Mining In Ecuador: Focus On The 2013 Presidential Elections

: Ecuador’s mining sector has faced a number of formidable challenges in recent years, including aggressive resource nationalism, an uncertain regulatory environment and strong indigenous opposition. However, the Rafael Correa administration is considering several policies that would kick-start a number of stalled projects to pay for the social programs that sustain his government’s legitimacy. This comes after Correa finalized Ecuador’s first commercial mining contract in March 2012 with China’s EcuaCorriente S.A. (for $1.4 billion). With Correa the heavy favourite in the Feb. 17th Presidential elections, we believe his victory could benefit ongoing contract negotiations for several long delayed projects largely priced out of NAV estimates (e.g., Kinross Gold Corp.’s Fruta del Norte). Ecuador remains a high risk environment, however, and the government faces a long uphill climb to restore its credibility with investors.

1. Socioeconomic snapshot
An OPEC member since 2007, Ecuador is highly dependant on its oil industry, which generates some 44% of government revenues. Production of 500,000 barrels per day has helped finance high government spending (40% of GDP since 2007, up from 24% 2000-06), mainly on infrastructure development and cash transfers to the poor. This has in turn fuelled GDP growth of 4.2% 2007-11 (vs. 3.9% for Latin America). Agricultural exports (6.5% of GDP) and foreign remittances (3.5% of GDP) are also key sources of government revenue.

Since 2006, increased social spending has greatly improved the quality of life for many poor Ecuadorians. The country’s Human Development Index ranking has improved accordingly (84 of 187, up from 91 of 130), with marked gains being made in healthcare and poverty (high at 28.6%, especially in rural areas, but down from 36.7% since 2007 and 64% since 2000). This has bellied President Rafael Correa’s widespread popularity, keeping his approval ratings at or above 50% since 2006.

Inflation is relatively stable (4.5% avg. 2003-11), but the cumbersome regulatory environment has kept foreign direct investment (FDI) low compared with peers ($650 million in 2011 vs. $13 billion in Colombia and $7.7 billion in Peru). Less investment has subsequently resulted in declining oil production (down 16.4% since 2006) as well as net oil exports (down 25%, exacerbated by rising domestic consumption, see Fig. 1 below).

2. Socioeconomic vulnerabilities: oil dependency underlies exposure to external shocks, and the need for mining

Dependence on the oil sector and lack of economic diversity leaves Ecuador vulnerable to external shocks, which has led to socioeconomic and political instability in the past. The 1998-2000 economic crisis, for example, was the result of falling oil prices, alongside El Nino floods (lower agricultural output), and capital flight following the Asian financial crisis. The economy subsequently contracted 5.3%, the poverty rate spiked to 64%, the currency imploded and was replaced with the U.S. dollar, and several governments collapsed following widespread protests.

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