Analysts Mixed on Mining Risk in Ecuador

Last week, Ecuador's government tried to downplay the passing of the mining mandate that robs companies of most of their concessions and puts a halt on activity. On Tuesday, Aurelian Resources Inc. (AUREF.PK) went ahead and laid off most of its workers.

Looking ahead, Haywood Securities analyst Eric Zaunscherb considers it a positive that the government is still pro-mining, and has reduced his probability of "total expropriation" of projects to 10% from 50%. As a result, he raised his target on Aurelian to C$3.60 to C$1.40.

However, he still thinks the political risk in Ecuador is extreme, and that any statements by the government should not be taken at face value since the constituent assembly, which passed the mandate, is clearly calling the shots (rather than President Rafael Correa).

In a note to clients Mr. Zaunscherb wrote:

We hope that this risk will diminish as the new mining law is drafted by the ministry, passed by the constituent assembly's resource committee, and passed by the citizens of Ecuador in a referendum. Unfortunately, we still see considerable risk that the fairy-tale ending will not materialize.

Tom Meyer, an analyst at Raymond James, has a more positive outlook. He expects a "reasonable" positive outcome in Ecuador in the next six months or so, and is assuming a 40% income tax rate and a 3% royalty will wind up in the minerals law.

In a note he wrote:

In our view, this is politics playing out in the press and although we are far from a certain outcome, as a whole we are constructive on the country based on our view that the potential for mining industry investment is too high for the voters and the politicians to ignore.

Mr. Meyer, who covers Corriente Resources Inc. (ETQ), has gone way against the grain and actually upgraded the stock to "outperform" from "market perform" and raised his price target to C$6.00 a share (from C$5.00). He maintained that Corriente is an attractive takeover target despite the uncertainty in Ecuador, and that a deal could occur in months, or potentially take a year or longer.

Comments

[jock]

There are differences between Ecuador and Venezuela:

1. Ecuador is poor, lacks VZ's oil, and needs economic development.
2. Pres. Correa has a Phd in economics from U. of Illinois, Urbana - while Chavez did not attend university, and had an entirely military career. Chavez thinks command and control; while Correa is critical of Wall St., he knows economics.
3. Extractive industries are controversial in Ecuador; although mining is new, Texaco and other oil companies caused major public health and environmental damage in Ecuador.

Sure, Correa has to ride herd on a raucus political process, but at the end of the day, I think western miners who can "dance with the music" will find happiness in Ecuador.