Ecuador Mining Re-Vamp leads to strong Bond returns Ecuador - TopicsExpress



          

Ecuador Mining Re-Vamp leads to strong Bond returns Ecuador President Rafael Correa’s bid to open the mining industry to more foreign investment is giving the nation’s dollar bonds support amid the worst rout in emerging-market debt since 2008. Ecuador’s $650 million of bonds due in 2015 have returned 1.34 percent on a risk-adjusted basis since May 16, when Correa said he planned to cut taxes and cap royalty charges for mining companies to lure overseas funding and spur growth, according to data compiled by Bloomberg. That’s the most among 67 developing nations, where bonds lost an average 0.46 percent when adjusted for volatility in the same period, the data show. Correa, a self-proclaimed socialist revolutionary who oversaw Ecuador’s $3.2 billion debt default four years ago, is seeking to lure companies to tap metal reserves estimated at $115 billion, based on data from the nation’s mining chamber, after foreign-direct investment fell last year and economic growth slowed to 5 percent from 7.4 percent a year earlier. Developing-nation bonds tumbled the most in the past 30 days since the period ending Nov. 7, 2008, as concern mounts that the U.S. Federal Reserve could scale back stimulus that has boosted global liquidity for emerging-market securities. The rally in Ecuador is “definitely connected” to the mining rule changes, said Risa Grais-Targow, an analyst at New York-based consulting firm Eurasia Group. “I do see the government making that push in terms of the rhetoric and in terms of making a very clear effort to court investors.” Yields Drop Ecuador’s debt is also the best-performer in emerging markets year-to-date on a risk-adjusted basis, according to data compiled by Bloomberg. The extra yield investors demand to own Ecuadorean government dollar bonds instead of Treasuries has fallen 201 basis points, or 2.01 percentage points, to 625 this year, compared with the average 59-basis point increase in emerging markets, according to JPMorgan Chase & Co.’s EMBI Global Index. Yields on Ecuador’s bonds have fallen one basis point since the May 16 announcement, compared with an average 61-basis point increase for sovereign yields in emerging markets, JPMorgan data show. Ecuador’s bonds are gaining as the Andean country plans its first sale of international debt since the default. Ecuador, a member of the Organization of Petroleum Exporting Countries, gets almost half of its public revenue from oil exports. ‘More Pragmatic’ “Correa’s certainly made an attempt since re-election to appear more market friendly, more pragmatic, more open to foreign investors, but the proof will certainly be in the pudding,” said Michael Henderson, an emerging-markets analyst at Capital Economics, said in a May 29 telephone interview from London. “People have long memories.” Foreign-direct investment in the country fell 8.3 percent last year to $587 million, according to central bank data. That’s the lowest in South America after Paraguay and about 45 percent less than in Bolivia, according to data from the United Nations economic unit for the region, known as Cepal. Central bank President Diego Martinez said May 8 that Ecuador’s economy will expand more than 4 percent this year. Ecuador’s government estimates that the proposed reforms could attract as much as $4.7 billion of new foreign direct investment to develop mines by 2016, said Santiago Yepez, president of the nation’s mining chamber, a private industry group. The five mines designated by the government as strategic may create as many as 13,000 local jobs, he said. ‘Too Strong’ While about 95 percent of Ecuador’s Andean highlands and lowland tropical forests haven’t been explored by mining companies, the chamber estimates the country’s current reserves at about 39.1 million ounces of gold, 88.7 million ounces of silver, 8.14 million metric tons of copper and 210,000 metric tons of zinc. That values the reserves at about $115 billion at today’s prices, according to data compiled by Bloomberg. The current mining law needs changes to attract more foreign investment and spur exploration for the nation’s mineral reserves, Correa, 50, a former economics professor with a Ph.D. from the University of Illinois, said May 16 when he announced the bill. “We have a very good mining law, but there have been some errors committed and in a few cases it was too strong,” Correa said. “The investment we would have wanted to come hasn’t arrived.” ‘Help Diversify’ The proposed changes include measures to cap royalty payments at 8 percent for large-scale mining projects and a reduction in the number of permits needed to operate, according to a copy of the bill. The government also wants to create a new category of mid-size mines with fewer regulations, according to the bill. There are new safeguards against illegal mining and added provisions to prevent pollution. “If you look at the example of nations like Peru and Chile, when you get these FDI inflows, they have the tendency to boost local spending,” Capital Economic’s Henderson said. “It will help diversify away from reliance on the oil sector.” The country’s industrial mining industry halted operations in 2008, a year after Correa took office, when the government suspended projects and Congress started drafting new rules giving the state greater control over natural resources. The regulations took effect 19 months later, requiring companies to renegotiate contracts before they could resume mining. Kinross Talks Since then, only one foreign company, Ecuacorriente SA, a 50-50 venture of China Railway Construction Corp. and Tongling Nonferrous Metals Group Holdings Co., China’s second-biggest copper producer, has signed a deal with the government. Of the other four strategic projects, only Toronto-based Kinross Gold Corp. is holding formal talks with the government. Toronto-based Iamgold Corp. and Scottsdale, Arizona-based International Minerals Corp. sold their Ecuadorean gold mines and left the country in the past year, while contracts for another copper mine owned by Ecuacorriente will be negotiated after Kinross talks end, the government has said. Non-Renewable Natural Resources Minister Pedro Merizalde and Vice Minister of Mines Richard Vera declined interview requests made through the ministry’s press office. Jaime Jarrin, executive director of Ecuador’s mining regulator, known as Arcom, didn’t respond to telephone and e-mailed messages seeking comment. Ecuador’s contract talks with Kinross since the 2009 mining law took effect were hampered by the so-called windfall tax, in which the government claims a 70 percent cut of any revenue over a pre-negotiated commodity-price threshold, according to former Non-Renewable Natural Resources Minister Wilson Pastor, who spoke with reporters on April 24 before he was replaced the following week. ‘Positive’ Impact A change under the new proposal that would allow companies to recover their investment before paying the windfall tax would make new projects more likely, said Santiago Mosquera, an analyst at Fitch Ratings. “If suddenly you have an important or even a moderate inflow of foreign direct investment into the country, it’s going to be positive,” Mosquera said June 5 in a telephone interview from New York. “How much fiscal balances are going to be supported by additional revenues will all depend on how much money these companies are willing to spend.” --Editors: Bradley Keoun, Lester Pimentel y
Posted on: Tue, 11 Jun 2013 12:41:02 +0000

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