Challenge and opportunity in the mining industry of Ecuador

March 4, 2021

by Merlin Marr-Johnson, Executive Vice President at Salazar Resources Ltd.

Disclaimer: This article contains the personal beliefs and opinions of its author, and not the ones of Coring Magazine. Coring remains neutral, assuming no responsibility for the author’s overall and political points of view thus can not be held liable for any of the information presented by him in the text.

If you want to make a major new mineral discovery, Ecuador is one of the best places in the world to explore. The Andes are central to world copper supply, with 25% of annual production coming from northern Chile and a further 15% from Peru. Magma fertility studies show that Ecuador has the same geological and metallogenic potential as its southern neighbors. Potential has been matched by a track record of spectacular discoveries as the country has gradually opened up to systematic exploration. It is one of the few countries in the world where large, good grade ore bodies are still being found at the surface, and the current roster of companies investing in Ecuadorian exploration includes global leaders such as BHP, Fortescue Metals, First Quantum and Anglo American.

And yet the country’s mining sector is still at an early stage of development, with only two operating mines that were both commissioned in 2019. Chinese-owned Mirador became the first large-scale copper mine, aiming to produce 94 000 tonnes of copper cathode per annum. TSX-listed Lundin Gold’s Fruta del Norte became the first large-scale gold mine, aiming to produce 340 000 ounces of gold per annum. There are many companies ready to invest but they are struggling to get their money into the ground. Exploration dollars are backing up, poised to test theories of early-stage targets, to delineate recent discoveries or to advance resources through technical and financial evaluation in the approach to production.

From 2015 onwards when Ecuador opened up to the idea of a responsible, well-regulated mining industry, employment was set to boom, dollars were set to flow and the mining sector was set to become a mainstay of the economy. By 2018, foreign companies had committed to invest a billion dollars into exploration, resource definition and technical studies within four years; quite apart from the capital investment associated with construction and commissioning.

The rationale for a modern mining industry in Ecuador was simple then and remains compelling today. Ecuador runs a US-dollar denominated monetary system and therefore cannot print its own currency. This leaves debt, foreign direct investment (FDI) and export earnings as the only ways to increase money supply. With the debt options (via the IMF and China) largely exhausted already, Ecuador needs dollars from FDI and exports, and mining fits the bill perfectly. Mining is the only Ecuadorian industry that offers growth potential as agriculture, tourism and the oil industry are ex-growth with structural problems, and the mining industry is keen to invest heavily and generate future earnings.

The socialist government of Rafael Correa (2007-2017) learned about the potential for mining to fund the country while in power and it acted swiftly. It pivoted from being staunchly anti-mining, with punitive taxation, and at one stage a total ban on mining, to making the mining code fiscally competitive with peers and placing mining as the cornerstone of economic growth plans. In 2015, Ecuador was proudly declared open to the mining sector.

Under the leadership of Lenin Moreno (2017-2021), however, few mining permits have been issued, no new concession applications have been allowed and companies have struggled to elicit scout drilling and water permits to enable ongoing work. Not only that but a vocal anti-mining cohort has gained support.

The highest profile anti-mining indigenous leader, Yaku Perez, has been behind a number of referenda aimed at protecting the Amazon rainforest from mining and deforestation. On the National Assembly elections, his Pachakutik Party achieved 27 seats, almost five times more than previously.

Perez’s progressive environmental agenda has proven to be a compelling platform, as the illegal mining sector in Ecuador is vast, unsafe, polluting and destructive and does not generate FDI or tax revenue to the economy. COVID-19 has shrunk the country’s GDP by 9%, resulting in double unemployment and reduced government spending, particularly in the Amazon basin. With even less oversight from the government, illegal mining has skyrocketed, increasing the pressure on the Indigenous nations of Ecuador. Under these factors, Perez’s staunch anti-mining position appears difficult to enforce.

In the first round of the Presidential Elections held in early February, the ‘Correa’ candidate Andres Arauz emerged as the front-runner with 33% of the vote. The support for Arauz is rooted in the experiences of life under the Correa administration from 2007 onwards. The early Correa years were a time of high commodity prices, significant investment in national infrastructure and a rejection of the ‘IMF-led capitalist ways’. Correa effected a major wealth-redistribution in Ecuador and earned the loathing of the powerful elite and the initial approval of the broader population. He, and by extension Arauz, are still popular even after his corruption trial (and conviction) last year highlighted unaccountability and authoritarian tendencies, including suppression of the press. Arauz, being a convert to the potential of the sector, is likely to champion a responsible mining industry from day one in office.

Opposing Arauz in the run-off on April 11, 2021, is Guillermo Lasso. He clinched the second place with 19.74% of the vote, narrowly beating Perez (19.39%). Lasso, representing the old elite, is an ex-banker with a support base in the populated coastal region and the backing of the business community. He is expected to work closely with the IMF on tackling debt and his campaign is focused on creating jobs by increasing investment into oil and mining extraction.

Not only did Lasso come second by a large margin but Yaku Perez and the Pachakutik party have stated they will not support either presidential candidate, which will only serve to widen the gap. Lasso’s chances of defeating such a popular socialist, in the face of Andres Arauz, are slim, given that over 75% of the votes cast in Round One of the elections were left-leaning. The final outcome will be decided in six weeks.

What is certain is that Ecuador is in a difficult position. The petroleum industry is in crisis and there are claims that national oil company Petroecuador needs to buy 7.5 million barrels of crude oil during 2022 if it is to meet its contractual supply obligations. But all is not gloom and doom – the two operating mines in Ecuador are proving to be a great success. Ecuador exported USD 810 million of copper and gold from January to November 2020, contributing 4.4% to total exports.

Putting the ideologies of the candidates aside, by far the most important subject is the state of the economy. Once the identity of the new President is declared then the real business of establishing how to fund the country will begin. To external observers, the case for growth through mineral resource development seems glaringly obvious, and the expectation is that sense will eventually prevail.

About the company

Salazar Resources is an Ecuadorian exploration company with a proven track record of discovery. The company aims to make the country’s next commercial copper-gold discovery. It is currently advancing three grassroots exploration projects in Ecuador which provide multiple value catalysts.

Core to all of its activities is the team’s commitment to ensuring that it has a positive impact on Ecuadorian communities and the economy.

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