By Silvia Santacruz

Ecuador Mining News

Washington D.C. July 27, 2009 —

Large-scale mining operations in Ecuador remain halted as a consequence of the April 2008 mining mandate. And despite the industry waiting more than a year, operations will not resume until new regulations are issued and individual contracts are signed. How would you assess this long waiting period?

The more the government delays issuing mining regulations, the greater the risk. However, investors are less worried this year than in 2008, when we were in the midst of the mining mandate. They feel operations will resume soon, especially after January 2009, when the new mining code was released. And even though regulations are still pending, the general sentiment is that they are going back to work soon.

HSBC only analyzes companies with significant gold projects in the world. In Ecuador, these include only Kinross and IAMGOLD. How do these two firms manage the variables of political risk versus geological potential profitability?

Ecuador’s geological potential is very strong due to Kinross’ Fruta del Norte (FDN) discovery, one of the world’s best. IAMGOLD’s Quimsacocha, for its part, has some metallurgist challenges, which will be addressed to determine the project’s profitability. But besides the geology, the legal and fiscal frameworks are very important aspects to determine the projects’ viability. Thus, after the frameworks are completed, individual contracts’ terms would be key to determine if a project can or cannot be developed. The negotiations of the royalty –of a minimum 5 percent — and 70 percent windfall tax base price would ultimately determine if a several hundred million dollar project is or is not worth it.

The new mining code establishes a 5 percent minimum royalty and ratifies the 70 percent windfall profits tax (WFT). What would be an acceptable maximum royalty and a fair WFT base price?

I believe that the global maximum royalty is 6 percent, so, a 5 percent minimum is already very high. Sales royalties typically range between 2 and 3 percent. Regarding the WFT, which is a very rare tax among miners, it will only generate uncertainty due to the metal prices’ unpredictability. Copper, for instance, was traded at USD 4 per pound just few months ago. If contracts were signed last year, and the negotiations would have set a price based on those levels, companies would have no problem at the moment. But if the contracts are signed now, when copper is down to $2 a pound, and the price increases to $4, it will be a problem. Thus, it is not possible to set a fair WFT base price. In addition, a 70 percent WFT is way too high.

Does this mean that the analysts’ prices predictions for metals do not help to determine a WFT base price?

It is very difficult to predict metal prices accurately. Hence, there is no such a thing as a fair WFT base price. When copper prices were at $4, very few analysts would have guessed that in few months it was going to be at $1.30. HSBC’s projection, for example, was $3.20. However, it fell much further than expected as a result of the global financial crisis. We are not always right in our predictions, and therefore a WFT only creates uncertainty.

Two years ago, Ecuador was one of the world’s new mining hot spots. Did we miss the train?

The global financial crisis and low metal prices have affected mineral exploration activities around the globe. In Ecuador, the mandate had a very serious impact because it halted exploration activities, and now that it seems to resume operations shortly, we are in [global financial] crisis [that has depressed metals prices]. However, the important FDN discovery will greatly help to keep Ecuador on the global mining radar.

The Ecuadorian government and the Ministry of Mines and Petroleum (MMP) seem to favor four mega projects: IAMGOLD, Kinross, International Minerals, and Corriente Resources. In addition, they seem to prefer majors over juniors. Would Ecuador be minimizing the importance of less-advanced exploration projects by only focusing on the big four?

It’s possible. But because the country is just establishing its legal framework, it’s acceptable to give priority to certain projects, while making the smaller ones wait. What is relevant is in the long term they should not prioritize, and they should keep everybody moving towards the same development program, without red tape. A healthy mining industry requires the participation of junior firms – who are mostly exploring — and major companies – which can develop big projects such as FDN, because of their technical and financial capacity.

Ecuador has substantial gold, silver and copper resources and reserves. What is the difference between these two?

A project has resources when it has geological certainty; meanwhile, a reserve has geological and economic certainty. In other words, a reserve has a feasibility study, which establishes the costs to build a mine, its technical parameters, production levels, etc. I think Quimsacocha is categorized as a reserve. FDN is still a resource.

How much longer can investors and companies wait for the negotiations between Kinross and the government?

I frankly think that the negotiation process between Kinross and the government will take between 6 and 12 months. I doubt that there will be an agreement this year, and rather hope that they will have it for mid-2010. If it takes longer than that, let’s say late 2010 or in 2011, mining companies will categorize Ecuador as an interesting country from its geological viewpoint, but as very long-term investment. What will happen is that companies will give priority to other developments in other nations. That has already happened with IAMGOLD, which used to categorize Quimsacocha as their star project, but after the mandate, it focused on its African and Canadian projects, pushing Quimsacocha to third place.

The Ecuadorian government has been a tough negotiator with oil companies. Could this strategy create a precedent for mining firms?

They are very different industries. Ecuador’s mining fate will be determined by the Kinross negotiation with the government. The Kinross contract will be the main test that the new legal framework is actually effective. Thus, if Kinross successfully negotiate an attractive tax favorable to both sides, and can develop FDN, Ecuador’s doors are open to international mining operations. After Kinross, IAMGOLD, International Minerals, Corriente and others will follow. On the contrary, if Kinross’ negotiation is delayed or the tax is unfair to the company and its investors, it will be much more difficult to pursue other projects. To me, it is very simple, if it goes well with Kinross, the whole mining industry in Ecuador will do well.