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Ecuador’s Constitutional Court ruling (from IKN654)

The note below on the deterioration of Ecuador as a destination for junior mining companies, particularly those from Canada and Australia who’ve been acting as if they own the place for years, appeared in IKN654 this weekend and came on the back of last week’s Constitutional Court (CC) ruling against Cornerstone Capital (CGP.v) and Ecuador’s State mining company Enami at the Rio Magdalena project zone, North Ecuador. If you decide to read on, don’t expect the messaging you get fed from company IR departments, the now-ubiquitous pay-to-play media platforms which value marketing and fees over facts, or the high-powered and deep pocketed industry leaders exposed to Ecuador who are now in a tight spot and don’t like the idea of losing. Sorry people, sometimes the truth just plain hurts.

Ecuador’s Constitutional Court ruling

The first paragraph is op-ed, we move to the facts of the matter below. Let us begin by stating that not all companies in Ecuador are bad actors, but Cornerstone Capital Resources (CGP.v) has been one for many years and should be ashamed of itself for the way it’s gone about its business, ignoring the will of entire cultures and playing legal hardball with communities, instead of engaging them meaningfully. This isn’t a recent turn of events either, CGP.v has been said bad actor for approaching two decades, its policies and corporate attitude have brought us to last week’s ruling and to be clear, the above sentiment applies equally to Warren Irwin of Rosseau Asset Management, long-term backer and vociferous proponent of CGP who should hang his head in shame. But now, with the comeuppance the company received last week at the hands of Ecuador’s Constitutional Court (CC) by seven votes in favour (nine seats total), its path of litigation comes to a halt, aside from appeal letters its lawyers have already submitted to the same body that are highly unlikely to gain any traction. What’s more, CGP has now opened a clear flank of legal weakness for the entire mining sector in Ecuador, providing anti-mine groups and entities with a strong legal precedent to push back against mining projects up and down the country. Cornerstone may go down in infamy as the company that ruined it for everyone.

With the news the CC has banned all activity at the Rio Magdalena project, CGP.v quickly tried to downplay the ruling in this punctual NR (10), telling the world they were not active in the zone and giving us “a few facts”, i.e. a five point list of how wonderful they have been that includes how its CESA subsidiary and JV partner ENAMI (the State-run mining company) “…have the strong support of the local communities.” I will make no further op-ed comment on that, instead merely direct your attention to paragraph one of this note.

This report from Ecuador’s daily newspaper Primicias (11) was better than most on the issue last week, with its visual copy-pasted here showing the overlap of protected jungle/forest/woodland [sidebar: The Spanish word “bosque” can cover all three English words and “jungle” is not necessarily “selva”, for linguists out there] and that is where the legal issues arise:

From here on, we will use the term “protected forest” for the sake of brevity. The country’s Constitution allows not just for human rights but also “rights of nature”, i.e. the country must treat “nature” as an entity with legal rights and that formed part of last week’s 119 page ruling that came to five key rulings:

  • It upheld the ruling against the mining companies made by a lower court in June 2020
  • The “rights of nature” of the Los Cedros protected forest had been breached
  • The rights to water and a healthy environment of local communities had been breached
  • The right of locals to consultancy about decisions that affect their local community had been breached
  • The environmental registry and permits received by the mining companies were made null and void

The court also outlined reparations that the mining companies must make and ordered them out of the area, effective immediately. If you only read the CGP news release on the subject you may come away with the impression that it was no big deal, in fact it’s quite the opposite; the ruling handed down could hardly have been any worse for the company and for mining in Ecuador in general. The same Primicias note linked above went on to quote a regional coordinator of Ecuador’s Ministry of Energy and Mining, who kept his comments limited to the areas around the Rio Magdalena project zone and the precedent that had just been set by the highest court in the land, but still couldn’t avoid the term “domino effect” from being used as the sub-header of the section. We quote (translated):

Domino Effect

The coordinator for the northern zone of the Ministry of Energy, Mauricio Almeida, warned that the Constitutional Court decision could have a domino effect. “The people could demand a protection order against the mining company in the Cerro Golondrinas protected forest, justifying that the court stopped extractive activity in Los Cedros”, said Almeida.

And if you think Ecuador’s anti-miners, which include CONAIE and its party political arm Pachakutik with its large voting bloc in Congress, will stop at the near neighbours then think again quick. Let us not forget that Ecuador’s environmental and anti-mining lobby is no bunch of disorganized tree-hugger types. We’ve already seen how the now national political figure Yaku Pérez has stopped development in the South of the country in his native Cuenca region and not just by putting up roadblocks. He studied to become a lawyer and then took the mining companies to court and through the system, with legal rulings to halt the Rio Blanco (Chinese capitals) mine and suspend development at Loma Larga (ex-INV Metals). Be in no doubt, the anti-mining lobby is cock-a-hoop about last week’s ruling and know what it means, plus how they will be able to use it against other projects in different regions of Ecuador. Therefore, let’s give some practical advice:

  1. If you are exposed to Ecuador via a company with an exploration or development stage project, get your maps out and check whether its concessions overlap with “protected forest” because if they do, that project (and therefore your investment) is in trouble.
  2. If yours is free from “protected forest”, think on the image that gets cast in future Ecuador as concession after concession in the country is reverted, nullified and the mining company working it is sent packing.

For what it’s worth, in practical terms this ruling is unlikely to affect mining operations already up and running, e.g. Lundin Gold (LUG.to) at Fruta del Norte, simply because the environmental lobby isn’t stupid and will choose their next targets carefully. The most vulnerable flank is local to Los Cedros and the Rio Magdalena project, that’s where the legal precedent will begin to firm up with petitions and orders to stop activity in the zone. After that, expect the anti-miner lobby to expand its target zones and find exploration-stage projects sitting on top of large areas of bosque protector, (there are a lot in Ecuador) then with a few of those permits permanently reverted, as someone said in the comments section of the post added to the open blog last week (12), “…a potential future legal mouse hole can become an elephant hole…”. Your author strongly agrees and would go further, changing the word “can” to “will” and there is nothing “potential” about all this. Welcome to Ecuador, enjoy the ride.

To close we return to op-ed, and one thing you can surely expect is the mining world to close ranks. Companies with Ecuador exposure will belittle the ruling, consider it petty and unrelated to their own projects. Also, expect them to hit the airwaves to call this note and others like it as over-dramatizing reality. I have already borne witness on how the propaganda machine feeds “sponsored coverage” regarding Ecuador and as there’s big money in-play, I fully expect to be ridiculed for this position on the bleak future for Ecuador’s mining industry. So be it and when it begins, you may like to push back by asking the propagandists and paid pumpers to answer you in Spanish instead of English, as it’s strange how just that simple question will quieten 95% of Ecuador’s mining bulls. The country, was, is and will always be the Mini Basket Case of South America and there’s a long list of other places better suited to your retail investment or their mining FDI. The IKN Weekly offers you two alternatives to learn those simple facts, the easy way or the hard way. Now it’s up to you.

8 Comments

    Thanks for your insights here – much appreciated and interesting view. Will be interesting to see how Lasso takes up this decision as someone really got the impression he is pro responsible mining… What is your stake on Salazar and Adventus – it seems line they understand to take/ support the locals near the exploration activities – bith also have ecuadorian local management

    Reply

    What is your opinion of this rulings effect of Lundin Gold’s regional exploration program?

    Reply

      See above. I submit that the anti-miners aren’t stupid and will choose their targets carefully. Therefore, why waste bullets in zones where mining has gained some traction? LUG hasn’t been the perfect citizen (e.g. the collapsed bridge incident) but the wealth effect is tangible and by all accounts the CSR team is top class.

      Meanwhile for others, I’m not going to start giving a blow-by-blow on every company and project in Ecuador, it’s your exposure so there’s only so much I can say and you’re going to have to do your own DD at some point, anyway. I don’t mind putting a good word in for LUG as it’s obviously going to be down the list of targets, but that’s as far as I’m going with specific names. Personally, I have zero exposure to Ecuador and I can’t see any reason to change that. Stocks are cheap in the friendly zones of Chile, Mexico, Peru (and even Argentina, so help me), why add extra risk for no reason?

      Reply

    Just noticed MMG/ Las Bambas Peru is shutting down by mid-Dec apparently permanently due to blockades.
    Community meetings unsuccessful.

    Reply

    […] facts for mining companies up and down the country in its extended coverage earlier this week, link here. Truth […]

    Reply

    Congratulations on adding such clarity to the situation. I live not too far from Los Cedros, and are part of the ongoing resistance to the nearby Llurimagua concession (Enami-Codelco); next on the chopping block. The Rights of Nature and the Rights to previous consultation will carry outside Los Cedros, wherever mining intersects ecologically fragile areas and/or those harboring endangered species (most of Ecuador). That includes the Llurimagua project; held up since 1995…

    Reply

    […] out of its Rio Magdalena concession due to its disregard for the country’s constitution saw local authorities talk of a “domino effect”, as the precedent set may bring about reversals for other controversial mining concessions and […]

    Reply

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