Ecuador
Guest Column

Five reasons to invest in mining in Ecuador

Bnamericas Published: Friday, June 10, 2022

By Rebecca Illescas

Deputy mining minister and mining minister in Ecuador between 2017 and 2018. Consultant for companies and government in the efficient management of natural resources in Ecuador.

Geological Potential. Ecuador is the least explored country in the region, with only 10% of the country explored, according to data from the Ecuadoran ministry of energy and mines for 2021. The country is part of the Andes mountain range, so there are eight identified areas that have high mining potential due to their geological, mineralogical and structural characteristics. Ecuador has at least five projects that are emerging as world-class deposits. One of them is the Cascabel project, which is one of the world's largest copper discoveries in the last decade and is expected to go into operation by 2028. It also has four investment projects in the initial exploration phase.

Sustained growth of exports, investments and importance to the national economy. Ecuador's central bank stated that the mining sector exported 697,000t of mining products for US$2.09bn in 2021, making them the fourth largest export product for Ecuador and representing 5.70% of the country's total exports, while minerals were the goods that drove up Ecuador's non-traditional exports most in the first quarter of 2022. It is estimated that exports from the 12 biggest mining projects in the country would have a current value of US$176bn until the end of their useful life in 2052. In 2020, with investments of US$568mn, mining was the economic activity that attracted the most foreign capital, accounting for 48% of Foreign Direct Investment in the midst of the pandemic. Over the next four years, direct formal employment created by mining would increase by more than 215,000 jobs compared with 2020, ending 2024 with 270,180 employees. As of 2027, the mining sector would generate more than 500,000 formal direct and indirect jobs. The high potential for mining expansion could transform this sector in the medium term into a driver of economic growth through production chains via intermediate consumption with the other industries and generation of direct and indirect employment.

World demand for minerals for the energy transition. According to a report prepared by the International Energy Agency (IEA), by 2040 the demand will quadruple for minerals such as copper that are required for the construction of clean energy technologies. Global decarbonization plans will require significant additional mining capacity to enable growth in electric vehicles, energy storage and electricity transmission (between US$0.7tn for 3°C+ and US$1tn for 2°C). China, the world's largest consumer of most metals, is ready to make a significant investment in its energy transition to carbon neutrality by 2060, occupying a dominant global position in the production of lithium-ion batteries, solar modules and wind turbines, as well as in their associated supply chains. The European Union is also seeking to move away from its energy dependence on Russia in the medium term due to the conflict in Ukraine. At the same time, the development of committed projects in the world is not sufficient response to the increase in demand for minerals. The lack of development of projects will manifest itself in a structural shortage and in a sharp rise in prices from the end of the decade. There is currently a rebound in metals prices (gold and copper are at highs equal to 2012-2013) due to the impact of the pandemic and now the crisis in Ukraine (copper prices were up 34% in March 2022 compared with January 2021). This establishes clearly favorable conditions to search for markets with high potential for mining exploration, such as Ecuador.

Competitive tax burden, access to productive factors and auxiliary value chain. In 2014-2016, important reforms and incentives were approved that have had a significant impact on the economy of mining projects. They include tax stability contracts, standardization of the treatment of historical investments for the Ajuste Soberano [Editor's note: an adjustable formula incorporated into project contracts to ensure that the benefits of the State are higher than those of the operating company] and simplifications of extraordinary income tax, etc. The changes implemented have allowed Ecuador to reduce its tax burden to the competitive range for the region. According to the Fraser Index report for 2021, Ecuador's score grew by 26% compared with 2020, as one of the most attractive countries for investors in the mining sector, ranking 24th among 84 mining jurisdictions, with a score of 72.79 out of 100 compared with the 57.95 points seen in 2020. The country represents low investment costs for production due to the geological conditions of the minerals (excellent metallurgical grades and high mineral concentration per tonne). At the same time, the electricity master plan, with the construction of eight hydroelectric plants in the last 15 years, has made Ecuador an exporter of clean and low-cost energy (US$5.8/kWh) in comparison with Peru and Colombia, which improves competitive conditions investments in mining projects.

The political decision to promote responsible mining. Mining has become a strategic sector for State development in administrative policy in recent years. The State identified five large-scale projects that it classified as strategic. While the second-generation projects have made significant progress, 275 new areas were granted for exploration since 2018 and more than 28 new international companies have been domiciled in Ecuador in the last six years. As of May 2021, President Guillermo Lasso established the bases to develop a new mining policy in executive decree 151, seeking to promote responsible and efficient mining that guarantees the legal certainty required for the development of greater investments in this sector. The national government, through the energy and mines ministry, promotes strengthening of institutions, tax, legal and administrative stability and adherence to the Extractive Industries Transparency Initiative (EITI), which means Ecuador is an attractive mining country for investors.

This content is the sole responsibility of the author and does not necessarily reflect the opinion of BNamericas. We invite those interested in participating as a guest columnist to submit an article for possible publication. To do so, contact the editor at mining@bnamericas.com

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