Ecuador Should End WFT Double-speak
In the midst of
congratulating the Ecuadorian government on its landmark decision to
eliminate the proposed 70 percent windfall tax on mining profits, EMN
received a letter – via e-mail— from none other than José Serrano. The
Ecuadorian vice-minister of mines asked me to publish a correction to
my article Clearer Horizon for Ecuador’s Mining Industry.
His assertion: despite the accounts of several people at the Denver
Gold Forum that MMP Acting Vice-Minister Xavier Cordova stated the
government’s willingness to eliminate the WFT, EMN had been wrong in
reporting this.
The
circumstances do not call for a correction, as several Canadian media
reports and telephone calls to several Denver Gold Forum participants
confirm that Cordova made those statements.
“…The
windfall tax law defined oil and gas as ‘national resources’, which
potentially included mining. The minister suggested this was not
intended or well thought out. Meetings have started with the Tax
Department to write in an amendment to identify mining separately from
oil and gas, either removing the windfall tax from mining or setting a
very high threshold price,” Cordova was quoted by Canaccord Adams, an
independent Vancover-based financial services firm, on its September
15th Junior Mining Weekly newsletter.
Canaccord
Adams coincides with EMN’s initial source, an article titled
“Ecuadorian official pledges fair rules for foreign miners” published
by Report on Business, which was first to convey the elimination of the
windfall tax.
“The
South American country is expected to amend tax laws to exempt mining
firms from a 70 percent windfall revenue tax applied to oil and gas
companies operating there,” reported the Canadian newspaper. Read article
The
Ecuadorian media also echoed the positive development. Last Wednesday,
renowned economist Walter Spurrier published in the Quito-based El
Comercio that “last week, Xavier Cordova, acting vice-minister of
mines, stated that Ecuador is willing to eliminate its 70 percent
windfall tax, due to the bad results in other countries, during a
mining forum, in Denver, U.S.A.” Read Spurrier article
In
his letter to EMN, Serrano asserts “the WFT will apply to the mining
industry, as soon as the companies sign production contracts with the
government, as stipulated in the new mining law draft.” Cordova, the
acting vice-minister of mines who represented Ecuador at the Denver
Gold Forum, personally sent the e-mail with Serrano’s letter attached,
denying he announced the elimination of the WFT.
“I
would personally like to clarify that I have never made such an
assertion, because I know perfectly that the windfall tax was approved
within the Tributary Law, and that the government’s will to eliminate
it doesn’t exist. We consider that it is a fair way to redistribute
the benefits that generate our natural resources.”
Something is fishy here.
Now,
it’s the duty of mining publications such as EMN to inform the world
that the WFT may apply to the mining industry. So, here I go. Please,
mining analysts and executives who participated in the Denver Gold
Forum, forget about what you may have heard. You and others following
the industry news, readjust your high-risk models that instruct others
to invest in Ecuador. It was a misunderstanding, perhaps. Listen,
Xavier Cordova himself sent me this e-mail, confirming he didn’t say
so…
This
is certainty not the way a country welcomes responsible mining
operations, like president Rafael Correa loves to say. You welcome
foreign investment with clear rules, not with double-speak, and
certainly not by creating a WFT for a nascent industry. At this point
in the early exploration stage of many junior firms, the government
wants to play Robin Hood using a WFT rather than a bow. This will just
scare away investment.
In
his letter, Serrano explains his Robin Hood concept further: “This is a
sovereignty decision, the goal of which is to redistribute wealth and
the benefits that natural resources bring to Ecuadorians, a situation
that has been historically excluded, and it’s now a reality with the
government of President Rafael Correa and the MMP minister, Galo
Chiriboga.” [Translated from Spanish by EMN.]
Stated
his way the WFT sounds like a noble idea, but it’s not. The whole
world cannot be mistaken when it does not apply such a tax for mining
companies. If Ecuador insists on the WFT idea, it will become the only
nation in Latin America and the only nation besides Mongolia to apply
it.
While
government officials engage in double-speak, poor communities
surrounding exploration projects are still waiting for the drilling
machines to turn back on. They have no jobs, they have families to
feed, and are negotiating with coyotes to abandon their country like
some in Pucara have. Read Cementing Poverty by Decree This situation is not just untenable from a development standpoint, it is morally wrong.
I
said it before, and I’ll say it again: Government of Ecuador, do not
apply the windfall tax. It is bad for the country. Mining analysts
regard it as very negative. EMN has written a number of news articles,
and analyses in this regard. Read Windfall Tax Approved, Mining Law on Horizon
And LatAm equities analyst Mark Turner, the voice of reason on such matters, has also authored a crucial piece.
Why the WFT Would Be Bad for Both Ecuador and its Mining Industry
EMN
hopes the Ecuadorian government will come to its senses and understand
that foreign investors’ biggest enemy is uncertainty. And, that the
industry has had a handful with the infamous April 18 mining mandate,
which continues halting large-scale mining operations until
mid-October. Not to mention that the industry faces reforms to its
attractive mining law such as stricter environmental controls and
higher royalties than the maximum 5 percent previously announced.
If
authorities are yet unconvinced, I encourage them to take a look at
EMN’s Investors Concerns Survey, run in March 2008, where it’s clear
that the WFT is one of the biggest investor concerns, according to
question no. 4. Go to EMN’s survey result
If
Messrs. Serrano and Cordova are reading this opinion piece, please do
not disappoint the investors who put their faith in Ecuador due to the
pronouncements of President Correa. Investment banks do not fund
junior mining companies, regular people in developed countries do,
through the stock markets. They are EMN’s readers. EMN is their
voice. Just do what was offered in Denver, and take their worst
nightmare away: get rid of the windfall tax. And if all else fails,
the President may want to intervene.