights if the land has not already been located and recorded by another party.’ Moreover, they point out that those rights are as follows:
acquired on a first-come, first-served basis. Land can be located on the ground through traditional staking methods (namely, cutting claim posts and blazing claim lines, in Quebec using government issued tags), but most provinces have now adopted ‘map designation’ in lieu of ground staking, where claims are delineated online using a grid system based on global positioning system technology (in both instances, claims that are ‘ground staked’ or ‘map designated’ are referred to as being ‘located’).6
Unlike Chile and Canada, where the system works on a first-come first-served basis, the Ecuadorian system is completely the opposite. In order to access a mining concession in Ecuador, the interested party must participate in a public tender process. The specific characteristics and requirements of the tender process will depend on the surface area of the mining concession. In general terms, there are three different processes: petition, bid and tender.
This process applies for mining concessions in the range of small-scale mining, and it is considered a direct application process similar to the system used in Chile and Canada known as ‘first-come first-served’. Therefore, to the extent in which the interested party fulfils the requirements that are set forth in the Guidelines for Granting Metallic Mining Concessions, the Energy and Non-Renewable Natural Resources Ministry will award the mining concession.
In this case, the interested parties initiate the process by mapping the area of interest with ARCOM’s system; claims are delineated online using a grid system based on GPS technology on its website. After this initial stage, the Energy and Non-Renewable Natural Resources Ministry verifies if the interested party fulfils the requirements of the Guidelines for Granting Metallic Mining Concessions and publishes the details of the area on its website for a period, so that other potential interested parties can file their bid upon meeting certain economic and technical requirements.
Public tender process
This process applies for mining concessions of more than 500 hectares in the medium- and large-scale mining regimes.
In the process of granting mining concessions within medium- and large-scale mining regimes, there are two different scenarios that must be taken into account. The first is when the Energy and Non-Renewable Natural Resources Ministry initiates the process and the second is when the process is initiated at the request of a private party. This chapter will refer exclusively to the latter.
The process initiates by mapping the area of interest with ARCOM’s system. Once the area is plotted, the interested party must file the document with the Energy and Non-Renewable Natural Resources Ministry. The aforementioned document must be filed along with certain information that proves economic solvency for the development of the specific project, and an economic offer for four years of exploration.
Once the information is filed and validated, the Energy and Non-Renewable Natural Resources Ministry publishes the terms of reference for the project on its website for other potential interested parties. At the end of this period, interested parties are invited to a hearing at the Ministry in which the authority opens the economic offers of all the parties. Upon concluding this process, the Ministry will award the mining title.
From the opening of the mining cadastre to its closure, and according to information from the Energy and Non-Renewable Natural Resources Ministry, 275 mining concessions were granted in the period between March 2016 and December 2017. These 275 concessions are equivalent to 3.72 per cent of national territory. These figures are impressive for a country that was not on the radar of the international investment community 10 years ago. However, way in which mining concessions are granted in Ecuador is not consistent with the way that mining concessions are granted in other countries of the region. In order to become a more competitive jurisdiction, new amendments must change the public tender process of the Mining Law in order to access mining concessions and incorporate the ‘first-come first-served’ system of other jurisdictions.
At the time of writing, we understand that the Energy and Non-Renewable Natural Resources Ministry is working on amendments to the Guidelines of Granting Mining concessions. The aim is to correct some inconsistencies in the current process.
The Mining Law recognises four mining categories: artisanal, small-scale, medium-scale and large-scale. Furthermore, initial and advanced exploration activities are limited to the concessionaires within the areas of their concessions. In order to carry out mining activities in Ecuador, and in accordance with article 26 of the Mining Law, the mining concessionaire must have the following permits:
- environmental authorisation;
- water permit; and
- sworn declaration before a public notary in which the mining concessionaire declares under oath that its activities will not affect public infrastructure.
All mining titles include the right to explore, exploit, process and sell any metallic minerals extracted within the concession. Therefore, regardless of the stage of the activity, the concessionaire shall comply with the aforementioned authorisations.
It is necessary to consider an amendment to the Mining Law, especially relating to the granting process of mining concessions, in order to become more competitive in the region. Additionally, it is necessary for the government to understand that the public tender process is not common in any other mining jurisdiction, and it is not coherent with the industry per se.
Challenges for the mining industry in Ecuador
There are certainly multiple challenges for the mining industry in Ecuador. However, the most important one is the concept of mining rights as personal rights. For the purpose of this chapter, we will be dividing this section into two parts. The first part will address a detailed analysis of the concept of mining rights, and the second will refer to other challenges that exist in Ecuador for the mining industry.
Main challenge of the mining industry in Ecuador
Without a doubt, one of the most important topics discussed around the world with respect to the legal nature of mining rights is the comparative analysis of the types of contracts used in jurisdictions based on common law, and the problems that arise when adapting them in countries with French traditions based on civil codes, which prevail throughout Latin America, as is the case with Ecuador.
Among the most discussed concepts of the two systems is the concept of ownership. In general, in the Ecuadorian system there are two types of rights: real rights – those that associate individuals with things; and personal rights – those that associate individuals with other individuals. The subject of real rights, according to article 595 of the Ecuadorian Civil Code (CC), corresponds to the domain, inheritance, usufruct, use or inhabiting, active easement, lien and mortgage; whereas personal rights correspond to liabilities and contracts (article 696 of the CC).
This notion is different in the Anglo-Saxon system. The concept known as ‘property rights’ has a more extensive meaning, and a proprietary nature that not only includes assets and property, but also the ‘property’ of contracts and credits. In the Anglo-Saxon system, an individual may have ownership over his or her assets, as well as his or her rights and liabilities with other individuals, and can freely arrange them as seen fit.
At a recent event during the biennial ‘Special Institute on International Mining and Oil & Gas Law, Development, and Investment’ of the Rocky Mountain Mineral Law Foundation, the reflection of R Craig Johnson and Carlos Vilhena was illuminating in addressing this matter, because on numerous occasions when we have attempted to explain the problems resulting from classifying mining rights as personal rights in Ecuador, various colleagues, who practise in Anglo-Saxon court systems, did not understand the importance and repercussions of this in Ecuador.
Thus, the main shortcoming of the current Mining Law, enacted in 2009, is mining rights being deemed as personal rights. The problem arises from the initial draft that was discussed in the National Assembly, which conceived the entire structure of the law as a real right, but at the last minute, for reasons unknown, the nature of the mining rights were modified to personal rights, and this gave way to a series of inconsistencies and contradictions.
Without going into too much detail, and without trying to be redundant in mentioning the inconsistencies arising from the personal nature of mining rights in Ecuador, the following points are necessary to mention:
- Constructions, facilities and other objects affected by the exploration, exploitation and production of minerals are classified as ‘accessories’ to the mining concession (article 30 of the Mining Law). Nevertheless, accession is a manner of acquiring domain of assets, and therefore it is a real right and not a personal right. There cannot be accessory assets to a personal right, such as the mining concession.
- As a mining concession is a personal right, it is, at the very least, debatable that it is sufficient for the concessionaire to become the ‘owner’ (which is a real right) of minerals extracted from the mining concession.
- In connection with the foregoing, the Mining Law establishes two types of contracts: exploitation and services contracts (article 39 of the Mining Law), but given the personal nature of the mining concession, only the latter option is feasible, as the state is the owner of the deposit, and the concessionaire, through the authorisation granted by the state, receives payment for the services rendered to the owner of the mine. Consequently, ownership of the extracted minerals, as the mining concession is not a real right, corresponds to the owner of the deposit, which is the state.
- If the state maintains ownership (domain) over the concessioned area, the responsibility for maintaining the area free of disturbances – for example, illegal mining – falls on the titleholder of the resources, which is the state. In other words, the party liable for claims, protection orders and other actions is the state, and not the mining concessionaire, which only holds a personal authorisation to perform mining activities within the area. The real right is absolute, as it can be applied to everyone, whereas personal rights are relative, as they can only be applied to the bound party. Therefore, for example, the owner can demand that no individual contravene the application of a real right and, if this is breached, a real lawsuit can be filed; however, a personal suit can only be filed against the debtor. This is a strange aspect, because concessionaires must make a claim to the state, and not private parties, when mining concessions face disturbances caused by private parties.
- A similar case involves the ability of the concessionaire to enter into contracts with third parties. As the mining concession is a personal right, it can be argued as to whether or not the concessionaire can enter into operations or lease agreements with third parties, which can normally only be carried out by the owner of the area, which is the state.
- The matter is even clearer when dealing with pledges. According to the law, it is possible to pledge the mining concessions; however, if the pledge is a lien against something, is it truly possible to pledge personal rights? Any answer could be heavily disputed. The purpose of the real right is a specific thing, whereas a personal right is a human act, whether giving, doing or not doing something. The legal concept of a real pledge contradicts the personal nature of mining rights.
These inconsistencies had gone unnoticed until now. Regarding specific matters, such as the structure of guarantees, for example, various amendments have been made to secondary legislation with the aim of overcoming the limits of personal rights. Apart from these measures, it is understood that certain matters have been improved in the exploitation contracts recently negotiated with the state. Nevertheless, said efforts are useless as the legal inconsistency remains.
The true effects of these inconsistencies will be revealed in the future for both funding operations for mining projects, and potential controversies that arise between the state and mining investors, which will be dealt with in international arbitration courts.
Without legal reforms that modify the nature of the mining right to a real right, as in Ecuadorian legislation, all of the efforts to resolve this huge inconsistency will just end up being short-term remedies. It is hoped that these inconsistencies do not have lasting effects on the investors.
Other challenges for the mining industry in Ecuador
With respect to the current economic conditions in Ecuador, it is necessary to point out that the state must adjust, improve and amend such conditions in order to attract mining exploration investments in the years to come. For instance, a reduction in the annual patent fees must be considered, which are way above the amounts of neighbouring countries. The aim should be to adjust these amounts to make them more competitive.
In August 2018, the National Assembly approved the Economic Development Law in which it finally eliminated the windfall profit tax from legislation, and adjusted the calculation for capital gains tax. This is a very positive development for the mining industry.
Overregulation and authorisation
This issue has become one of the main problems for carrying out mining activities in Ecuador. In accordance with article 26 of the Mining Law, and as it was explained in the previous section, prior to executing mining activities, the mining concessionaire must obtain authorisations from the National Water Secretariat (SENAGUA) and the Ministry of the Environment.
At this point, it is fair to say that authorisation from the Ministry of the Environment for initial exploration is a relatively simple process. However, obtaining authorisation from the SENAGUA is really complex and requires many documents, and even a technical visit to the concessions, which could take three to four months.
The issue of prior consultation has recently become one of the main challenges for mining projects in Ecuador, and not just because the duty of prior consultation with indigenous peoples and nations is a duty of the mining concessionaires, but because the state has not done its part properly.
What has changed is the culture in the communities regarding this matter, which are starting to effectively use legal control tools. With this development, the mining industry companies must emphasise compliance with the prior consultation processes of each project, not limiting their actions to the application of the law, but rather incorporating the best corporate social responsibility practices into their corporate DNA.
Another fundamental issue for mining concessions in Ecuador will be the position of the government regarding illegal mining activities, which take place in various parts of Ecuadorian territory. The stance of the government against illegal mining is crucial. These activities, which are now presented as artisanal mining, are negative for the country from every point of view. Activities are financed by clandestine money, with no consideration for the environment, while affecting human rights (child labour and human trafficking, etc), which must be a concern of any government. A clear policy regarding this issue and the eradication of illegal mining in Ecuador would be well regarded by the mining industry and the Ecuadorian population.
Exploration activity by foreign entities in Ecuador
The international awards that Ecuador received during 2017 confirm the success of its mining industry. The Mines and Money Americas Outstanding Achievement Awards 2017 presented 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 and Money gave an award to Ecuador as the Most Innovative Country in December 2017.
These awards are not a coincidence. They are the combination of government decisions and the extraordinary exploration results of mining companies, which have placed Ecuador in the sights of investors.
As of the creation of the Mining Ministry (now called the Energy and Non-Renewable Natural Resources Ministry) in 2015, the Ecuadorian government has achieved various milestones, including signing the exploitation contract with Lundin for the development of the Fruta del Norte project, opening the mining cadastre, and starting the construction of the Mirador and Río Blanco projects. Additionally, there is the arrival and return of various companies with well-known experience, such as BHP Billiton, Anglo American, Newcrest and Fortescue.
However, the most important mining news is without a doubt the extraordinary results of the Cascabel project of the Australian company, SolGold, which indicate the existence of a world-class deposit that, according to experts, is only discovered every 10 years around the world. During a recent corporate presentation, published on the web page of SolGold, the investment required to develop the Cascabel project was projected using a conceptual economic model with a processing capacity of 40 metric tonnes per annum using the block cave mining method, and the numbers were impressive: US$3 billion capital expenditure, comprising one-third equity and two-thirds debt. An investment of this magnitude will surely impact the GDP of Ecuador by a number of points points, 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 of the port that will be used for exporting the minerals.