March 6, 2012 / 1:25 AM / 5 years ago

Ecuador signs first large-scale mining contract

4 Min Read

* Ecuacorriente to invest $1.4 bln in copper mine

* Ecuador to invest revenues in roads, hospitals, schools

* Contract marks win for Correa, analyst said

By Eduardo Garcia

QUITO, March 5 (Reuters) - Ecuador's President Rafael Correa on Tuesday signed the country's first ever large-scale mining contract, which calls for Chinese-owned Ecuacorriente to invest $1.4 billion in the El Mirador copper project.

Ecuador has no mining industry to speak of and Correa, a U.S. trained economist, is eager to attract investment to tap the country's big copper, gold and silver deposits and diversify the economy from its dependency on oil exports.

Correa is trying to reap lofty benefits from miners and negotiations with Ecuacorriente and Canada's Kinross, which plans to develop the Fruta del Norte gold project, have taken much longer than initially expected.

"Comrades, today marks the beginning of a new era in Ecuador ... this will be the first large-scale exploitation project," he said adding that his government is set to receive high revenues from El Mirador, which it would spend on roads, schools and hospitals ahead of the 2013 election.

Including royalties, value-added taxes, income tax and other duties, Ecuacorriente will pay the state about 52 percent of its revenue.

The government says with El Mirador, Ecuador will become the state with the highest benefits from a mining project.

"The contract marks ... a political win for Correa, whose strategy has been to push to the absolute limit the amount of money that he can extract from the sector while still ensuring that several major foreign-owned projects move forward," Eurasia Group analyst Risa Grais-Targow said in a statement.

El Mirador, an open-pit project in the southern Zamora Chinchipe region, will pay royalties of between 5 percent and 8 percent, depending on copper prices, and should start production at the end of 2014. The government estimates there are 4,738 million pounds (2.15 million tonnes) tonnes of copper reserves at the site.

Grais-Targow said Ecuacorriente may have been more willing to accept the tough terms demanded by the OPEC-member country because it is a state-owned company and because China has become a key source of financing for the Correa government.

Ecuador signed a $2 billion credit deal with China in June and in October it signed a pact for a $571 million loan with a Chinese bank, which took total debt commitments to China to around $7.3 billion, including loans, advance payments for oil sales, and energy project financing.

More Contracts?

Toronto-listed Kinross signed a tentative agreement in December to invest $1.2 billion, according to the government. But last month Kinross said it wanted to re-negotiate the deal in a bid to obtain more favorable economic terms.

The government has warned that negotiations could fall through because Kinross was making demands that were "over the top."

Analysts say the tough terms of the deals and the risks of doing business in a socialist country could deter miners from investing in Ecuador.

Ecuador is set to negotiate contracts this year with International Minerals over its Rio Blanco gold-silver project, with Ecuacorriente over its Panantza-San Carlos copper deposit, and with IAMGOLD which plans to develop the Quimsacocha gold-copper-silver mine.

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