Ecuador News Round Up – January 30, 2008

Associated Press
Ecuador Imposes Food Price Controls

Reuters
Ecuador plans mining overhaul; wants new deals

World Trade Online
Hoyer Says Consideration Of Any FTA ‘Doubtful’ This Year, To Meet With Schwab On Trade Agenda

Resource Investor
Buying in Ecuadorian Panic

Ecuador Imposes Food Price Controls

January 29, 2008

QUITO, Ecuador — Ecuador will impose price controls on basic foods including rice, milk, corn, bananas and flour in a bid to stem creeping consumer costs, Agriculture Minister Walter Poveda said Tuesday.

"We've seen prices rise and rise for consumers. We think the state must intervene," Poveda told Teleamazonas television.

The new controls will "protect consumers and producers, save and conserve harvests, and provide for a sustainable supply of exports," he added, without detailing the scheme or when it would be introduced.

Although annual inflation was just 3.3 in 2007, Ecuador cannot allow food prices to reach levels seen in developed countries until its economy provides comparable jobs, Poveda said.

Leftist President Rafael Correa, a U.S.-trained economist and ally of Venezuelan leader Hugo Chavez, has blamed rising food prices not on market forces, but on a conspiracy by businesses opposed to his government.

In Venezuela, price controls have prompted scattered shortages of sugar, meat and beans _ something Chavez likewise blamed on businessmen and distributors.

Ecuador last implemented price controls on basic foods during the 1988-1992 government of President Rodrigo Borja.

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Ecuador plans mining overhaul; wants new deals

By Alonso Soto

January 29, 2008

QUITO, Jan 29 (Reuters) - Ecuador plans to revoke most mining concessions, but preserve those held by the industry's biggest players in a move to push them to renegotiate their deals, top government officials told Reuters on Tuesday.

The assembly rewriting the country's constitution is analyzing a government proposal to issue a decree to boost state control over the nascent gold, silver and copper mining sector.

A copy of the proposal obtained by Reuters calls for the takeover of most of the country's 3,000 concessions, but would exclude companies that have big investments in exploration. The document does not detail a capital amount.

"The main companies will not have any problems," a top government official close to mining policy decisions told Reuters, asking not to be named.

President Rafael Correa, a left-wing economist and ally of Venezuelan President Hugo Chavez, has vowed to boost the government's role in natural resource extraction to better distribute wealth in the poverty-stricken country.

Last week the government revoked 587 mining concessions held by companies that failed to pay annual fees, sparking fears among investors of greater state intervention in a sector that is largely still just exploring for precious metals.

Another official close to Correa said the decree would exclude companies like Aurelian Resources (ARU.TO: Quote, Profile, Research), Corriente Resources (ACX.TO: Quote, Profile, Research), Iamgold Corp. (IMG.TO: Quote, Profile, Research), Dynasty Metals (DMM.TO: Quote, Profile, Research), Coastport Capital and International Minerals Corp (IMZ.TO: Quote, Profile, Research).

The official said the decree's goal was "to force companies that have invested to come in and talk."

The proposal is being discussed by the assembly's natural resources committee, which would propose an order that would be voted on by the 130-member body. Two assembly members told Reuters the 13-member committee had only started to discuss the proposal and does expect to decide on it immediately.

The proposed decree says the spared companies would have to renegotiate their deals with the government in one year or else the state would cancel their deals. It says royalties paid to the government will be at least 3 percent.

The proposal would also give Correa the powers to set "mining areas of national interest," which will be only exploited by a planned state mining firm.

Mining Deputy Minister Jose Serrano has said that revoked concessions would be auctioned once a new bill to reform the current mining law is approved later this year.

The proposed decree also calls to cancel concessions in environmentally protected areas and those in the application process.

(Reporting by Alonso Soto; Editing by David Gregorio)

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Hoyer Says Consideration Of Any FTA ‘Doubtful’ This Year, To Meet With Schwab On Trade Agenda

January 30, 2008

House Majority Leader Steny Hoyer (D-MD) said yesterday (Jan. 29) that each of the pending free trade agreements which President Bush wants Congress to approve this year faces a particular problem, and expressed doubt whether any of them will pass in this Congress in that time frame.

“There are no present plans for us to put Colombia on the agenda,” he said in a Jan. 29 press conference. “Whether or not Colombia or any of the other trade agreements will pass this year, I think, is…doubtful.”

He said Bush could send up the Colombia FTA under fast track and start the congressional timetable. “But I don’t know that that is useful unless he believes it is going to pass,” Hoyer said.

He said the Panama FTA faces the problem of the election of Pedro Miguel Gonzalez-Pinzon to the post of Panamanian National Assembly president. Gonzalez, who is accused of “murdering an American soldier,” has refused to resign from that post before his term expires in September, he said. According to Hoyer, Panama would be “relatively easy to pass this year” except for this issue.

On Colombia, he said Democrats continue to have a “great concern” about the country’s record of anti-union violence, implying that this runs afoul of the May 10 agreement between Congress and the administration that all FTAs deal with workers’ rights and environmental issues. “Certainly, one of the basic workers’ rights is the right to stay alive if you’re a union organizer and Colombia has a very bad record on that,” he said.

But Hoyer also pointed out that Colombia is an ally of the United States, a “friend of ours in an area of the world where it is important.”

According to Hoyer, the Korea FTA is “problematic at best until we work out a fair treatment of our automobile import[s] with Korea.”

Hoyer said he will meet with U.S. Trade Representative Susan Schwab on the Colombia FTA in the near future, and Schwab announced separately on Jan. 29 that she will meet with members of the House leadership as well as the chairmen and ranking members of the House Ways and Means and Senate Finance committees.

She said in her meeting with Ways and Means Chairman Charles Rangel (D-NY), she would try to assess how he intends to proceed on the trade agenda and “what we can do to make sure [pursuing] this is a bipartisan, coordinated effort rather than something that is confrontational.”

In his own response to the State of the Union address, Rangel also urged cooperation between Republicans and Democrats and said nowhere was that “more critical” than in overhauling the tax code. On trade, he pointed out that the May 10 agreement on labor and environmental commitments led to strong bipartisan support for the Peru FTA, but said each FTA must be judged on its own merits. “Since President Bush has not decided to send the remaining FTAs to Congress for a vote, we will have to wait and see what decisions he makes in the coming months,” Rangel said.

In her press conference, Schwab said the expansion of the trade adjustment assistance (TAA) program and the renewal of the Andean Trade Preferences and Drug Eradication Act (ATPDEA) would be part of her discussions. Both Rangel and Senate Finance Committee Chairman Max Baucus (D-MT) have made an expanded TAA a priority, which some observers say opens the possibility of a trade-off deal on the FTAs with the administration.

Schwab said she is seeking a short-term extension for ATPDEA as did a State Department official earlier this month. He said that the administration wants this to apply to Peru and Colombia and is still trying to decide how to handle the extension of preferences for Bolivia and Ecuador in light of complaints of unfair treatment by U.S. investors.

Schwab said the administration’s approach to the trade agenda is to “work in conjunction” with the leadership to bring up the Colombia FTA for a vote. “I do not think the congressional leadership wants to be in a position of denying the Colombia FTA a vote,” she said.

According to Schwab, having the Bush administration send up the final implementing bill for the Colombia FTA without the consent of the leadership is “always and option” but “certainly not a preferred option.” According to business lobbyists, such a decision would have to be made by mid-March to give the Congress the maximum time under fast track to deal with the Colombia FTA.

But a number of House members, including Rep. Joe Crowley (D-NY), have warned this would lead to a defeat in the Ways and Means Committee. Under fast track, the FTA would still advance to the floor at which point House Speaker Nancy Pelosi (D-CA) could opt to change the fast-track rules to regular legislative procedures if the majority of the House approved a recommendation of the Rules Committee to do so.

Technically, the fast-track is considered a rule of the House and can be changed accordingly.

Schwab criticized members of Congress and opponents of the Colombia FTA for demanding that the country do more to curb anti-union violence without specifying what that should be. There is not “enough clarity” in the debate where “individuals who are asking for more […] have been reluctant or unable to define” the goal posts.

She said the debate, like “any kind of negotiations” includes three approaches by critics of the Colombia FTA. These are setting goal posts that are “realistic but tough,” setting goals that are “so extreme” as to make them “utterly impossible,” and moving goal posts once they are set.

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Buying on Ecuadorian Panic?

By Ben Abelson
29 Jan 2008 at 12:59 PM GMT-05:00
CHICAGO (ResourceInvestor.com) -- Canadian explorers and miners focused on Ecuador have been slammed since Friday’s announcement by the leftist government that some 500-plus mining concessions had been revoked for failure to pay certain fees. The news sent shares of some explorers like Ascendant Copper [TSX:ACX] down as much as 20% in an initial reaction, before rebounding.

While it’s still not entirely clear which firms have been the target of the government, it now appears that the government has mostly targeted very small firms, many of which had staked claims that they had then failed to properly maintain and pay for.

Although pending news on the country’s mining law reform has kept things in flux, it now appears that many of the major operators in country have been doing an excellent job of maintaining relations with the government – and stand a good chance of success at developing their deposits.

Timing of Mining Laws

While smaller scale explorers may not have the lobbying heft or oversight to properly steer conversations with the Ecuadorian government, miners such as Aurelian Resources [TSX:ARU], Corriente Resources [TSX:CTQ] and IAMGOLD [NYSE:IAG; TSX:IMG], don’t appear to be in any serious jeopardy of running afoul of the country’s socialist government. While country risk certainly remains, of course, one could argue that this should be discounted as a risk more in line with that typically found in other emerging markets – and not as much as the risk found in Venezuela.

While the establishment of a new mining law in Ecuador is a frustrating process – in as much as it’s unclear where exactly the government will make decisions on windfall taxes and other terms – such a code will ultimately ensure that the rights of major potential operators in the country will be protected. For their part, the smartest are working diligently with the government to ensure they don’t get worked over – and are modifying plans that may appear to offend locals (such as IAMGOLD’s probable decision to develop its massive Quimsacocha deposit as an underground mine so as to avoid the ugly visual associated with open-pit mining).

Indeed, the very fact that defaulted concessions were cancelled may be a signal of an upcoming release of a mining code – and positive news. A similar cancellation happened in 2001 as a necessary step toward releasing the country’s current mining law a few months later.

For all its environmental and anti-imperialist bravado against mining, the government of Ecuador doesn’t find itself in the massively energy-rich situation of Venezuela – and as a country desperately in need of capital will not have the luxury of systematically kicking out a legion of foreign operators.

Where to Target

Chances are that producers with solid deposits are the best bets, as many of these are overly discounting the risk of operating in Ecuador. Aurelian’s Fruta Del Norte (FDN) deposit is one of the best gold finds in recent years – with nearly 14 million inferred ounces of gold and 22 million inferred ounces of silver. With the clarity of a new mining law (hopefully by mid-year), it’s quite probable that a senior will look to take the company out.

According to analysts at Dundee Capital Markets, for example, Aurelian’s NPV with FDN at a 5% discount rate is about C$16.50 – with long-term gold price only projected at $600. Given the firm’s current trading range of about C$8, this is one gamble that is probably worth taking.
While IAMGOLD is a more diversified operator, the concerns about its sizeable Quimsacocha project are one of the factors that have held the miner back in the past year-plus, and left it as one of the cheapest mid-tier producers on the market. Given that Quimsacocha is one of IAMGOLD’s flagship growth assets going forward, any clarity on the regulatory front could be the trigger to propel the shares higher – and get acquisition minded seniors like Kinross Gold [NYSE:KGC; TSX:K] and Barrick Gold [NYSE:ABX; TSX:ABX] potentially interested.

We’d favour IAG and ARU over Corriente Resources, simply because of a desire to avoid excess copper exposure at this point in the cycle. However, if you’re looking for base metal exposure, investors in Corriente shouldn’t have much to worry about. The company already has several properties in development, has been in Ecuador for many years, and has been able to get strong government support in the past (witness the recent approval of the company’s Environmental Impact Assessment report for a new port operation for shipping copper concentrate).

Remaining Sceptical

The biggest risks in Ecuador remain in the junior exploration companies. While most of these will likely survive, and some will ultimately prosper, it’s quite probable that one or two have seriously run afoul of some miniscule government regulation, or not lobbied the right people enough, or will find that a marginal deposit has been made uneconomic by new tax regulations.

While it’s almost impossible to say which companies these will be, it’s scary enough to lead a relatively conservative investor to shy away. As we’ve seen with past mining law changes in emerging markets around the world, the smallest exploration companies – those with not fully delineated deposits, or potential capital raising problems – are typically those that bear the brunt of potentially adverse government actions.

For investors wishing to capitalize on the current uncertainty in Ecuador, an investment in Aurelian’s massive FDN property, and the more diversified IAMGOLD, is a an excellent way to profit from the potential positive development of a new mining code sometime in the next six months.

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