Monday, November 8, 2010

Dynasty ( What subscribers read about Ecuador yesterday

If you were a subscriber you would have known yesterday (Sunday 7th) why DMM made a decent move today (Monday 8th). First they read this:
Dynasty Metals & Mining ( Is the long wait nearly over? Modestly optimistic news came out of Ecuador Friday evening, which we examine in detail in ‘Regional Politics’ below.

And then in the 'Regional Politics' section of the weekly, 1,018 of the 14,000 words contained in IKN79 were devoted to the subject. The only thing missing is the small chart that's also available on link 15.

Ecuador: The government set to sign its deals with miners
News out of Ecuador on Friday was positive. Early Friday the Ministry of Non-Renewable Natural Resources (MRNNR) (15) published the following (translated):

The Ministry of Non-Renewable Natural Resources (MRNNR), via the Vice-Minister of Mines, has made ready the “Contract for Mining Exploitation” that will be negotiated with those mining companies that are found in the the exploitation/production phase.

The Vice-Minister of Mines, Luis Bustamente Monteros, said that the contract has been elaborated together with the Tax Office (Servicio de Rentas Internas (SRI)), the Ministry of the Environment, the Secretary of the People, the Ministry of Finances and the National Secretary of Water (Senagua) due to their direct areas of competency in mining activities.

The terms of the contract document will be disclosed once the Minister of Non-Renewable Natural Resources, Wilson Pástor Morris, signs the respective ministerial agreement as established by Article 41 of the Mining Law.

Bustamente said that the contract model is directly related to terms established by the Mining Law and the Law of Fiscal Equity. This means that the document will include terms on royalty payments as well as windfall taxation.

He confirmed that the “Contract for Mining Exploitation” must be signed by mining companies that have large scale and industrial projects, that are in production phases and whose concessions were acquired before the implementation of the current Mining Law (January 2009).

Included in the list are the five projects considered as the “Strategic Mining Projects”: Fruta del Norte (Kinross Aurelian), Quimsacocha (Iamgold S.A.), Río Blanco (San Luis Minerales S.A.), Mirador (Ecuacorriente) and Panantza San Carlos (Explorcobres S.A.). The Fruta del Norte, Quimsacocha and Río Blanco projects have gold and silver resources, while the Mirador and Panantza San Carlos projects have copper resources.

For the negotiations, programmed to begin around the middle of December 2010, the MRNNR and Vice-Ministry of Mines will be represented by teams made up of national and foreign experts.

Vice-Minister of Mines Luis Bustamente said that once the contract model is officialized it will be shared with representatives of mining companies that operate in the country.

The MRNNR also included this map with its release showing the location of the five large projects deemed “strategic” by the government of Ecuador.

Dynasty (, along with other mining companies outside the five “strategics”, was not named in the release, but this new contract is clearly the one DMM signs with the government as well. As the Zaruma project is already up and running (though on tick-over until the deal is done and dusted) DMM will be there at the front of the queue to sign and be done on this issue.

Now for a bit of Friday timing. Interestingly, the MRNNR release (16) came early Friday morning, but seemed to pass largely un-noticed by the wider world. Around midday Friday, while the markets were still open, there was an oblique mention of the NR in another Ecuador government website (17) but it wasn’t until the story was picked up by State newswire ‘El Ciudadano’ (The Citizen) and published after the Friday bell (5:15pm local time) (18) that other newswire services noted the event and ran their own copy (19) (20) etc. This may explain the lack of movement seen in on Friday, because the contents of this release are a solid step forward for mining companies in Ecuador. There are still unknowns here, as we’ll be particularly interested in seeing the precise terms of state burdens proposed by the Ecuadorian government (royalty percentages, WFT details etc) and we’re still going to have to wait until mid-December to get to negotiations between government and mining companies underway, but we now have a document that’s ready to be presented and we have a fairly solid timeline (though the usual LatAm caveat applies at this point; when it comes to timescales, anything can happen and often does).

As for the terms that may be included, we recall that according to the letter of Ecuador’s revised mining law each mining company must negotiate its terms with the government. However, by the sounds of things it looks like there will be some sort of group negotiation, if only on the main terms that are most likely to include its royalty and windfall tax (WFT) agreements. We also recall that according to the terms of the mining and state fiscal laws, the WFT cannot be set under the spot price for the metal on the day of the agreement, which means that, for example, if DMM signed this very evening the WFT base level could not be set under Friday’s London PM fix of U$1,395/oz

Be clear: I fully expect Dynasty ( to rally on this news Monday morning. I’m also reasonably confident that once details are revealed we’re not going to see any nasty surprises for mining companies and the terms that Ecuador wants to apply will allow mining companies to go ahead, do their stuff, mine for metals and make a decent profit. Yes, the burdens are likely heavier than other regional countries, but when it comes to DMM we’ve already accounted for a 51% total burden on revenues and come out with a stock that is a virtual double, so there’s plenty of room for the very robust economics displayed by DMM at Zaruma to accomodate extra state payments (according to this analyst’s Casio at least). So once the contract terms are known to the outside world, there’s every reason to see a second rally in DMM. In my mind’s eye (Ecuador and mining: WHAT COULD POSSIBLY GO WRONG?) we’d then get a quiet period until the negotiation gets going mid-December and if all goes well between miners and government suits, shareholders in DMM will be set for a year to remember in 2011, a year to wipe away three years of suffering.

Yes, I’m bullish Always have been in fact, because there’s no getting away from the fundamentals on this one. All we want is a final piece in position, a country that finally gives DMM a chance to do some serious mining.

DYODD, dude. I'm also happy to report that at least two subscribers (maybe more, I only have evidence from two people mailing in) took advantage of those $4.00 prices at the opening bell.