Ecuador
Q&A

'It's worth betting on Ecuador mining, despite the uncertainty and risks'

Bnamericas Published: Friday, January 20, 2023
'It's worth betting on Ecuador mining, despite the uncertainty and risks'

Ecuador's government is looking to stimulate its local mining industry with the aim of having it eventually surpass oil as its main export sector.

With only two large-scale mines in production, the Mirador copper operation and the Fruta del Norte gold mine, there are around 10 other projects that are at various stages of preparation in the country.

These developments include Cascabel a world-class copper, gold and silver asset, and several others in different phases stages of exploration. 

Despite sitting across the Andean Copper Belt, an area that extends from Chile to Panama, which is thought to host around half of the world's total resources of the red metal, Ecuador is largely unexplored in mining terms.

However, not only is there a challenge to pinpoint resources, the industry is also facing fierce opposition from activists and indigenous peoples, making it hard for the country to get things off the ground.

BNamericas speaks with Alberto Acosta, political editor at magazine Análisis Semanal and analyst at its owner Grupo Spurrier, about the challenges that mining operators will have to address in 2023 and during the remainder of President Guillermo Lasso's government, which ends in 2025.

BNamericas: What are the main risks to mining activity this year?

Acosta: The political issue is the greatest risk, because there's a lot of pressure and a very strong lobby against mining.

The risk is more complex with the confederation of indigenous nationalities of Ecuador [Conaie], which has very great organizational capacity and is capable of using violence to impose its agendas, which was seen in June last year when they paralyzed the country for 18 days.

On that occasion, with the negotiation with the government, Conaie achieved a moratorium for new projects, which it misinterpreted and understood that it also applied to current projects, so now the president of the organization, Leonidas Iza, says that the government has breached the agreements.

The text is very clear, a moratorium was agreed [while a law on prior consultation and environmental regulations is approved] for new projects and new environmental permits, not those that are already underway.

BNamericas: One of the agreements in those negotiations is related to the audit of concessions and environmental permits. How might that have an impact?

Acosta: It's a worrying issue. Its legality is even questionable because Conaie is going to participate in the debate. I can't understand how it's possible for a private group to become part of a roundtable to review environmental contracts and permits.

It was also agreed to work with Conaie on the prior consultation law and environmental consultation.

Clearly the biggest challenge for the sector is on the political side. Since the social unrest in June, Conaie has created a militia group, which they say is a community force that guards the territories against mining projects.

BNamericas: But the government announced that it will declare security zones for mining projects to guard them with the support of the armed forces and the police.

Acosta: Conaie has already responded that it will prevent that presence with its community guard, which is actually a parallel militia that will seek to prevent the armed forces from entering those areas.

A bigger problem could be caused because the confrontations will involve violence unfortunately. 

That is the great challenge for the Lasso government, which decided to give its full support to mining. The decision to have the armed forces protect mining projects demonstrates the government's interest in defending the industry.

BNamericas: Iza recently warned that those who invest in mining will lose their money because they [Conaie] won't allow it. How do you see that?

Acosta: That's obviously a political announcement, which the government isn't going to accept because it would disregard the rule of law. There are signed contracts and it's not possible to try to expropriate [projects], but that demonstrates the degree of conflict, which has some weight in an electoral environment with elections for local authorities – mayors, prefects and others.

In the end, the citizens have the final word and you have to think that one of the pros of mining is that it's already producing results. it's no longer an esoteric issue or a possibility, it's a reality.

Mining is already the country's fourth biggest export product. it generates significant income and benefits large sectors of the population in the areas surrounding the projects, which will want them to continue.

The problem could be for projects that haven't yet gone into production because there will be pressure and people [in those areas] haven't yet seen the benefits of the activity.

BNamericas: There are at least 10 projects for which construction of mines should begin either this year or next. Could the environment become more difficult for those projects after the elections?

Acosta: On the threshold of the elections, Iza's announcement is aimed at obtaining political support for its candidates, whose rallying cry is its opposition to mining. We already saw that in the last presidential election with the candidate Yaku Pérez, who almost achieved made it into the runoff with his campaign in defense of water and against mining.

Unfortunately, in order for the projects to become mines, the obstacles lie not only externally but also in internal opposition within the government. The required environmental permits aren't awarded, the environmental authorities are afraid to make decisions because they fear problems with the national comptroller.

Ecuador has huge mining potential. Those 10 advanced projects could generate great wealth and would enable mining to become the country's number one export product in the near future.

One characteristic of this government, unfortunately, has been an inability to align all the actors. The president supports mining, but many things get bogged down because decisions aren't made and that delays progress.

The main ally of mining is having producing mines, so if more mines go into production and their benefits are seen, it will be much more difficult to stop them.

Mining activity is in a better situation than in the past because there are already two mines that generate revenues [Mirador and Fruta del Norte], but the future of mining depends on the ability of the government to resolve the problems and allow more mines to go into production.

BNamericas: Will the problems with Conaie, the slow bureaucratic procedures, as well as the popular consultation on various issues that will be held together with the sectional elections, slow down the projects?

Acosta: We have to be very clear that the political position of the Lasso government is precarious and has been from the beginning, even more so when it lost its allies in the national assembly.

Without allies, a government that fails to communicate and align its strategies within the State itself, which has very good ideas but fails to put them into practice, has a permanent weakness.

We can expect that the government will do poorly in the local elections, that the opposition will win almost all the positions, which wouldn't be something new.

Additionally, the opposition will continue looking for all kinds of pretexts to destabilize it. At this time, they're looking for ways to remove Lasso from power. That will be a constant in this government.

However, it's essential to consider that decisions by mining investors are based on the long term.

Although the power that groups like Pachakutik [Conaie's political arm] can obtain is a matter of concern, even more so if the environment is such that this group can win a presidential election, it has to be considered that in the Ecuadorian political spectrum, the other sectors, although they don't say so, are supportive of mining activity. For example, the Unes political movement, of former president Rafael Correa, is openly favorable to mining.

BNamericas: If the social conflicts worsen, will the companies that operate in Ecuador have enough financial muscle to be able to wait for an improved outlook?

Acosta: The issue of concern there is that there are deadlines in mining that have to be met in each of the stages and if these deadlines aren't in line with the reality of mining activity, they could cause projects to be abandoned because, for example, they require very large funding from abroad, which also depends on the international financial market.

In an environment in which interest rates are rising and liquidity is restricted, it's more difficult to obtain funds, which means that some projects can't be carried out immediately but the terms continue to run and there may be cases where investors have to return the concessions to the State.

Investors can keep extending the stages, but they can't postpone projects indefinitely.

BNamericas: Taking into account the various political and social conflicts, what would you say to investors regarding Ecuador?

Acosta: I think Ecuador has a lot of potential in many areas. In mining it's a rising star. It has privileged geology that countries like Peru and Chile have been able to take advantage of very well. In Ecuador, activity has just started, which is a great attraction.

Like other countries in the region and underdeveloped countries, this nation has weak institutions and that generates a lot of uncertainty, which has to be offset with higher returns.

There is great potential in the country, but it must be understood that it's associated with uncertainty and weak institutions, to which investors are no strangers in these areas, since it's not the only country with this situation.

The high risks in this industry are a constant in different regions of the world.

It's worth betting on Ecuador because its great geological potential can offset part of the risks: almost everything remains to be done since mining is only just taking off.

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