QUITO, ECUADOR — Ecuador’s Minister of Mines, Javier Cordova, says his government is close to agreeing to fiscal terms with Lundin Gold (TSX: LUG) with respect to its Fruta del Norte gold project in the country’s southeast.
“We expect they will be in production by 2018, and we will get into an agreement with them by the end of this year,” Cordova told The Northern Miner in an exclusive interview at his office in the capital Quito.
Lundin Gold acquired Fruta del Norte from Kinross Gold (TSX: K; NYSE: KGC) in December 2014 for US$240 million. The project is one of the largest and highest-grade undeveloped gold projects in the world.
Cordova said it was important that Ecuadorian government close a deal with Lundin Gold to show the world that it is keen and ready to advance the mining sector, one of the country’s strategic sectors.
“I feel that investors in the mining industry are looking closely at Fruta del Norte — they want to know if that’s a project that we can make happen,” Cordova says. “It’s going to show that you can do mining in Ecuador, and of course, if we fail, that will be a negative signal. But we are positive. We’re working closely with Lundin, and we’re 100% confident that we will (agree to fiscal terms) by December.”
Kinross abandoned the project in 2013, saying it couldn’t make it work given Ecuador’s tax regime, and the hefty windfall profits tax. The company acquired Fruta del Norte through its US$1.2-billion acquisition of Aurelian Resources in 2008, and subsequently spent US$225 million on the asset.
The mining minister noted that one of the items that remain to be negotiated in the government’s stability agreement with Lundin is the amount of royalty the company must pay. Under the country’s mining code, royalties on large-scale mining projects (above 1,000 tonnes per day) fall in a range of 5–8%.
“I would say there are a couple of things that we’re working on [with Lundin]. Most important of course is the tariff for the royalty that we need to negotiate, but I would say that we’re really close, I don’t think that we’re going to have any surprises.”
The mining minister also said that Kinross erred by giving up too quickly on a project that he describes as “the best discovery in the last fifteen years.”
He says that “Kinross left for two reasons: one was their argument on taxation, but Kinross was also going through a difficult financial phase, and I believe they still are. It was a bad decision, but it was their decision, and I believe we’re going to prove that when we close an agreement with Lundin.”
Cordova added that in his view there were things that Kinross and the Ecuadorian government could have discussed and agreed on.
“They asked for changes to the law, the government was making the changes, and the changes that Kinross asked for were made to the law. Those were approved and we were making new tax incentives, and they decided to sell it.”
Cordova conceded that Ecuador hired consultants Wood Mackenzie in early 2014 to assess its taxation policies and identify ways that the country could attract investment in the mining sector.
“One of the main problems that they identified was that taxation was too high,” he recalls, adding that the consulting firm analyzed the Mirador copper project, and calculated that with royalties, revenue tax and value-added tax, the total tax rate came out to 35%, versus an average 27% for the region.
The finding led to changes in the mining code, with taxes coming down to the regional average, he said.
“President Rafael Correa approved some tax incentives, and they were implemented by the end of 2014, and that led us to being in the average for taxation in the region,” Cordova says.
The minister also noted that Ecuador has advantages that it can offer foreign mining companies, including fiscal stability agreements that are good for 15 years and renewable for another 15 years, low electricity and labour costs, prospective geology, ample water, five ports and good infrastructure.
Ecuador has invested billions of dollars in rebuilding more than 80% of all the highway infrastructure, he says.
Electricity costs in Ecuador — at US8¢ per kilowatt hour — are one-third the cost of what they are in Chile and Colombia, and half the cost of electricity in Peru, Cordova says, adding that they will stay low because the government is developing eight hydroelectric plants, bringing the total to nine. With the new ones in production next year, the country will have a surplus of electricity that it can then export to its neighbours.
“This is a country with a lot of potential for mining,” he says. “We are trying to be active internationally; we are trying to promote our country; we are trying to show investors that things have changed, that we have most of the things in place now and that Ecuador should be the next mining frontier.”