Lundin Gold tax fight tests Ecuador mining rules

Ecuador’s $154-million (C$215-million) tax assessment against Lundin Gold (TSX: LUG; US-OTC: LUGDF) has opened a dispute over how the country calculates the state’s share of mining benefits.

The country’s Internal Revenue Service, known as the SRI, assessed Lundin Gold for the 2023 fiscal year under Ecuador’s sovereign adjustment mechanism. The proposed payment consists of $73 million plus $81 million in potential fines and penalties, excluding interest, the Vancouver-based miner said.

“Based on our review, we believe the assessment results from a misinterpretation of the calculation methodology set out in our Exploitation Agreement,” president and CEO Jamie Beck said in a statement. “We remain confident in our interpretation and will take the appropriate steps to escalate this issue to protect our rights under our agreements.”

The dispute centres on Fruta del Norte, one of the world’s highest-grade operating gold mines, and the fiscal framework established between Lundin Gold and Ecuador before the mine was developed.

The sovereign adjustment is designed to ensure the government receives at least half of the cumulative benefits generated by the operation, with Lundin required to make an annual payment if the state’s share falls below that threshold.

50% threshold

Under Fruta del Norte’s Exploitation Agreement, Ecuador’s share of cumulative benefits from the mine cannot fall below 50%.

The company’s benefits are calculated using the net present value of Fruta del Norte’s actual cumulative free cash flows since its inception. Ecuador’s benefits include the present value of corporate income taxes, royalties, state labour profit sharing, non-recoverable value-added tax and previous sovereign adjustment payments.

The framework grew out of fiscal terms negotiated between Lundin and Ecuador as the company moved towards developing Fruta del Norte.

The mine is also subject to a 22% corporate income tax rate, a 5% net smelter return royalty net of advance royalty payments and state profit sharing equal to 12% of taxable profits, along with payroll, withholding and other statutory charges.

The assessment comes as Ecuador seeks to attract more mining investment. The country has significant gold and copper potential but has also faced permitting, community and political challenges as it tries to expand its relatively young mining industry.

Operations continue

Lundin Gold maintains that the SRI’s assessment does not conform with the calculation methodology established under its agreements with Ecuador and plans to challenge the determination through the appropriate channels.

The Exploitation Agreement and Investment Protection Agreement together establish the fiscal, legal, tax and dispute-resolution framework governing Fruta del Norte.

The disagreement has had no operational impact so far. Fruta del Norte continues to operate normally, Lundin Gold said, and the assessment does not affect its existing guidance, exploration and expansion plans or capital-return strategy.