http://news.goldseek.com/GoldSeek/12...

-- Posted Friday, 2 May 2008 |

Last week, Ecuador joined the ranks of investor pariahs with its decision to put everything on hold in the mining sector for up to six months. Based on the full slate of proposals it’s likely a large number of the more junior explorers will be completely shut out of the country. This week, Venezuela went from dumb to dumber with a decision that knocks out a number of companies on the verge of gold production, most notably the hapless Crystallex. If you’re seeing a trend, you’re not alone. These sorts of actions, along with tax grabs, will be an increasingly common part of the landscape for international explorers. Good? No, but it’s the way of the world. Ask any long term oil and gas follower what happened after OPEC had its way in the 70’s. Governments worldwide lucky enough to be sitting on oil reserves have been using them as cash cows ever since.

We don’t think, yet, things will be as extreme in hard rock but these actions are but one more reason we have been saying for years about the commodity super cycle that “it’s the supply, stupid”. Actions like these mean investors need to keep a close eye on politics along with everything else and avoid the more volatile an unpredictable countries. It also means times lines to full supply, much less oversupply, of many metals and bulk commodities will just get longer. Bad news if you’re caught up in one of these political train wrecks, but good news for the sector overall in terms of metal prices. Below are our thoughts on the Ecuadorian situation specifically, from April 2oth, which might turn out a little better than some fear though it will be a long while before the country is trusted again by international money.

Ecuador’s Constitutional Assembly passed a decree on Friday that puts most mining and exploration related work on hold for up to 180 days while a new mining act is passed. Also, by reducing the total number of concessions allowed for per entity (which would include the broader sense of individuals, families and incorporations) to three, the decree will cancel roughly 80% of the outstanding concessions. There will be a moratorium on granting new concessions until the new act is in place. In essence, since the maximum size of an Ecuadorian mining concession is 5,000 ha (about 12,500 acres) companies will be reduced to about 15,000 ha of holdings. Not pretty.

It’s clear from the shock and confusion at all the large explorers in Ecuador that they did not see this coming at all. Indeed, pronouncements from Ecuador gave us reason to hope for a fair resolution. By all accounts discussions between company reps and government officials centered on reasonable (though undefined) rates of taxation and royalty levels in a new mining act had been well in hand. We understand this was overturned early last week by political haggling within the leftist grouping that holds the Executive office and runs the Constitutional Assembly that issued the decree.

The center of the storm is Alberto Acosta, President Raphael Correa’s longtime “ally” and head of Correa’s Alianza Pais in the Constitutional Assembly. Existing rule-of-law for the mining sector has been offered up as the price for some political expediency. The provisions in the Decree canceling concessions and work permits without compensation can only be viewed as draconian. Lest anyone mistake this for other then a political gambit, it should be noted that small scale operations (up to 150 tonnes per day) run by co-operatives are exempted from the decree. These are inherently the worst polluting operations, often employing mercury recovery systems that are short on safeguards, but we doubt that will slow the trumpeting that this is a “green dream” in the making.

Why do we think this? Acosta is the former Minister of Mining and Energy, given the post by Correa after Correa’s victory at the polls. He seemed an odd choice for this position since he is anti-development and an environmental activist who is quite close to the international green movement. The original troubles with permitting and anti mining rhetoric began after he took office. It was made abundantly clear that he didn’t like mining, energy or extractive industries in general. He has talked about banning open pit mining and wanted to outlaw development of Ecuador’s heavy oil.

Things changed when Acosta moved from the ministry he despised to head up the caucus in the Constitutional Assembly. This move was viewed with optimism by the mining sector. Although the permitting process at all levels had slowed to a crawl, there was at least some forward movement. Industry insiders believed that the new mining act that was in the works would at least be fair, if not cheap.

Optimism was reinforced in recent speeches by Correa vilifying the environmental movement, calling for the people to “throw them off” as they were outsiders and nobodies. This was surprising from someone viewed as something of a minor deity by greenies. The events of the past few days may put these speeches in the light of political infighting. That said, while Correa is not a free marketer he does seem aware that responsible mining and oil and gas extraction offered leverage to create higher per capita income for Ecuador.

Whatever the case, it appears Correa has been outflanked by Acosta, using the very tools Correa devised. Correa won a referendum last year that created the Constitutional Assembly as a way to circumvent the Senate. In order to get past the Senate (where his party held no seats) when drafting its new constitution the Assembly has the power to issue decrees that cannot be altered by even Correa himself and that don’t allow for appeal or compensation. Correa’s party, under Acosta, has a large majority in the Assembly and considerable leverage to do what it pleases until this mandate runs out. The Ecuadorian people do however have a recent history of tossing Presidents they don’t like. We understand support for the Constitutional Assembly has been waning quickly of late, so its main limitation could be another round of direct democracy of the Ecuadorian street protest type.

Based on conversations and reading this weekend we think the immediate damage, from a legislative perspective, is all on the table. Mining ministry bureaucrats, who hadn’t been warned about this, have been mandated the task of dealing with the Decree’s provisions on ownership. At least in the case of Aurelian that we think is very much the litmus test for fairness within the new terms, verbal assurances have already been made that the process is not to be a random disenfranchisement.

Most of the over 400 Ecuadorian’s that Aurelian employees will of course be out of work for the next while, though the company will continue to operate the local school and other community trusts it created. It’s expat workers will also have less to do, but the issue with them and others in-country would be more about whether to stick with one of the sector’s best discoveries and best emerging (potentially, that is, at this point) new districts, or to take one of the many offers that will come from an expertise starved sector. W

David Coffin and Eric Coffin are the editors of the HRA Journal, HRA Dispatch and HRA Special Delivery; publications focused on metals exploration, development and production stocks. They were among the first to draw attention to the current commodities super cycle and have generated one of the best track records in the business thanks to decades of mining industry and financial experience and contacts throughout the industry that help them get the story to their readers first. Please visit their website at www.hraadvisory.com for more information.