* Law delays windfall tax, sets royalty minimums
* Approval follows Kinross' decision to leave Ecuador
By Eduardo Garcia
QUITO, June 13 Ecuador's lawmakers on Thursday approved a mining law that should speed the development of small and medium-size ventures, only days after Canada's Kinross canceled a massive $1.2 billion gold project in the country over a tax dispute.
Ecuador's mining industry is at its infancy, but the Andean nation is largely unexplored and could potentially have big copper, gold and silver deposits.
Socialist President Rafael Correa, who won a sweeping re-election victory in February, is eager to attract investment to reduce the economy's dependence on oil exports and help finance social spending - the key to his high popularity.
But the U.S.-trained economist wants the Ecuadorean state to take the lion's share of mining revenues. That prompted Kinross Gold to halt the development of its Fruta del Norte gold project on Monday because it considered the tax burden would have made the project inviable.
Yet the new mining law, approved with 105 votes in favor, 14 votes against and 14 abstentions, has generally been applauded by other investors.
"The law makes it very attractive to invest in small and medium-size projects in Ecuador. Regarding large-scale mining, the tax burden is still a big problem, especially the windfall tax," said the head of the Ecuadorean mining chamber Pablo Acosta.
The law seeks to ease investment terms by delaying the coming into force of the windfall tax until miners recover their investments. It also sets a ceiling on mining royalties of 8 percent for exports of gold, copper and silver.
It states that small-size mines will have to pay 3 percent in royalties, compared with 4 percent for medium-size and a minimum of 5 percent for large-scale mines.
Meanwhile, small and medium-size miners can push ahead with their projects signing more flexible "concession" deals, instead of having to negotiate exploitation contracts with the government.
The law also seeks to eliminate red tape so that investors can push ahead faster with their projects.
It calls for tougher penalties on illegal miners and it tightens environmental protection rules.
Last year, Correa signed the nation's first large-scale mining contract, under which Chinese-owned Ecuacorriente is due to invest $1.4 billion in the El Mirador copper project.
Kinross' decision to put an end to Fruta del Norte is a blow to the government's plan to attract large mining investors, but the mining chamber said there will be no shortage of companies interested in taking over the project.
"The state will have to put it up for tender, or it will look for a partner to exploit it ... But you can be sure that this deposit will be exploited," said Acosta as he hailed Fruta del Norte's potential to become a top-class gold mine.
David West, an analyst with Salman Partners in London said Ecuador's failure to sign a contract with Kinross is unlikely to have a negative impact on negotiations with other mining companies.
"My assumption is each negotiation is a one-off. There's no direct link between how one is going compared to another," West told Reuters, adding that even though Ecuador is trying to ease investment terms for miners, the country remains "a difficult place to do business."
"I can't see mining companies spending a large amount of money in Ecuador over the next little while. And you could even point directly to this as a reason why they wouldn't," he said.
Ecuador also plans to negotiate contracts with International Minerals Corp over its Rio Blanco gold-silver project, with Ecuacorriente over its Panantza-San Carlos copper deposit, and with INV Metals Inc, which plans to develop the Loma Larga gold-copper-silver mine.
Those three are in relatively advanced stages of exploration, but junior miners have about 15 other exploration projects under way.