Why are we only just hearing about Ecuador? Isabel and I think it must be down to that age-old maxim that good news doesn’t sell newspapers. A really shocking thing has just happened to miners in Ecuador and suddenly there’s information all over! The government has revoked mining concessions!

This is all very new and a bit of a shock. The last time the Ecuadorian government changed its mining laws was way back in the early 1990s. Then the World Bank was keen on it deregulation. Critics said it was pushing for Ecuador to let in the internationals at the expense of the environment and local communities.

But this is the age of resource nationalism. Just a few days ago, the pendulum started to swing the other way. President Rafael Correa’s government is already in the throes of redoing oil deals as world prices reach records. Now it is mining’s turn. Here’s another yet reminder to check company risk when investing!

Dire mining news hits the headlines

Just about unanimously, Ecuador’s parliament voted to suspend 80% of the 5,000 mining concessions and impose a moratorium on new ones. There is absolutely no mention of the world ‘compensation’. And it gave the government six months to re-write the country’s mining legislation. That grabbed the newspapers!

According to Reuters, the assembly’s president, Alberta Acosta, said that: “What’s at stake here is to define the future of large-scale metallic mining in Ecuador.” So the assembly passed the mandate by 95 to 1, with 25 abstentions.

Quite a few international mining companies operate in Ecuador. Around 40 is the estimate. The figure of $220bn put on the mineral reserves there is quite an attraction! They’ve been investing around $100m a year. At this stage output is relatively low. Many of the mines are in early stages.

A lot of these companies are Canadian. There’s Ascendant , Aurelian Resources, Dynasty Metals & Mining and IamGold, for a start. Of course, on the news their share prices headed south in a rush, halving or worse.

Boy, are they not happy! “The government …is saying ‘Let’s get our hands in the cookie jar, too,” was the bitter response of Midas Management’s Tom Winmill, a big investor in Aurelian, when speaking to Bloomberg.

Millions wiped off capitalisations

With nice understatement Haywood Securities analyst Eric Zaunscherb described the situation as being “fraught with negative actions.” We can see what he means!

More to the point was Dynasty’s spokesman William McCartney with his “it’s devastating and could affect everybody. We’ve just had millions of dollars of market capitalisation wiped out.”

A foretaste of what is coming might be taken from comment from Ecuador’s MPs. Acosta’s was: “The new mining law will favour serious entrepreneurs, not the speculators.” Another, from a member of Correa’s party was: “In Ecuador concessions were handed out for the price of a sick chicken!”

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Ecuador ’s MPs are talking of setting up the country’s own kind of sovereign fund. It is exploring the idea of a state-owned mining company. A model would be Chile’s Corporacion Nacional del Cobre.

Also on the cards at this stage is a limit of three concessions per company.

The assembly has the power to make laws without the need of the President’s sanction. However, he sounds sympathetic to their cause. He came to power last year vowing to increase state control of the country’s national resources and the economy. A US trained economist, he spoke a lot about mining with social, environmental and economic responsibility. This includes protection of the country’s water resources and containment of pollution.

Local environmentalists are cockahoop.

Carlos Zorrilla, executive director of Defensay Conservación Ecológica de Intagwas was quoted by Reuters as calling the assembly’s decision a victory of “right over might.” At one point he was forced to go temporarily into hiding because of his anti-mining and environmental activism against Ascendant Copper’s Jinin project. He was saying in the stories that all this could “lead to an Ecuador free of large and medium scale metal mining in the near future.” 

So, who is going to carry out the large-scale mining that is currently done by foreign groups? These days it’s increasingly hard to lay your hands on all the things you need for mining. That extends right through from skilled workers and specialist equipment to the money. This will no doubt present a few dilemmas for the Ecuador government, as it is for resource nationalists the world over.

A worry for the miners is Ecuador’s links with neighbouring Venezuela. No good for the short term is augured here! President Hugo Chavez is into nationalisation in a big way.

Behind all this is, of course, the current anti-US feeling running through the southern continent. Correa has dismissed his defence minister, army chief of intelligence and commanders of the army, air force and joint chiefs. Why? He said that Ecuador’s intelligence systems were “totally infiltrated and subjugated to the CIA!”

Another lesson to look out for resource politics

He accused senior military officials of sharing intelligence with Colombia, the Bush administration’s top ally in Latin America. He is chafing at ties between US intelligence agencies and Ecuadorean military officials. Thus he is purging his army of alleged friends among his top commanders. More than 100 members of the US military are to leave and he plans to close a US base that surveys drug-trafficking.

Meanwhile, Correa has tried to reassure the hundreds of miners, rioting for return of their jobs, saying that “it is absurd to say ‘no’ to mining.” They booed him as he stood on a balcony of his presidential palace above them. Opposition delegates in the assembly have been speaking of the loss of tens of thousands of jobs.

There were quotes in the papers from an unnamed top mining ministry official that it had “flexibility to apply the decree and interpret some issues.” That does not, however, including undoing the licence suspensions.

So, at a time of rising world shortages here is another event that looks like making them worse. Good for prices, of course. And further lesson to keep a wary eye open on resource politics!

Keep mining – if you can!

Erin and Isabel.