Iamgold not “bailing” on Ecuador

Headlines in the mainstream media that Iamgold (IMT-T) is giving up on Ecuador are fundamentally incorrect, Candace MacGibbon, president and chief financial officer of junior explorer INV Metals (INV-T), told The Northern Miner.

INV Metals announced a deal on June 21 to buy a property in the Andean nation from Iamgold in a transaction that would give the mid-tier gold mining company a 40-45% stake in the junior.

“They’re not bailing on Ecuador—they’re going to be our largest shareholder,” MacGibbon said. “They’re essentially transferring the permitting and exploitation contracts to another management team.”

That seasoned management team includes among others, INV Metal’s director Terry MacGibbon, who as chairman of Quadra FNX Mining oversaw its friendly takeover by Poland’s KGHM earlier this year.

“Terry has done this before, our other directors have done this before, it’s a forte, so Iamgold is partnering with us, rather than bailing on Ecuador,” MacGibbon continued.

Under the proposed deal Iamgold will receive 150 million shares—or between 40% and 45%—of INV Metals in a transaction worth about $16.5 million based on the junior’s closing share price on June 20. The acquisition is subject to INV Metals raising $20 million in an equity offering priced at 20¢ a share—bringing the total value of the deal to about $30 million (based on 150 million shares issued to Iamgold multiplied by the assumed equity financing price).

Iamgold will also receive milestone payments of $5 million worth of INV shares once the junior signs an exploitation contract with the Ecuadorian government and another $2.5 million worth of shares once the project reaches commercial production.

The Quimsacocha project brings with it an attractive indicated resource of 3.3 million ounces of gold, but its location in Ecuador makes it less appealing to some. The South American nation was recently ranked among the world’s worst jurisdictions for mining investments in the Fraser Institute’s annual survey of mining companies—along with Vietnam, Indonesia, Kyrgyzstan, the Philippines, India, Venezuela, Bolivia, Guatemala and Honduras. Iamgold suspended fieldwork at Quimsacocha in 2009.

A day after the proposed transaction was announced, MiningWatch Canada put out a press release quoting Carlos Perez, president of the Union of Community Water Systems of the province of Azuay, stating that Iamgold was stepping back from the project not just for economic reasons but because it had encountered eight years of opposition to the project from local rural communities.

“This company has not obtained the consent of affected communities to carry out this project, because we recognize that our sources of water are going to be irreparably affected if mining takes place in this area,” Perez claimed. The indigenous leader also said that in October 2011, water users in the communities of Victoria del Portete and Tarqui participated in a local plebiscite in which 92% voted against mining in the area of Quimsacocha.

The MiningWatch Canada press release also quoted Abel Arpi, representative of the Assembly of the Peoples of the South in Defense of Nature, who urged INV Metals to think twice about acquiring the project. “This junior mining company, INV Metals, that is considering buying the Quimsacocha project, would be better off saving its time and money because we are committed to protecting this entire area for future generations.”

In the company’s announcement of the deal, Terry MacGibbon noted that INV Metals’ management had met with senior government officials in Ecuador and “are confident that the President and his government are very supportive of the development” of the project. 

“The form of Ecuadorian exploitation contracts has been mandated by the government and all new mine developments will be individually negotiated within that format to produce property specific exploitation contracts that will allow development and mining,” he continued in prepared remarks. “The company believes that the economics of the project have potential to prove to be positive within the current Ecuadorian fiscal regime. All of the relevant permits are in place to allow for the commencement of advanced exploration on the property immediately following the closing of the acquisition.”

Karen Hooper, a Latin American analyst at geopolitical analysis firm Stratfor, says that in Ecuador, as in all Andean nations, clashes between indigenous populations and foreign investors are not uncommon. In some cases, local communities are concerned about the impact mining or other projects may have on the environment, and in others, it sometimes can boil down to a view that foreign companies are competing with local groups to exploit natural resources.

“It’s a balancing game—the key is to get domestic local buy in and have relationships at the top,” she says. “Knowing who to know is always the first question you should ask yourself before you go into any Latin American country.”

The key to Ecuador and to any state like it with a lot of natural resources, poor infrastructure and poor distribution of wealth, she adds, is that it is a rent-seeking nation that wants to make money from what resources they have, and to encourage foreign investment. “Ecuador is reliant on foreign capital and technology to develop its own resources, so there is a significant incentive to avoid alienating investors.”

The Austin, Texas-based analyst also points out that mining is not unimportant in Ecuador but only makes up about US$200 million of the country’s annual exports and does not even rank in the nation’s top five export industries, the most important of which is oil.  

 As for President Rafael Correa, who foreign news agencies often describe as a “friend of Venezuela’s Hugo Chavez” and an “outspoken critic of U.S. foreign policy,” he has actually been fairly friendly to foreign investment, Hooper says.   

“One of the things that is interesting about Correa is that he doesn’t really fit any of the moulds,” Hooper explains. “He’s not a leftist leader, and isn’t a pro-business, U.S.-friendly kind of guy either. Overall he has created a fairly friendly investment climate, although there are going to be ad-hoc challenges to anyone who wants to work there.”

 “With Correa coming into the presidency we’ve actually seen one of the most stable periods in the country’s recent history,” she continues. “What’s been surprising is that he has been such a successful leader. He’s not in with the elites, he is out of left wing if you will. He’s not adhering to any particular ideology … he rewrote the Constitution, he’s outlasted his predecessors and he appears to be hanging on to things despite ongoing conflicts with several sectors of society, including the press.”

Quimsacocha, about 30 km southwest of Cuenca, Ecuador’s third-largest city, is a high-sulphidation epithermal gold-copper-silver deposit with a high-grade core surrounded by a lower grade shell within Upper Miocene volcanic flows and volcaniclastics.

Both indicated and inferred resources have high-grade zones that contain the majority of the gold resource and INV says it is considering both open-pit and underground mining scenarios.

Indicated resources currently stand at 32.6 million tonnes grading 3.2 grams gold per tonne for 3.3 million ounces of contained gold, 22 grams silver per tonne for 22.7 million ounces of contained silver, and 0.20% copper for 143.1 million pounds of copper.

Inferred resources add 2.3 million tonnes grading 2.2 grams gold for 0.2 million ounces of gold, 27 grams silver for 2 million ounces of silver, and 0.22% copper for 11.2 million pounds of copper.

The resource estimate was based on a 0.4 gram gold cut-off grade and a long-term gold price of US$1,500 per oz., a silver price of US$26 per oz., and a copper price of US$3.50 per lb.

The mineralized zone hosting the resource has a strike length north-south of about 1,600 metres by 120 metres to 400 metres east-west and up to 60 metres thick beginning from about 120 metres below surface.

Quimsacocha’s alteration footprint covers an area of roughly 12 km by 6 km, the company says, noting that epithermal gold deposits similar to the Quimsacocha deposit “tend to cluster within large alteration zones, and are also frequently associated with porphyry copper-gold type deposits.”

INV has earmarked $15 million for exploration over 18 months.

For MacGibbon’s part, she is eager to continue Iamgold’s social programs in the area of Quimsacocha, and after a trip to the site came away with the view that many locals want the project to go ahead.  “We visited the project and the locals in the area where the project is and they were quite keen on having jobs and the investment,” she says. “There are always people looking for [negative] headlines, but we’re confident that Iamgold has done a good job in the area and we will continue doing that and whatever issues they have we’ll hopefully reach a resolution on.”

The United Nations was the first to carry out exploration in the area in the late 1970s. Cogema acquired the property in 1991 and in 1993 entered into an exploration joint-venture with Newmont Mining (NEM-T, NEM-N) and TVX Gold. Iamgold acquired the project in 1999 and started drilling in 2003. It discovered Quimsacocha a year later when drilling returned an intercept of 102 metres averaging 9.1 grams gold, 46.9 grams silver and 0.4% copper.

Iamgold drilled 74,625 metres in total and completed a pre-feasibility study in 2008, but no significant exploration work has been conducted on the property since then.