Exactly one year ago, in an article I wrote for MINERGIA with a similar title, I predicted that 2016 would be an important year for the mining industry in Ecuador. This prediction came true.

Despite the general crisis experienced in Ecuador, the mining industry has seen extraordinary progress, in both the public and prívate sectors, which places the country on the radar of international investors. The main highlights during 2016 include the signing of an exploration contract between the Republic of Ecuador and Lundin for the development and exploitation of Fruta del Norte; the exceptional results of the Cascabel project of ENSA, owned by SolGold (SOLG); the expectation created on the international market due to the merger of Odin with Ecuador Gold and Copper, forming a new company known as Lumina Gold Corp. (LUM), headed up by mining legend, Ross Beaty; and the opening of the mining cadaster by the Mining Ministry in order to grant new areas. Additionally, Australian and Canadian mining exploration companies operating in the country have closed financing operations in recent months, for example SolGold (SOLG), Salazar Resources (SRL), Cornerstone (CGP) and Lumina (LUM) In general, 2016 was a year full of positive news, providing lots of hope for 2017, a year with looming difficulties due to the country’s elections.

Ever since the promulgation of the Mining Mandate in 2008, no metallic mining concession has been issued for industrial mining, due largely in part to the legal requirement for a bidding process to issue new concessions, which is atypical to traditional mining jurisdictions. The current mining authorities, led by Minister Javier Cordova, have put forth great efforts to foster the granting of new areas to individuals, navigating the difficulties and limitations of the Ecuadorian regulatory system. The process being carried out by the Mining Ministry has received overwhelming acceptance on the market, as more tan 1,900,000 mining hectares have been reserved, of which 650,000 hectares have been granted, representing committed investments for more of US$120,000,000 for initial exploration(2).

Regarding legal aspects, there were two legal matters in 2016 that were really important for investors. In order of importance, in my opinion, they are: The official demise of the Mining Manclate on April 6, 2016. Through Ruling No.002-16-SAN-CC, the  Constitutional Court handed down a sentence in two cases of non-compliance, which resolved that Constitutional Mandate N° 6 (otherwise known as the Mining Mandate), published in Official Gazette N° 321, dated April22, 2008, was left null and void as of the promulgation of the Mining Law issued on January 29, 2009.

This judicial and official acknowledgement of the repeal of the Mining Mandate is essential for the development of the industry, as there was never legislation to repeal it, whatsoever, and there were individuals in the public sector that clamed that its standards remained in effect. We must remember that the Mining Mandate, issued by the Constitutional Assembly in 2008, extinguished the ~  mining rights of more than 2.000 concessions for causes that were not included in mining legislation at the time, thereby creating a standstill that pushed the industry to the brink of collapse. The ruling by the Constitutional Court is a key piece in the development of an environment with juridical security, as demanded by any foreign investor.

More news that must be mentioned is the reimbursement of VAT for mineral exporters. In my opinion, this is one of the most important amendments for the mining industry in recent times. Mineral exporters were impeded from recovering the VAT paid during the production process, as permitted for all exporters of any other industry, due to a tax standard that was originally created for the petroleum industry and subsequently included for the mining industry. Through the reforms introduced by the Organic Law of Incentives for Public-Private Associations and Foreign lnvestment (APP), mineral exporters can now recover VAT paid during operations as of January 1, 2018. Despite the future date for application of this benefit, there is no doubt that this will make investments more attractive in small-, medium- and large-scale projects in our country.

Nevertheless, there is still a 1ot of work to be done. Essentially, the true interest of the State attempting to prevent concessions from falling into the hands of those who are not willing to perform activities in the concessions is not achieved by ignoring the realities of the industry, but rather by fostering conditions that attract the best, serious, responsible miners, and this is achieved by treating them as partners, understanding their needs and acknowledging their legitimate interests in the law. This is how miling is carried out in Chile, Canada and Peru.

Additional measures must be taken in the future to improven and amend the rules of the game and the economic conditions in Ecuador, in an attempt to make mining investments more attractive. For example, there must be modifications to the Mining Law in order for mining rights to be deemed a real right, as is the case in all countries where this industry is developed, and not a personal right, as is the case in Ecuador. The bidding and auction process must be eliminated, which is not successful in any mining jurisdiction. Additionaly, the cost of conservation patents must be reduced to amounts that are competitive within the region. Finally, the maximun term for exploration and other phases must be eliminated, as this is contrary to the logic of all mining projects, which cannot be dependent upon timelines set forth in a law, but rather are based on the geological conditions of the area and the international market of the commodities.

The fiscal model for the industry must be flexible. lt is necessary, for example, to eliminate the windfall profit tax and the recently created capital gains tax, as these are additional burdens on an already excessive tax system, which are not even comparable with the parameters of the region when dealing with mining. I admit that the government has made efforts to mitigate the impact of the windfall profit tax and the sovereign adjustment; however, due to the complexity of the appicable formulas, investors have concerns regarding the effectiiveness of the model.

Timely reforms and various derogatory provisions (a few pages of text) would be enough to get rid of these obstades. lf the new government believes that mining is the only means of attracting large amounts of foreign investment, which are essential for an econonny based on the Dollar and with low oil prices, I am sure that we can replicate and even surpass the positive progress we had in 2016. Hopefully this comes to fruition.

“Despite the general crisis experienced in Ecuador, the mining industry has seen extraordinary progress, in both the public and private sectors, which places the country on the radar of  intemational investors”

MINERGIA Magazine 10 – Marzo 2017

We are very pleased to share the report “MINING 2018 Guide (Ecuador)” prepared by our firm TOBAR ZVS and published by the prestigious firm Chambers & Partners.

Should you require any further information, please do not hesitate to contact us at:  REI@TZVS.EC

To read complete guide, please Download Related Material

On June 28, 2018, Minister of Mines, Carlos Pérez, signed the Ministerial Decree Nro. 2018-0034 (Decree 34) which will allow mining concessionaries to perform scout drilling during the initial exploration phase of mining concessions in Ecuador.

Up until now, drilling activities were only permitted during the advanced exploration phase of mining concessions. Undoubtedly, this situation affects the initial exploration activities that according to the Mining Law must be performed during 4 year since a mining title is granted.

According to Decree 34, test or reconnaissance boreholes can be drilled in a maximum of forty (40) platforms within each mining concession. Exceptionally, in areas that intersect with highly sensitive ecosystems legally declared by the Ministry of the Environment, test or reconnaissance boreholes can be drilled in a maximum of twenty (20) platforms within each mining concession.

Test or reconnaissance boreholes are understood as exploratory wells drilled at various angles and depths, using human portable or air transportable rigs. The platforms must be of maximum  10 meters per side and use efficient water systems and biodegradable drilling fluids.

As far as we know, the Ministry of the Environment has not declared any mining area as an “area with a highly sensitive ecosystem,” and therefore the limit of twenty (20) platforms does not currently apply.

With these new regulations, in order to perform scout drilling, no new standards or additional regulations are required. Nevertheless, considering that the mining concessionaire will use water for this purpose, it must obtain an authorization for industrial use of water at the National Water Secretariat (SENAGUA). In some cases, it also would be necessary to get a registration of hazardous waste and a forestry feasibility certificate (if the areas are within protected forests).

Certainly, we believe that allowing scout drilling within initial exploration is great news for the Ecuadorian mining industry and especially for investments within the concessions granted through the tender processes that started in 2016. When the process started, many companies committed to make investments with the understanding that permits and authorizations would be granted in a timely manner. Regretfully, this did not occur and investments have slowed due to the delay on issuing licenses and permits specifically from the Environmental Ministry and the National Water Secretariat.

We are confident that the possibility of carrying out scout drilling during initial exploration activities should restart the flow of investments. For Ecuador and the companies it is a win-win situation.

The administrative silence is a legal[1] presumption. It is an effect the law grants for the absence of administrative will: either positive or negative. Such presumption turns into a necessary imperative, given the fact that if there should not exist a statement, the Public Administration could escape from the judicial control of its acts due to their inactivity. That was the reason for the creation when it was established for the first time in France, under the 1900[2] Law.

Therefore, the law presumes the administrative will when there exists the absence of it and, hence, it occurs a true presumed administrative act, accepting the petition of the individual and, other times, denying such pretension based on the law.

It would not have any sense the petition right enshrined in the Constitution (art. 66, number 26) if the Public Administration should not be obliged to respond such petitions in an argued manner. For this reason, the legal presumption called administrative silence guarantees the right to a fundamental right consecrated in the Constitution.

From the theoretical point of view, as García de Enterría and Tomás Ramón Fernández mention, “negative silence is not a presumed act itself, but the absence of it, which enables the interested party to appeal before the contentious court. However, the positive silence is itself a presumed administrative act and with generation of the legal effects that go beyond the exercise of the rights.

It is clear the fact that, for the administrative silence to be effective, it shall be within the law as any other explicit administrative act. In my opinion, there should be three elements for the configuration of the legal presumption of positive silence:

i. A petition initiated by an interested party to a competent authority;
ii. A real or potential right of the interested party that should be acknowledged by an administrative act (legal and possible petition); and,
iii. The absence of a statement within the term determined by the law for the enforcement of the legal presumption.

Traditionally in Ecuador, the administrative silence was negative. This was modified with the Law for the Modernization of the State in 1994, where the form of the positive administrative silence was incorporated, undoubtedly inspired in the Spanish Law of the Legal Regime of the Public Administration dated November 26, 1992, amended in 1999.

In the practice, the challenge was turning effective those rights attained by means of the administrative silence. The absence of a legal norm provoked the Supreme Court to generate through their decisions a sui géneris contentious administrative execution procedure. The Ecuadorian law acknowledged the right attained as a result of the administrative silence as an autonomous right generated by the law, hence, the judge shall limit to execute said right and therefore the procedure itself was not of knowledge but of execution. Several problems were derived from these judicial precedents, mainly that its enforcement was not automatic but when judicially executed.

The Organic Administrative Code (“COA”) has included important amendments to the institution of the administrative silence in Ecuador, keeping its positive sense. It is worth mentioning the following:

a. Pursuant the OAC, the term of 30 days for the positive administrative silence to be in effect, while it was 15 days in the Law for the Modernization of the State;
b. It is acknowledged an automatic effect of the positive administrative silence; therefore, it does not require a later act by the Public Administration in order to make it effective;
c. The OAC acknowledges the positive administrative silence as a title for execution under the terms of the COGEP and, consequently, in case of inobservance of failure to fulfill by the Public Administration, the individual shall be enabled to file an execution action before the contentious administrative court, as for a mediation act, a transactional act or a past judgment in authority of a res judicata. For this purpose, it would only be required the document with the dated and signed receipt of the petition to the competent authority and a sworn statement that, having the legal term elapsed, no answer had been received from the Public Administration;
d. The OAC impedes the Public Administration to make later statements related to unattended petitions of the citizen, except if such statement shall confirm the positive effect of the administrative silence (Art. 207);
e. The OAC sets forth that the positive right, as a tacit administrative act, shall not be effective only if there should be irremediable deficiencies resulting in the nullity of the whole administrative act (Art. 105). If the administrative silence has deficiencies that can be validated, and the Public Administration deems convenient its enforcement, only a harmfulness action could be filed to leave it without effect.

The OAC acknowledges certain exceptions for the enforcement of the positive administrative silence.

a. Within the contact relationships, since in pubic contracts there is no exercise of legal authority but the fulfillment of mutual contractual obligations;
b. In the requests between public entities, since these do not hold rights but they make use of legal attributions to pursue their ends and competences;
c. In general consultations, particularly in those with a binding character; even though it is a controversial matter where other criteria can be included;
d. Within administrative proceedings that impose different terms and effects;
e. Particularly in proceedings regulated by the Organic Law of the General Attorney’s Office;
f. Within the Motion of Appeal when is requested the suspension of the administrative act and, if the authority does not respond, it is understood that it has not been suspended (Art. 229 OAC); and,
g. In an Extraordinary Appeal process: i) if within 20 days there is no statement about the admission, it is understood as dismissed; and ii) if admitted but not resolved within one month, it is understood as dismissed.

Personally, my opinion is favorable to the amendments included in the COA for the administrative silence, although it will always be necessary to observe the behavior of the Public Administration and of the individuals in order to objectively assess the enforcement of these norms.

[1]  Civil Code Art. 32.- The consequence deduced from certain background or known circumstances is called presumption.
If the background or circumstances causing the presumption are determined by the law, it is called a legal presumption.
It will be allowed to prove the non-existence of the fact that is legally presumed, although the background or circumstances that infer the law are true; unless the law itself shall expressly reject such proof, assuming the background or circumstances.
If one thing, pursuant the expression of the law, is presumed to be legal, it is understood that the contrary proof is admissible, assuming the background or circumstances.

[2]If within three months there was no statement of the Public Administration, it was understood that the petition had been denied and therefore the citizen had the possibility to file a judicial appeal.