The Republic of the Equator

South America is lush, beautiful and has an incredible history. In its heart – right at the equator – is Ecuador, is a small country with 16.8 million people the “Republic of the Equator”, which gained independence from Spain in 1830.

A major milestone in Ecuador’s future was set in January 2000 when President Jamil Mahuad’s announced he would peg the currency to the U.S. dollar, eventually making the greenback the national currency. This was a bold move as many in South America want to try and go their own way without the intervention of major powers. Perhaps this is naïve, but I still applaud any country that fights to support its own people before the interest of a global superpower. Ecuador is a resource-rich country that mining companies are excited about. Mining companies develop infrastructure, schools, hospitals, ports, power systems and huge sums of money that often go to local and federal governments to administer.

The country is an oil and gas country. It is resource based, but struggles with the balance of economy, the future and the loss of beautiful jungle habitat. Under the Ecuadorian constitution, the state has the right to extract minerals regardless of whose land they are located under, according to the constitution and Ecuador’s national mining plan. However, projects in protected forests are subject to strict environmental standards. I am someone deeply concerned with the environment, and like many want strict guidelines for environmental safety in these regions.

Today Ecuador’s economic freedom score is 46.9, making its economy the 170th freest in the 2019 Index. The country remains underdeveloped, but the wheels of history are turning. The 2019 Index of economic freedoms reported that ‘about 57 percent of adult Ecuadorians have access to an account with a formal banking institution.’ It is a tough situation to expect and ask a country to remain behind. Ecuador’s best chance to catch up is through developing its natural resources – a plan the national government is solidly behind.

The 2018-2020 Country Prosperity Plan recognizes that Ecuador’s economy still does not “enjoy good health”. The plan calls for stimulating private investment to which will also enable continued poverty reduction and protect the country from oil price fluctuations. This strategy has resulted in GDP growth averaged 4.3 percent between 2006 and 2014, primarily driven by high oil prices and substantial external financing. Most economists recognize that foreign investment becomes attractive if a country is pegged to the US dollar. This stimulus enabled increased social spending and important investments, especially in the energy and transportation sectors. During that period, poverty declined from 37.6 percent to 22.5 percent. This boom helped Ecuador experience a period of growth and significant poverty reduction.

The IMF

Ecuador suffered a devastating earthquake on April 16, 2016 that killed 146 and injured 16,000 while estimated costs were determined to be $3 billion. In response, the IMF approved a $4.2 billion fund towards building the economy—not just along the incredible resources it has but also to fight corruption, and rural communities. The loan has four objectives: boost competitiveness and jobs; promote fiscal sustainability, dollarization and financial sector resilience; protect the poor and fight corruption. The deal is part of a larger arrangement that includes an additional $6.0 billion in loans from other multilateral lenders also to be disbursed over the next three years.

The IMF has been historically unpopular in the country and President Moreno’s popularity has fallen due largely to the weak economy. The next presidential and legislative elections are not until February 2021 allowing government time to implement reforms to achieve further fiscal consolidation. The handing-over of Julian Assange should render some good favor by the US, the IMF and World Bank as Moreno looks to build a relationship with Trump. It will be interesting to see what develops, but this new twist makes me favor the bullish case.

Mining

When we consider mining in particular, two of Ecuador’s five mines in development are on track to start producing copper and gold in the fourth quarter of 2019. Those two mines are Lundin Gold’s Fruta del Norte and Tongling Nonferrous Metals Group has a 70 percent stake in the Mirador copper project. Wood Mackenzie produced an excellent report on Mirador, a huge project and the first large scale open pit mine. The project is in Zamora Chinchipe province, had construction started in 2015 and expecting production by Q1 2020.

The OPEC nation, which has struggled with low oil prices in recent years, has been drumming up foreign investment for its large mining deposits. Ecuador aims to more than double the value of mining to its cash-strapped economy by 2021. The Deputy Mining Minister Fernando Benalcazar still expects that mining exports will rise to $3.66 billion in 2021 from $270 million in 2018. “Ecuador’s economic future is based in mining,” Benalcazar said. “We’re not a potential destination anymore; we’re the country where any large-scale mining company needs to be.” The goal is to experience the same type of growth as neighboring Chile and Peru, the world’s two largest copper producers. As another endorsement, and a large step forward, Codelco, biggest copper miner in the world choose Ecuador over Chile to invest in. Dundee Precious Metals Inc. stated that it will begin investing in Ecuador through junior miners already operating in the country, as well as Barrick Gold Corp. It is clear there are many that see the potential for growth and investment, but it is not only having the government on your side, it is necessary to have the people on your side. The obvious concern is that the money mining companies hand over in concessions may show little social benefits.

Canadian miner Luminex Resources announced that Anglo American Plc signed an earn-in joint venture agreement on three exploration projects. It also boosted that ‘BHP Group, the world’s biggest miner, has agreed to invest about $75 million exploring for copper’. BHP wants to increase its exposure the metal and has targeted Ecuador as a key jurisdiction for that growth.

Lucky Minerals, The Fortuna Project

The final consideration is this 550 km2 property in the heart of a ‘proven, highly mineralized mineral district’ in Ecuador. This land package has seen limited exploration and has never been drilled but is close deposits only 40km away. This junior is a steal at .10 but may have incredible upside potential.

There is evidence of geochemical anomalies and a number of other indicators similar to a number of gold and copper deposits only 40km away. I am going to a deeper into Lucky Minerals’ in the next weeks since the company was brought to my attention.

Overall, we should expect growth in Ecuador. There is an enormous potential in this country. The country could shift to mining which is the foundation of all green/clean technology. Being pegged with the US dollar, working with the World Bank and now with the US indirectly means opportunity. President Moreno is making investing in this resource rich country possible, and even attractive. We should expect to see majors using joint ventures with already established companies and juniors that have established contacts and a foothold in the country to shine. The biggest takeaway is that along with being speculative in its sector risk, the political risk is also a major consideration but that can also be the incredible multiplier in potential return.

Securities Disclosure: I, Andrew O’Donnell, hold no direct investment interest in any company mentioned in this article. Also I was not paid for this article

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