TerraLex Cross-Border Guide to Cross-Border Guide to Mining Rights

According to the Constitution, the state owns all minerals and non-renewable natural resources within the national territory. These minerals and resources are considered part of strategic sectors, which are managed, regulated, controlled, and governed by the state. The state can, on an exceptional basis, delegate the development of extractive sectors to individuals or entities by granting mining concessions for a term of 25 years. Thus, the concessionaire will have the exclusive right to explore, exploit, process, and sell any metallic minerals within the concession. When a project is considered in the range of large-scale mining, prior to the commencement of the exploitation phase, the concessionaire must first sign an exploitation contract with the Ecuadorian state. This contract is not needed when a project is in the range of artisanal, small, or medium-scale mining. Overall, there are several legal provisions regarding the mining industry within the Constitution. Added to that, there is the Mining Act as well as the General Mining Regulations and the Small-Scale and Artisanal Mining Regulations. There is also the Mining Environmental Regulations for Mining Activities.

The principal regulatory body that regulates and controls the industry is the Ministry of Energy and Non-Renewable Natural Resources, which replaced the former Mining Ministry. The other relevant bodies are the Ministry of the Environment, the Mining Regulation and Control Agency (ARCOM), and the National Geological Mining Investigation Institute (INIGEMM). In addition, with the Mining Act, the national mining company (ENAMI-EP) was created, which is responsible for developing state mining projects by itself or in association with private or public companies, or both.

According to the Mining Act, in order to obtain a new mining concession, applicants must participate in a public tender process in accordance to the Guidelines for Granting Metallic Mining Concessions. If a concessionaire wishes to transfer an existing concession to a third party, authorisation from the mining authorities must first be obtained. However, it is important to consider that a new mining concession cannot be transfered, at least for two years, from the granting date. ENAMI and state-owned companies of the international community have the right to access new mining concessions in any free area of the country without participating in a public tender process.

The mining cadastre is temporarily closed due to state internal planning activities of the Government. Therefore, it is currently not possible to apply, reserve, or grant new concessions for mining companies.

Individuals or corporations may acquire mining concessions, which are granted by the Ministry of Energy and Non-Renewable Natural Resources following a public tender process. The Mining Act recognises four mining categories: artisanal, small-scale, medium-scale, and large-scale.

The state owns the non-renewable natural resources within the national territory. The state can, on an exceptional basis, delegate the development of extractive sectors to individuals or entities by granting mining concessions for a term of 25 years where the concessionaire will have the exclusive right to explore, exploit, process, and sell any metallic minerals within the concession.

Once the mining concession has been granted, in large and medium-scale mining the concessionaire is subject to the following phases and terms:

• up to four years of initial exploration;
• up to four years of advanced exploration; and
• up to two years of economic evaluation of the deposit, which can be extended for an additional two-year period.

During the final phase, the concessionaire must apply for the commencement of the exploitation phase of the project. Within six months of beginning the exploitation phase, the concessionaire, in the large-scale mining category, must sign a mining exploitation contract with the Ecuadorian government, although negotiations may begin during the economic evaluation phase. As indicated, artisanal, small-, and medium-scale mining operations do not need to sign a mining exploitation contract with the Ecuadorian government.

It should be noted that ownership of mining concessions is distinct from ownership of the surface land.

The Constitution provides that the state is entitled to receive a share of the benefits resulting from the exploitation of non-renewable natural resources, which is not to be less than that received by the concessionaire carrying out the exploitation. The Mining Act more specifically establishes that the state’s share consists of various duties, taxes, and royalties, including annual patent fees, income tax, VAT, a percentage of the concessionaire’s profits and royalties depending of the category of the mining title.

Added to the items mentioned above, the Guideline for Granting Mineral Mining Concessions establishes that to file a request for a new mining concession, it is necessary to pay a fee equivalent to five times the current minimum wage per application. This amount is not subject to reimbursement if the interested party is not awarded the mining concession after going through the tender process established in the Mining Act and the Guideline. If a party is awarded a mining concession, it needs to pay a fee equivalent to twice the current minimum wage in order to register the minute award and the amount of one current minimum wage to register the mining title with ARCOM.

Duties

More specifically, mining concessionaires have a number of financial obligations under the Mining Act, including the requirement to pay annual conservation patent fees, except in the artisanal mining category. The conservation patent fees payable for concessions are calculated as follows:

• for small-scale mining: a sum equivalent to 2% of the current minimum wage, multiplied by the number of hectares in the concession;
• for medium-scale mining: a sum equivalent to 2.5% of the current minimum wage, multiplied by the number of hectares in the concession and regardless of the mining phase; and
• for large-scale mining:
• initial exploration phase: a sum equivalent to 2.5% of the current minimum wage, multiplied by the number of hectares in the concession;
• advanced exploration phase: a sum equivalent to 5% of the current minimum wage, multiplied by the number of hectares in the concession; and
• exploitation phase: a sum equivalent to 10% of the current minimum wage, multiplied by the number of hectares.

The minimum wage for 2019 is US$394.00.

In addition, mining concessionaires are required to pay additional fees for the use of water. These fees are set out in the Water Act and the Authorisation for the Use of Water Resolution granted by the National Water Secretariat. The Ministry of the Environment also sets fees with regard to the environmental licence.

Taxes

Mining concessionaires are also required to pay various taxes, both direct and indirect. Direct taxes include income tax, which is currently 25% and payable on income less expenses. In large-scale mining, the mining concessionaire must pay 3% of their profits to their employees and 12% of their profits to the state, as part of the benefits share system, whereas in medium-scale mining is 5% to the employees and 10% to the state. In small-scale mining is 10% for employees and 5% to the state. Finally, if mining concessionaires send money abroad, a 5% currency exit tax is payable.

As for indirect taxes, VAT, at a rate of 12% is payable on goods purchased and services rendered. As previously indicated, the amendments, introduced in December 2015, allow mineral exporters to recover VAT since January 2018. Finally, the same amendment permits all gold acquisitions by individuals or holders of mining concessions to also have a 0% VAT rate since 1 January 2018.

Customs duties and other charges imposed by customs are payable when importing goods to Ecuador.

Further, with regard to municipal taxes, liability for the following taxes should be borne in mind:

• municipal patent: the maximum annual tax that can be paid, calculated according to a concessionaire’s assets, is US$5,000;
• municipal tax equivalent to 0.15% of the concessionaire’s assets; and
• rural land tax.

Concessionaires are also required to pay a contribution to the Superintendency of Companies, which is currently set at 0.1% of the concessionaire’s real assets. Capital gains tax is also a variable on this section.

Royalties

With regard to royalties, the Mining Act states that during the exploitation stage, mining concessionaires must pay a royalty depending on the mining category. Artisanal miners do not have to pay any royalty at all. Small-scale mining is required to pay a royalty equivalent to 3% of the sales of the principal and secondary minerals and medium-scale and large-scale mining are required to pay a royalty from 3% to 8% of the sales of the principal and secondary minerals. The General Mining Regulations provide more detail, stating that the royalty is calculated on the gross income, less refining and transport costs.

On the other hand, the percentage of royalties payable by concessionaires carrying out non-metallic mining activities is calculated according to production costs.

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In Ecuador, there are various areas that are considered protected, mainly for environmental conservation. The referendum held on March 2017 amends the Constitution and establishes that the extraction of non-renewable resources, including logging, in protected areas and urban areas is prohibited under any circumstance.

Notwithstanding the abovementioned, it is important to clarify that within protected forests mining activities can be carried out once an environmental authorisation has been obtained. The specific environmental authorisation will depend on the mining phase of the concession.

The principal environmental laws applicable to the mining industry in Ecuador are: Constitution, Environmental Act, Mining Environmental Regulations and Water Act. The regulation and control bodies are the Ministry of the Environment and its regional environmental offices and, with regard to water resources, the National Secretariat of Water.

Through amendments to the Mining Law introduced on 16 July 2013, the process for obtaining environmental permits was simplified. With the new regulations, environmental permits can be summarised as follows: - for artisanal mining: environmental fact sheets need to be approved;

• for small-scale mining: environmental licences allow concessionaires to carry out exploration and exploitation activities simultaneously; and
• for medium- and large-scale mining:
• environmental fact sheets must be approved for the initial exploration stage, which is a different and much simpler process than the environmental impact assessments required in the past;
• an environmental declaration will need to be approved for the advanced exploration stage, instead of the more complicated environmental impact assessment; and
• an environmental licence will need to be approved for the exploitation on the basis of an environmental impact assessment.

When the concessionaires have completed all the requirements for the approval of the environmental licence, this must be granted within six months of the presentation of the required documentation. Should the competent authority fail to respond within this time frame, this shall be taken as tacit

agreement to the commencement of mining activities. In other words, the law establishes positive administrative silence for the approval of environmental licences.

There are no restrictions for building tailings or waste dams. Nevertheless, according to the Mining Act, Environmental Act, and Environmental Mining Regulations, it is necessary to have an environmental licence prior to benefiting from tailing ponds and waste piles. Added to that, the mining concessionaire must comply with the regulations and technical specifications contained in the Mining Act and Environmental Act. The company in charge of the operation and management of dam waste must demonstrate technical evidence and credentials to support its experience in this kind of infrastructure. Inspections of mining projects by local authorities are really common, especially since 2016. An alarm system is not mandatory, but according to the legal framework it is advisable to prevent environmental disasters; it is a common practice within private mining companies operating in Ecuador. In terms of responsibilities for a dam failure, the immediate action is to prevent any human/infrastructure loss, thus, the government will use all its resources in that line. There is a specific government entity that deals with any kind of natural disaster. As a common practice, companies must also provide all the necessary support to the abovementioned end.

Undoubtedly, the elimination of the Windfall Profit Tax was the most positive piece of news for the industry in 2018. The Organic Production Development Law, issued in August 2018, eliminated this burden that levied a 70% tax on the difference between the sale price of the metal extracted and the base price set in the Mining Exploitation Contract. This same standard also modified the capital gains tax, which was previously 22%, applying a table that ranges from 0% to 10% on the earnings obtained from the transfer of shares of mining companies; and, finally, it reduced the range of royalties for industrial mining, which now runs from 3% to 8% NSR (Net Smelter Return).

Although the tax amendments were fantastic for the mining community, Ecuador is still facing critical challenges within the industry.

The following two challenges are the most significant: - Judicial and political activism against mining: In 2018, we witnessed an aggressive campaign against the mining industry from political groups that self-identify as ecologists. Additionally, activists took mining matters to the court system under the argument that the duty to provide free, prior, and informed consultation to indigenous peoples was breached (Art. 57 of the Constitution). They filed constitutional protection actions, causing strategic mining projects to be suspended, such as the Río Blanco, run by the Chinese Junefield. Along similar lines, on March 18, 2019, the Constitutional Court of Ecuador announced that the public referendum on mining in a canton where INV Metals intends to place facilities could proceed. The Court´s ruling was strictly procedural, holding that because it had not pronounced itself in a timely fashion on the substance of the matter – specifically, whether the process of the vote was constitutional – the decision of a National Election Council approving the vote must stand. The referendum vote took place on March 24, 2019, in Azuay province, long known to be especially sensitive about water use, and in a highly charged political environment, where misinformation and fear abounded. As expected, the local referendum voting went against the mining activity. INV responded by announcing they were evaluating the results and might possibly relocate the facilities to a more supportive canton. Several parties announced their intention to challenge the outcome of the vote on the grounds that it was unconstitutional.

• Illegal mining: The second challenge that is causing unrest in the mining industry is the growth of illegal mining in Ecuador. Regretfully, all of those who proclaim a “mining-free” territory, fighting against large companies, in reality are fighting a fake battle that leaves huge gains for illegal mining. Mafias have teams of slaves at their disposal who end up exploiting these resources, doing so without applying technology or any measures that favor the environment, no labor or health liability, and no tax payments, while performing work in risky and unsafe conditions.

Despite the abovementioned challenges in the industry, we are optimistic about progress to come. The current mining and economic authorities of the government have a clear vision of the importance of the industry for the economy, which is spearheaded even more by the drop in oil prices.

Recent decisions of the Ministry of Energy and Non-Renewable Natural Resources to allow scout drilling activities during the initial exploration phase, and the emphatic intervention of environmental authorities to facilitate the processes to obtain licenses and permits for mining activities, confirm the government’s support for the industry.

Foreign companies are not backing down, as demonstrated by CODELCO on March 29, 2019, formalizing the creation of a joint venture corporation with ENAMI for the co-development of the large Llurimagua copper porphyry deposit. Likewise, other major mining companies such as Anglo American, BHP, First Quantum, and Newcrest all continue to invest, directly and indirectly, in exploration and development in Ecuador. At the same time, two major mines, Fruta del Norte (Lundin Gold) and Mirador (Ecuacorriente S.A.), remain on course to come into production in the next year.

True progress in the mining industry requires competition and undertakings by companies. The State has duties that it must comply with to ensure the rule of law, but the companies also have duties that must be met as part of responsible performance of their mining rights.