Today I got another mail about the Ecuador mining issue. Although I'm not going to make this kind of post a habit, it's the weekend and let's indulge one more time by answering via the blog. Reader "S" asked the following two questions:

Do you think the share price will move up significantly once the mining law is published? A lot people seem to be concerned about the article in the Ecuador Mining News with Silvia Santacruz, Deputy Minister saying that the windfall tax will be in the new law, your thoughts?

This is a link to the article S was referring to, and if you haven't read it already (or if you haven't visited Silvia's excellent website before) go have a look asap. DepMin José Serrano is one of the key figures in Ecuador mining right now, and his words must be taken into consideration.

As for my thoughts? Clearly the whole point of this is to get you to worry (and in "S"s case it's working). Ecuador understands that once the law is on the table rampant capitalism may take over with miners will feeling they finally have some sort of upper hand. The gov't doesn't want this; it wants the industry to feel (or at least look) subservient to the country. Once the new law is passed (and yes, it will be good for the PPS of Ecuador mining companies..I expect immediate added value) those that wish to stop share prices going too high will immediately start banging on about the WFT, and how it's all uncertain, and how they could screw us all at any given moment, and this and that and the other. Fine.

Be clear that the tax will not be a blanket once-and-for-all "gold 1000 and done"...it will get reviewed annually. It won't be inhibitive to the sector, because otherwise Correa&Co won't get the jobs and fiscal revenues they're looking for here. It will be done on a case-by-case level with each company. It's likely work very much like the royalty "tax" and not much more. The key to it all is where the base line is set, and as it can't be lower than the spot price and will be adjusted annually there won't be much to truly worry about. As an aside, note that Ecuador's income tax rate is relatively low at 25% (e.g. Peru's is 30%). Under a "21st Century Socialism" ideal, if you don't expect the high wealth earners to pay more than the lower echelons you need to think a bit more.

Finally, if the industry refuses to commit because of uncertainty in the law, you'll quickly see the gov't out saying calming things about the WFT. Bottom line is the Correa gov't wants Ecuador's mining projects to make money as much as the miners do. See the forest for the trees, please. Those with an interest to make you worry will make you worry (and big miners prefer to buy junior miners cheaply than expensively...chew on that one). But it will be tempest in teacup stuff. And thanks for the mail, S. All correspondence appreciated.

PS: Relax! There's more to life than Ecuadorian politics.