While Haywood Securities admitted Wednesday, Like everyone, we continue to be in the dark on exactly how the future will unfold in Ecuador,  metals analyst Eric Zaunscherb noted, Overall, we continue to see significant risk to investors exposed to Ecuador.

But we also sense that the outlook is improving as pieces fall into place, he declared.

In a review of Aurelian Resources (TSX: ARU) released Wednesday, Haywood assessed the key points of Ecuador's Constituent Assembly's Mining Mandate including:

·         Revocation of exploration and mining concessions where investment has not been made as of December 31, 2007; environmental impact studies are not current; royalties and taxes are unpaid; mining concessions are within protected natural areas, forests and protective buffer zones; of those affecting source of water. All revocations are without any financial compensation.

·         Revocation of mining concessions where greater than three have been granted to a single entity or affiliated parties.

·         Immediately suspend all metallic mining activities on concessions that remain until the adoption of a new legal framework to regulate the activity. Single concession metallic operations are excluded from the moratorium.

·         Small-scale, artisanal and subsistence mining activities are not suspended as long as they are not within protected natural areas, forests and protective buffer zones, or those affecting sources of water.

·         Commits to complete the new Mining Law within 180 days of the enactment of the proposal or by October 15, 2008.

·         Creates a national mining company under the auspices of the Ministry of Mines and Petroleum.

·         Provisions are binding. There will be no ‘complaints, challenges, administrative or judicial actions, demands, claims, or appeals. Nor does it give rise to any compensation.

·         The decree is in force effective the date of its enactment.

Zaunscherb noted that most of the concessions that have been revoked involve non-payment of fees and other non-compliance. To date there have been no revocations under the three concession limit and no high profit foreign companies' concessions, including those of Aurelian, have been revoked. It would appear that the Ministry is being ‘diplomatically selective' in which concessions it revokes.

In his analysis, Zaunscherb also highlighted statements from Minister of Mines and Petroleum Galo Chiriboga this week discussing the new mining law that is being drafted. Key points include:

·         Chilean consultants have been advising the Ministry on effective mining policies and industry practices. Among the important results, it would appear the three concession limit will be adjusted higher, according to Zaunscherb.

·         An initial draft indicates a government royalty of 5% for large mines, which would likely be in addition to the windfall tax levied by the Ministry of Revenue.

·         Protection of the environment and ensuring that local communities economically benefit from mining operations are two key objectives. Regulations to protect water sources and courses are being fleshed out.

·         Consultation with mining companies is expected to continue until June 17 with a formal review of the draft mining law to be presented to President Rafael Correa on June 22 and publication of the draft on June 27. An international road show by senior Ministry officials is expected to follow to sell the merits of investment in Ecuador's mining sector.

Haywood Securities raised other concerns about the new draft mining law to be enacted by the Constituent Assembly including:

·         The Constituent Assembly is very busy drafting Ecuador's new constitution. The document would be submitted to voters in the fall and many members would like to submit the question of large-scale mining, particularly in sensitive areas, to referendum as well.

·         No one seems to know what will happen when the Constituent Assembly's [mining] mandate expires. ...The government may wish to delay submitting the draft mining law for ratification by the Constituent Assembly until it is too late, leaving promulgation to a stacked and compliant Congressillo [a small interim governing body to rule the country]. On the other hand, the Constituent Assembly may attempt to stack and neuter the Congressillo itself, preventing the passing of new laws until a new government is formed after elections in the spring of 2009. The latter could leave mining exploration and development in Ecuador in limbo for some time.

·         Market observers suggest that a ‘back to work order', allowing some mining companies to resume work may be imminent. While a potentially positive market catalyst, we do not believe this to be likely. ...Regardless, earth scientists, exploration drills and crews are leaving Ecuador for more favorable pastures suggesting a lag in time from ‘green light' to action.


Despite the quagmire surrounding mining policy and regulation in Ecuador, Zaunscherb expressed enormous respect for the management of Aurelian and their accomplishment in making one of the most important gold discoveries of the decade. We believe that the company has the technical and financial horsepower to advance Fruta del Norte [gold-silver project] towards production.

Given the world-class nature of Fruta del Norte, it is highly likely that Aurelian will become an acquisition target once ownership and the ground rules of taxation and operation are clarified, he advised.

Haywood has modeled a potential resource of 18.3 million ounces of gold at Fruta del Norte in southeastern Ecuador.  Our new price target of $4.90 increased from $3.60 reflects a moderate but still significant view of the risk created by Ecuador's Constituent Assembly.

The project's rating are been revised to SECTOR PERFORM from SECTOR/UNDERPERFORM based on what Haywood considered to be reduced risk. Haywood has reversed its view recommending reducing positions in Aurelian. The new target and rating allow for risk tolerant accounts to hold positions or begin accumulation on further weakness, according to Zaunscherb.

The blended target reflect a 95% probability that Aurelian will retain a significant interest in Fruta del Norte as Ecuador's new mining law evolves, he asserted.

Nevertheless, Haywood rated financial risk, forecast risk, political risk and valuation risk, all as high.