In a series of three brilliant financial maneuvers, two completed and one in progress, Ecuador’s new Regime plans to pull off one of the greatest economic comeback’s in modern history.
President Moreno Plans Set to Propel the Country and Its Citizens to It’s Rightful Place Among the World’s Most Prosperous Nation’s.
Ecuador’s Government Opens the Country to the World’s Top Miners to Explore its Huge Unexplored Deposits of Gold, Copper, and Silver. The World’s Last Unexplored Resource Rich Country.
“It doesn’t do anyone much good just sitting there underground as it has for millions of years and largely untouched by miners since the 16th Century (starting in 1501). We cannot be beggars sitting on a sack of gold.” Juan Carlos Estaban – local miner.
Ecuador’s new President (inaugurated in May of 2017) Lenin Moreno along with his hand-picked Ministry of Mining’s Rebecca Illescas (Feb 2018) plan to deep-six the Countries deficit problems by freeing up its massive natural resources.
Official Data Suggests in the Northern region alone of Ecuador that in addition to some of the world’s largest Cooper deposits, that there are estimates 23 million ounces of gold – worth some $32 billion at today’s prices which miners can unearth – giving the country an ongoing source of tax revenues – potentially lasting 49-66 years and thousands of jobs for its citizenry.
Brilliant Move #1.
Not too many years ago, Ecuador tricked its lenders into thinking it was going to default on its debt. It told banks and investors that it didn’t think it would be able to repay about $3 billion in bonds. Those bonds, as you would expect, plunged in value to about $0.30 for every dollar Ecuador had borrowed.
Once the bonds plunged in value, Ecuador started buying them, eventually snapping up 90% of the much cheaper bonds. The move wiped out the debt and saved the country nearly $2 billion, which was also how much the banks and investors lost on those bonds.
This was no banana republic (or Greece) being taken advantage of and fleeced by Wall Street sharks. Turning the tables, Ecuador was operating like a Connecticut based hedge fund itself!
This was a great trade for any country. Unless, of course, it ever wanted to borrow again. Or face dealing with the poorly structured loans made with China (like many countries have) by the previous administration – which Ecuador had.
Brilliant Move #2.
To buy time with China, in June of 2014 – Ecuador’s financial engineers went knocking on the doors of Goldman Sachs with a deal they couldn’t refuse.
“Let’s swap 466,000 ounces of gold or 1,165 gold bars, worth about $580 million.” when gold around $1,240 an ounce they said. Goldman, in return, gave the Ecuadorians “instruments of high security and liquidity,” which was likely cash (they hoped) or something close to it.
And Ecuador got to keep its gold (nearly half the countries gold). As part of the deal, three years from the swap, the two would reverse the swap. Ecuador would get its gold back. And Goldman would get the going price for 1,165 yellow bars in 2017. Sounds simple right?
BRILLIANTLY (OR LUCKILY) THINGS TURNED OUT JUST RIGHT!
The Ecuadorian central bank said in a statement, “Gold that was not generating any returns in vaults, causing storage costs, now becomes a productive asset that will generate profits.” Well alrighty then! Plus while in reality desperate for cash ($5 billion deficit that year), the swap didn’t make them seem like they were desperate for it, a good thing. Pure genius, in fact.
Of course if gold went back to $1,800 an ounce, Ecuador would have had to pay $838 million to get their gold back. As in yikes! But like a talented hedge fund, they also knew if gold fell to $400 an ounce (where gold was 10 years earlier), they could have got it back for $186 million, a potentially massive payday.
And of course, Goldman presumably hedged themselves, to minimize damage regardless of the outcome – meaning a potential a win-win situation, versus the more typical Goldman, all in – win all.
And while gold did trade to as low as $1,061 post swap by the following November – things were essentially a Las Vegas ‘push’ when the swap safely unwound.
The biggest curiosity (ours), in hindsight, is wondering if guys on Ecuador’s Banco Central’s trading desk were betting the news of the swap would send gold prices lower – pushing the trade into a profit right from the get-go. In fact, after news of the swap spread, money managers cut their net-long position, or bets on higher gold prices, by 24 percent and short holdings, or bets on a gold-price decrease, surged 72 percent.
But alas, the $200 per ounce downward spiral in gold didn’t last (see chart above) so we’ll never know.
Brilliant Move #3.
While the first two moves in the past decade demonstrate to us the internal financial acumen of Ecuador, the third move – implemented by the new regime is nothing short of a Coup de Grâce and a model for all natural resource-rich Countries to replicate for the benefit of their citizens.
A countries citizens should first and foremost benefit from what lies below the land they walk on a daily basis. Whether it is oil & gas, precious metals, coal, deep-sea Mexican Phosphate (long story there) and even resort-like tropical sands like in Cancun, where tourists spend money – which improves the locals’ lifestyle including roads, health, education, and jobs.
While Ecuadorian Government obviously had nothing to do with the creation of precious metals (that was the job of Volcanoes millions of years ago) it was two strokes of Lenin Moreno’s pen which may forever (50-100 years) change the lives of Ecuadorians for the better!
STROKE OF PEN #1.
In the ten years prior to Moreno’s arrival in between 2010-2017, former leftist President Rafael Correa (a close ally of Venezuela’s socialist, anti-U.S. President Hugo Chavez) and onetime ally but now a bitter enemy of Moreno, like a number of other Latin American countries (Panama, Costa Rica, Argentina), Ecuador got into a game of Three-card Monte with China and issuing debt. $6.5 billion worth – as well as an agreement to ship 90% of all its exportable crude to them through 2024 – as in Chinese check and mate.
Correa saw Chinese loans as attractive (for roads, dams, schools and office buildings) because their Chinese friends made no political or ideological demands, and the loans were a way of thumbing his nose at Uncle Sam, analysts said at the time.
Despite minimal mining during the past century – President Rafael Correa decided he would ‘allow’ big mining – if it brought billions in revenues to state coffers. Why not have the mining industry pay for his past mistakes?
So around 2009 Correa added to the statute book a windfall tariff, sought to levy a 70% tax on the difference between the sale price and baseline pricing. And that was pretty much the end of that ‘hail mary’ plan.
After the statue was fully implemented (along with a mining moratorium) in 2013, Kinross Gold (TSX: K) walked away from the negotiating table after two years of fruitless talks with the Correa’s government over the investment conditions for the Fruta del Norte (FDN) project, one of Latin America’s biggest undeveloped gold deposits.
Kinross took a royal beating and sold the construction-ready FDN in 2014 for US$240 million, close to a quarter of what it paid to acquire the project in 2008. Ouch, para follarte a ti mismo .
IAMGOLD (TSX: IMG) also sold its Loma Larga project and left the country, and shortly afterward, International Minerals sold its Río Blanco gold project and also said buh bye.
From that point on, no board of any publicly traded company would put up any proposal to vote to invest any money exploring Ecuador. No matter how much gold, copper or silver might lie below. World class deposit recommended by a world-class engineer, NO GRACIAS!.
You can probably guess by now, the Stroke of the Pen #1, was to abolish the 70% levy which Moreno did shortly after taking office (around August 2018). Much harder said than done. But done it was.
Henry Troya, Vice-Minister of Energy and Non-Renewable Resources, Government of Ecuador, said “The windfall tax for extraordinary earnings was our Achilles Heel since it was established by the Correa administration in 2009. President Moreno finally decided to eliminate it. This move has been very well received by the industry.” To put it lightly. From discussions with top mining executives, Ecuador now counts $3.7 billion in mining investments headed its way in the next two years alone. Woot!
Along with that, (importantly for stock market investors in the Senior and Junior minors in the area) it was announced that mining concession holders could drill during the 4-year initial exploration phase through a simplified permitting process.
Previously, drilling was only permitted during the advanced exploration phase. This is positive news for the Ecuadorian mining industry as it is likely to significantly increase the identification of mineral deposits within the initial exploration phase.
Stroke of the Pen #2 was appointing Rebecca Illescas to head the country’s mining ministry after her predecessor mysteriously resigned (some say in a ‘drain the swamp’ move) days before a key referendum on issues including mining and the environment.
The referendum was put forth by citizens who supported the end of the metal mining activity without exception in all its stages, in areas protected, intangible zones and urban centers. (wrong administration folks).
Illescas, a lawyer who was previously deputy mining minister, replaced Javier Córdova, a close ally of former President Rafael Correa.
On the same page as Moreno, shortly after taking office Illescas was widely quoted in the press as “hoping to to persuade the government of President Lenin Moreno to abolish the windfall profits tax.” That must have been hard!
The rest as they say is history in the making.
Ecuador’s decision to wait 50 years until 2018 to start drilling again; is either one of the most brilliant moves or strokes of luck in the history of modern Government!
Official Data Suggests in the Northern region alone of Ecuador that in addition to some of the world’s largest Cooper deposits, that there are estimates 23 million ounces of gold – worth some $32 billion at today’s prices. Consider the potential affect of rising gold prices:
- @ $1,400 OZ = $32 Billion
- @ $2,400 OZ = $55 Billion
- @ $3,400 OZ = $78 Billion
- @ $4,400 OZ = $101 Billion (Equal to GDP from all sources)
- @ $5,400 OZ = $124 Billion
- @ $6,400 OZ = $147 Billion
- @ $7,400 OZ = $170 Billion
- @ $8,400 OZ = $193 Billion
- @ $9,400 OZ = $116 Billion
- @ $10,000 OZ = $139 Billion
To put this into perspective, note that Ecuador only has 16 million residents (a tad bigger than the State of Pennsylvania) and a GDP of $103 billion with the majority (40%) coming from Oil as an OPEC member. Followed by $3.1 billion in bananas, $3 billion in shrimp and $846 million in cut flowers.
RELATED, second related link because this is really a great report for investors interested in public companies exploring in Ecuador: Special Report: Coming Gold Rush in Ecuador.