MINING REFORM: SEARCHING FOR A DIAMOND IN THE ROUGH

C O N F I D E N T I A L QUITO 000365

SIPDIS

SIPDIS

TREASURY FOR MEWENS
DEPT FOR WHA/EPSC FAITH CORNEILLE

E.O. 12958: DECL: 04/25/2018
TAGS: EMIN EINV ENRG EPET ECON PREL SENV EC
SUBJECT: MINING REFORM: SEARCHING FOR A DIAMOND IN THE ROUGH

REF: A. QUITO 315

B. QUITO 351

Classified By: DCM JEFFERSON BROWN, REASONS 1.4 (B&D)


1. (C) Summary: The Constituent Assembly approved a
measure cancelling thousands of largely unused mining
concessions. Concessions that have been explored but not yet
in operation will be frozen for six months until a new mining
law is finalized. Small mining concessions and mines that
are already operating are exempt from these provisions. The
owners of the four most lucrative concessions, all Canadian
companies, had already been attempting to renegotiate their
contacts, but those negotiations have been shelved pending
the new mining law. Many foreign companies are now
contemplating international arbitration. End Summary.

Cancelled Thousands of Exploration Concessions
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2. (U) On April 18, the Constituent Assembly passed a new
mining mandate cancelling all mining exploration concessions
that had not undertaken any investment through 2007,
presented an environmental impact assessment, or undertaken
prior consultations. In addition, it cancelled any mining
concession that had not paid required fees by March 31 of
each year, and any concession in protected areas. It also
cancelled all concessions exceeding three per individual or
company. According to the media, this measure affects some
3,100 of the 4,112 active concessions and all 1,220 pending
concession requests. (A mandate is legal measure, comparable
to a law, which is valid while the Assembly is in session.)


3. (U) The mandate allows small scale and cooperative mining
concessions to continue their activities, provided they
comply with the legal requirements. It also allows mining
concessions that have already begun to produce to continue
operating.

Large Mining Concessions Frozen
--------------


4. (U) The mandate froze all other mining concessions until
a new mining law is drafted and requires that the new law be
drafted within 180 days.


5. (C) It appears that the four companies that have found
large, commercially attractive gold and copper deposits fall
into this category. These four companies, all registered in
Canada, had recently been involved in contract renegotiations
regarding proposed royalty payments with government officials
at the Ministry of Mines and Petroleum (reftel a),and had
thought that they might not be affected by the mandate.
According to contacts at the Canadian Embassy, these
companies have not been formally notified of where they stand
under the mandate, but believe that their concessions will
not be cancelled, although they will be forced to renegotiate
to retain their concessions.


6. (C) According to the Canadian Embassy, they met after the
mandate was approved with 14 of the 25 Canadian mining
companies operating in Ecuador. After a year of now
fruitless negotiations, many of the companies are tired of a
dialogue that seems to be taking them on a wild
roller-coaster ride with no clear destination. Some, if not
all, are likely to start exploring legal alternatives,
notably arbitration.

New State Mining Company
--------------


7. (U) The mandate also calls for the federal government to
establish a new state mining company, the National Mining
Company (Empresa Nacional Minera) which will have a roll
("intervendra") in all phases of mining activity "under
conditions to preserve the environment and respect the rights
of the people."

Comment
--------------


8. (C) Ecuador has extensive mineral deposits, reportedly
worth as much as its petroleum deposits, but those resources
have not been developed because of an uncertain mining regime
that has been problematic for over a decade. Until this
mandate, the Correa administration had been sending mixed
messages about its intent to develop the mining sector, on
the one hand calling for the cancellations of unused
concessions and a new mining law but on the other hand
negotiating with large mining companies. Correa himself
argued several times on the importance of developing
Ecuador's mining resources.


9. (C) The mining mandate, like the freeze on petroleum
contract negotiations (reftel b),sends a confusing and
largely negative message to private investors. In both cases
the GOE had been negotiating with the investors to
restructure their contracts in a way that would have
increased revenues for the state while providing sufficient
incentives for the companies to invest in mining and
petroleum. Now those negotiations have been abruptly turned
off for at least six months, and the new conditions for
renewing negotiations are not at all clear. However, for all
the uncertainty, it still appears that the government does
not want to terminate the contracts and concessions of the
large foreign investors. Given high current prices for
natural resources, some investors may still have the appetite
to deal with this uncertainty but others will probably place
more faith in international arbitration.
Jewell