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Message: Opinion: Ecuador Should End WFT Double-speak
Opinion: Ecuador Should End WFT Double-speak
By Silvia Santacruz
Ecuador Mining News
Washington D.C., September 22, 2008 — In the midst of congratulating the Ecuadorian government on its landmark decision to eliminate the proposed 70 percent windfall tax on mining profits, EMN received a letter – via e-mail— from none other than José Serrano. The Ecuadorian vice-minister of mines asked me to publish a correction to my article Clearer Horizon for Ecuador’s Mining Industry. His assertion: despite the accounts of several people at the Denver Gold Forum that MMP Acting Vice-Minister Xavier Cordova stated the government’s willingness to eliminate the WFT, EMN had been wrong in reporting this.
The circumstances do not call for a correction, as several Canadian media reports and telephone calls to several Denver Gold Forum participants confirm that Cordova made those statements.
“…The windfall tax law defined oil and gas as ‘national resources’, which potentially included mining. The minister suggested this was not intended or well thought out. Meetings have started with the Tax Department to write in an amendment to identify mining separately from oil and gas, either removing the windfall tax from mining or setting a very high threshold price,” Cordova was quoted by Canaccord Adams, an independent Vancover-based financial services firm, on its September 15th Junior Mining Weekly newsletter.
Canaccord Adams coincides with EMN’s initial source, an article titled “Ecuadorian official pledges fair rules for foreign miners” published by Report on Business, which was first to convey the elimination of the windfall tax.
“The South American country is expected to amend tax laws to exempt mining firms from a 70 percent windfall revenue tax applied to oil and gas companies operating there,” reported the Canadian newspaper. Read article
The Ecuadorian media also echoed the positive development. Last Wednesday, renowned economist Walter Spurrier published in the Quito-based El Comercio that “last week, Xavier Cordova, acting vice-minister of mines, stated that Ecuador is willing to eliminate its 70 percent windfall tax, due to the bad results in other countries, during a mining forum, in Denver, U.S.A.” Read Spurrier article
In his letter to EMN, Serrano asserts “the WFT will apply to the mining industry, as soon as the companies sign production contracts with the government, as stipulated in the new mining law draft.” Cordova, the acting vice-minister of mines who represented Ecuador at the Denver Gold Forum, personally sent the e-mail with Serrano’s letter attached, denying he announced the elimination of the WFT.
“I would personally like to clarify that I have never made such an assertion, because I know perfectly that the windfall tax was approved within the Tributary Law, and that the government’s will to eliminate it doesn’t exist. We consider that it is a fair way to redistribute the benefits that generate our natural resources.”
Something is fishy here.
Now, it’s the duty of mining publications such as EMN to inform the world that the WFT may apply to the mining industry. So, here I go. Please, mining analysts and executives who participated in the Denver Gold Forum, forget about what you may have heard. You and others following the industry news, readjust your high-risk models that instruct others to invest in Ecuador. It was a misunderstanding, perhaps. Listen, Xavier Cordova himself sent me this e-mail, confirming he didn’t say so…
This is certainty not the way a country welcomes responsible mining operations, like president Rafael Correa loves to say. You welcome foreign investment with clear rules, not with double-speak, and certainly not by creating a WFT for a nascent industry. At this point in the early exploration stage of many junior firms, the government wants to play Robin Hood using a WFT rather than a bow. This will just scare away investment.
In his letter, Serrano explains his Robin Hood concept further: “This is a sovereignty decision, the goal of which is to redistribute wealth and the benefits that natural resources bring to Ecuadorians, a situation that has been historically excluded, and it’s now a reality with the government of President Rafael Correa and the MMP minister, Galo Chiriboga.” [Translated from Spanish by EMN.]
Stated his way the WFT sounds like a noble idea, but it’s not. The whole world cannot be mistaken when it does not apply such a tax for mining companies. If Ecuador insists on the WFT idea, it will become the only nation in Latin America and the only nation besides Mongolia to apply it.
While government officials engage in double-speak, poor communities surrounding exploration projects are still waiting for the drilling machines to turn back on. They have no jobs, they have families to feed, and are negotiating with coyotes to abandon their country like some in Pucara have. Read Cementing Poverty by Decree This situation is not just untenable from a development standpoint, it is morally wrong.
I said it before, and I’ll say it again: Government of Ecuador, do not apply the windfall tax. It is bad for the country. Mining analysts regard it as very negative. EMN has written a number of news articles, and analyses in this regard. Read Windfall Tax Approved, Mining Law on Horizon
And LatAm equities analyst Mark Turner, the voice of reason on such matters, has also authored a crucial piece.
Why the WFT Would Be Bad for Both Ecuador and its Mining Industry
EMN hopes the Ecuadorian government will come to its senses and understand that foreign investors’ biggest enemy is uncertainty. And, that the industry has had a handful with the infamous April 18 mining mandate, which continues halting large-scale mining operations until mid-October. Not to mention that the industry faces reforms to its attractive mining law such as stricter environmental controls and higher royalties than the maximum 5 percent previously announced.
If authorities are yet unconvinced, I encourage them to take a look at EMN’s Investors Concerns Survey, run in March 2008, where it’s clear that the WFT is one of the biggest investor concerns, according to question no. 4. Go to EMN’s survey result
If Messrs. Serrano and Cordova are reading this opinion piece, please do not disappoint the investors who put their faith in Ecuador due to the pronouncements of President Correa. Investment banks do not fund junior mining companies, regular people in developed countries do, through the stock markets. They are EMN’s readers. EMN is their voice. Just do what was offered in Denver, and take their worst nightmare away: get rid of the windfall tax. And if all else fails, the President may want to intervene.
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