Kinross inks agreement in principle on Fruta del Norte

Kinross Gold (K-T, KGC-N) is finalizing a feasibility study on its Fruta del Norte project in southeastern Ecuador that will be completed before the end of the year and project costs and capital and operating costs are expected to exceed those outlined in a prefeasibility study by 25-30%, the company says.

But the good news is that the company has reached an agreement in principal with the government of Ecuador on key fiscal and legal parameters for the exploitation contract in what Kinross president and chief executive Tye Burt calls “an important milestone” for the development of the project.

The key terms of the agreement in principle include an obligation to keep the government’s share of economic benefits at a minimum of 52%; a sliding scale net smelter return royalty linked to the realized gold price, with a royalty of 5-8% based on the price of gold sold; advance royalties of $65 million credited against future royalty obligations and payable in two installments.

Under the agreement the corporate income tax rate is pegged at 22% with an additional profit-sharing contribution equal to 15% of earnings before tax. Of the 15% contribution, 12% will be paid to the state and 3% to employees.

The agreement in principal also includes a windfall profits tax in which the government would receive 70% of the excess of the realized gold price above an agreed base gold price. The base gold price is defined as the greater of US$1,650 per ounce and the spot gold price at the time the definitive exploitation agreement is signed. (The base price is indexed to the United States Consumer Price Index (CPI) on a monthly basis.) The windfall profits tax would be deductible for the purpose of calculating royalties, profit sharing contributions and corporate income taxes.

In addition Kinross will be exempt from customs duties on capital goods purchased during construction and will receive power from the national grid at an industrial customer rate, which currently works out to be 6.8 cents per kilowatt hour.

“To complete a binding agreement the company still needs a completed and approved feasibility study and a definitive exploitation and investment protection agreement,” Brian MacArthur, an analyst at UBS Investment Research, wrote in a note. “Applying a P/NAV multiple of 0.75x to our revised operating NAV (at $1,900/oz. gold) of $27.30 and adding non-gold assets of $3.23 we derive our price target of $24.00” MacArthur has a buy rating on the stock.

Over the last year Kinross has traded within a range of $12.59 per share and $19.67 per share. At presstime in Toronto the company was trading at $13.96 per share.