INVESTMENT RISKS AND OPPORTUNITIES IN MINING PROJECTS

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development and Investment
(Apr 2009)
CHAPTER 6C
INVESTMENT RISKS AND OPPORTUNITIES IN MINING PROJECTS
Bernardo Tobar
Partner
Tobar & Bustamante
Quito, Ecuador

Bernardo Tobar is a founding member and currently Managing Partner of Tobar & Bustamante (previously Tobar & Tobar, established in 1993). His practice currently focuses on large infrastructure project development, with an emphasis on sustainability issues, that is to say on environmental and social management and communication strategies. He has been involved in projects from negotiation of public services concession agreements all the way through project financing and construction, commissioning and operations. Adding to his legal practice, Mr. Tobar's background includes four years - from 2003 to 2007- as CEO of a consortium formed by major oil producing companies including Encana Corporation, Oxy, Repsol among others, that built and operates a heavy crude oil pipeline system in Ecuador. During his role as executive president of this consortium, Mr. Tobar had to deal with unique sustainability issues of a project that extended almost 500km and crossed the amazonic region, the highlands and reached the coastline, interacting with a significant number of communities and stakeholders over 4 different provinces, while ensuring best practices and world class standards on a highly sensitive and challenging environmental and political setting. These days Mr. Tobar acts as lead counsel for the largest gold concession holder in Ecuador, in its efforts to move the project on to the advanced exploration stage. Mr. Tobar was admitted to the Bar in Ecuador in 1989, and his education includes the Catholic University of Ecuador, Law School (J.D., 1988); McGeorge School of Law, University of the Pacific, Salzburg, Austria (Dipl., 1989), in addition to a CEO Management Program at Kellog's Business School in Chicago. He is also recipient of a US Department of State Award (1998) for his role in the Protection of Intellectual Property rights in Ecuador and the establishment of a world-class Intellectual Property Law, when he headed the IP practice of the Firm.

INTRODUCTION

This paper analyzes the Ecuadorean case, which deals with the grant of a Mining Mandate by a Constituent Assembly with Full Powers, whereby approximately 2,000 mining concessions were extinguished without any compensation and mining activities were suspended in almost all the existing concessions. Though the effect on certain projects has been minor, the abovementioned "Mandate" is a concrete sign of a growing trend in Latin America to prioritize social and political legitimacy over the letter of the Law, as well as evidence of the lack of corporate vision and an adequate corporate structure to control and even pursue an agenda for change.

More than a detailed and thorough legal analysis of an event that burst through the existing legal framework, or of the hypothetical legal options or remedies of little practical use in the current social and political context, I intend to share some lessons learned and introduce some variables which are generally off the radar of the legal profession. However, these variables have become more critical today for the sustainability of mining projects than laws and contracts that make up their regulatory framework.

ECUADOR IN CONTEXT

Ecuador has been used as a base and laboratory by NGOs with an environmental and human rights cause. Ecuador has been a suitable backdrop for the increasing political influence of so-called "social organizations". The indigenous movement has been consolidated and its organizational model has spread to the whole continent, even though it represents a minority of less than 13% of Ecuadoreans, as per the official census. That figure is further reduced when you take account of the mingling and mixing of most of its members of the life, culture and customs of mestizos in Ecuador.

These social phenomena are explained in part by factors typical of the majority of Latin American countries, and also, more significantly, by conditions particular to Ecuador: its unique biodiversity. One of the provinces is home to more species of birds than half

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of the Brazilian territory. Although Ecuador covers only 1% of the Amazonian area in the southern hemisphere, it in fact contributes more than 18% to the sources of water of the Amazon River; the Ecuadorean confluence of the Humboldt and El Niño sea currents, as well as their volcanic origin, make the Galapagos Islands an area of unique marine diversity in the world, as well as the setting which allowed Darwin to support his theory of evolution of the species. From the capital, Quito, at 2,800 meters above sea level, not far from the plateau that is home to half of the condors within the southern hemisphere, to two hundred kilometers towards the East, where we find the Ecuadorian Amazon Region, with its natural parks, submerged forests and pink dolphins, coexisting with indigenous people living in voluntary isolation. These places have remained untouched by the train of development, except for helicopters that rip apart the skies to get to the nearby oil wells.

At the same distance to the west of Quito, crossing through protected world famous forests, we reach the beach areas, thus completing a range of water, sky and greenery, where there seems to be everything, except the desert. And, more frequently than we would like, common sense.

This regional diversity has made Ecuador a politically bipolar and fragmented country, with a southern and a port city that compete with the capital in terms of cultural brilliance, strength and political influence. Cuenca, religious, historic, traditional and prone to forms, is very different from the commercial, daring and self-assured culture of Guayaquil, which until recently registered the highest number of banking transactions in Ecuador, and which continues to be the major national port and immigration melting pot. On the other hand, Quito is excessively political, rebellious, is the most mestiza and most indigenous, most cosmopolitan of all Ecuadorean cities, the epicenter of a nation extraordinarily diverse in nature, culture and ethnicity.

This background therefore outlines a country which, like others, contributes with singularities, although in this case, it is precisely because of these particular conditions that the merging of several factors in permanent tension has been facilitated: natural wealth which is in the process of being exploited -oil- or not exploited at all, such as minerals; indigenous people permanently struggling to resist western development; an ethnic and cultural composition so diverse that it hinders a coherent political agenda; green lungs that attract European financing aimed at impeding extraction activities. Lately, the Bolivarian influence and its variations have taken hold in Venezuela, Nicaragua, Bolivia, Argentina and Ecuador.

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In this context, what interests are served by the increasing nationalization of the extraction business? What lessons can we learn from the Ecuadorean case for risk management in Latin America?

THE MINING MANDATE IN ECUADOR

In April 2008, the National Constituent Assembly (NCA) issued one of many "constituent mandates"; this time, in the field of mining. In essence, it provided for the cancellation, without any right to indemnification or judicial recourse of any kind whatsoever, of those mining concessions that came withint the grounds for cancellation that had not existed before the grant of the same mandate. The whole text of the mandate has been set out in the Annex, but it is enough for this analysis to quote some of the grounds for cancellation:

• Lack of environmental impact studies

• Lack of investment

• Lack of prior public consultation

• "Concentration", that is, more than three concessions owned by the same title owner

• Failure to pay conservation patents

Of all the above, only the failure to pay conservation patents constituted, as per the law in force at the time of the violation, cause for cancellation. The other causes are really a way of penalizing the mining concessionaires for violations that were not previously violations. This represents an open violation of the universal principle of law: nullum crimen nulla pena sine lege. The violation and the penalty were established in the mandate, in April 2009[2008?], and they applied to facts, acts and events which occurred before it became effective, clearly violating yet another universal principle, the non-retroactivity of law; laws can only provide for future events.

But these grounds, which were apparently aimed, among other critical elements, at protecting the environment, were excluded by the mandate itself from being applied to concessions operated by community or cooperative organizations. Discrimination was exercised, prejudicing corporate operations, ensuring mining concessions owned by other forms of organizations, are safe. The latter were even favored in the new Constitution that the same Assembly prepared. Thus, the principles that the law applies equally to everyone and of non-discrimination were also broken.

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Inasmuch as the Mandate provides for the cancellation of mining rights without any entitlement to compensation, the guarantee that prohibits confiscations was also directly and openly violated.

Finally, the Mandate also provided for the suspension of all mining activity in those concessions that did not fall within the grounds for cancellation mentioned above. Therefore, in order to recommence operations, it would have to comply with the new legal framework or otherwise, following a period of 180 days, on the negotiation of a contract. The fact is that in January 2009, the new Mining Law (ML) was passed, and while this is being implemented, the recommencement of mining activities is dependent upon compliance...