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9/30/08

Ecuador, the mining law, royalties and the windfall tax

Two macho men, a referee and an arm-wrestling contest.

Yesterday, a small report from Alonso Soto at Reuters hit the wires and I got three separate mails about it. Here below is the report pasted out (it's not a big one) and the mail I sent to one person and pasted to another. Further Ottocomments underneath:

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QUITO, Sept 29 (Reuters) - Ecuador's leftist president, Rafaela Correa, on Monday ruled out nationalizing oil companies but said he will "not allow" them to reduce investment levels.
Correa also said an 8 percent royalty on mining companies proposed in a draft mining law was "too low" and said a 70 percent windfall tax will be applied to future mining contracts. (Reporting by Alonso Soto)

Dear XXXXXXXXXX,

Correa is putting the mining companies on the defensive here. This is not the time to make them feel comfortable so he's doing a bit of "bad cop" here in his ongoing 'good cop bad cop' routine. He also made it clear in his comments that the mining law was "still in discussion" (that's a quote) and also that the publication this year "is a priority" (that's another direct quote).

Note that Correa was talking about the whole royalty band (3% to 8%) and the report only mentioned the upper limit to be charged to the big mines. It might be the lower band is raised to 5% and the upper band stays as it is. We don't know. To be honest the difference between an 8% payment and a 10% payment is not one that will break the budget of any project there.

As for the WFT, the whole thing depends on the base prices set. We'll not know those until the individual deals are made between MEM and the miners, and all that will happen in 2009 minimum (ie after the mining law is set in stone, and probably after the Presidential elections of March/April/May 2009)

Best, Otto


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After a night to cogitate on the matter, I'd add the following:

1) Correa was probably targeting the 8% upper royalty limit. However it wasn't as explicit as the Reuters article suggests. Correa is very good at leaving himself exits hatches on his statements. In fact he's developed ito a very competent politician, period.

2) If the royalty goes to 10% (for example) it won't affect Kinross at Fruta del Norte or DMM.to or IAG or CTQ.to and their plans, but it will affect those companies early in the exploration track. It's an extra layer of cost for those who would finance the operations to take into consideration. The likely result is a 'wait and see' attitude for brand new mining projects, and investment capital flowing to other countries with a more mining friendly attitude.

3) The windfall tax (WFT) is likely to remain incognito for some time to come, and now becomes the bastion of Correa's 'make 'en sweat' tactics. Remember, he wants a fair deal or Ecuador. That means he doesn't want the mining companies feeling comfortable as yet. Just look at the way he's conducted negotiations with the oil sector players (a far more powerful lobby in Ecuador) and see how he's applying the style to mining. It's roadmap for mining investors par excellence (and he's doing the same in the hydro construction deals...AND it's already worked wonders for him in the telco negotiations).

4) Soto really is good at his job. Read him, even if you don't like the message.