VANCOUVER — Kinross Gold (K-T, KGC-N) is walking away from its development-stage Fruta del Norte gold project in Ecuador, five years after spending just under $1 billion on Aurelian Resources to acquire the project, and two years after starting negotiations with the Ecuadorian government over how to share mine cash flow — negotiations that proved impossible.
Kinross says that, despite two years of dialogue, the company was simply unable to come to terms with the Ecuadorian government on “certain key economic and legal terms.” The company did not reveal any further details but talks had been hampered by Ecuador’s hard push for a 70% revenue-based windfall profits tax, something Kinross was no longer prepared to accept.
But Kinross was prepared to accept a US$720-million charge for dropping the project. Approximately US$700 million of the charge will be non-cash, reflecting Fruta del Norte’s net carrying value. The other US$20 million represents accrued severances and closure costs. The charges will be applied to Kinross’ second quarter.
“We have said that we will exert strict capital discipline across our company, that we will allocate our capital only to projects which meet our investment criteria and that we will only enter into agreements that are in the best interests of the company and its shareholders,” said Kinross CEO J. Paul Rollinson in a press release. “It is unfortunate that the parties were unable to reach an agreement on Fruta del Norte which would have met those criteria. That said, we respect the government of Ecuador’s sovereign authority and its right to determine how its resources are developed.”
The clock was ticking on the Fruta del Norte development negotiations: the project’s economic evaluation phase was drawing to a close, and if Aug. 1 passed without a deal, the main La Zarza concession — which contains the entire 10-million oz. Fruta del Norte gold resource — would have reverted to the government.
Ecuadorian law usually permits an extension of the economic evaluation phase or a suspension between the evaluation and exploitation phases, either of which would have allowed the parties to keep talking, but Kinross said the government would not support an extension or suspension for Fruta del Norte. The government had also told Kinross it would not support any possible sale of the project.
As such it seems Kinross had little choice but to walk away from Fruta, a project that was supposed to churn out 6.3 million oz. gold and 6.8 million oz. silver over 16 years.
“Sometimes the best deal is the one you don’t sign,” Rollison said to Reuters. It’s a comment that rings true, as Kinross had reached a point where the company could either walk away or agree to a development deal it did not believe would provide sufficient return on investment.
Return on investment has taken over as the gold sector’s primary focus after a spell of overpriced acquisitions aimed at achieving growth for the sake of growth left many gold majors burdened with capital-intensive projects offering marginal economics.
Kinross itself has already written US$5.5 billion off the value of its Tasiast gold mine in Mauritania and its Chirano gold mine in Ghana, both of which it acquired in the company’s $7.1-billion takeover of Redback Mining in 2007.
Kinross’ departure is also a blow to Ecuador, where the government is drafting a new mining law intended to encourage investment.
Kinross’ shares plummeted 6% on the news, reversing a rally underway since mid-May. Shares traded at $6.01 at press time, for a $6.9-billion market capitalization, but have fallen 38% this year.
In the recent past many mining companies have ignored political risk, to their later regret. Ecuador is a little like British Columbia in that there are two fairly evenly matched but very different political forces. Unfortunately, in the last election the wrong group won in Ecuador. Looking forward it would not be surprising to see a company from Mainland China taking over the project.