Newcrest takes 27% stake in Lundin Gold

Newcrest Mining (TSX: NCM), Australia’s largest-listed gold producer, is investing US$250 million for a 27.1% stake in Lundin Gold (TSX: LUG), a Canadian junior whose  Fruta del Norte gold mine under construction in southeastern Ecuador is expected to start production in the fourth quarter of 2019.

The investment is part of a $400-million private placement that includes Orion Mine Finance ($100 million at $5.25 per share) and the Lundin Family Trusts (US$50 million at $5.50 per share). Upon closing, the Lundin Family Trusts will own 22.3% of Lundin Gold and Orion, 11.4%.

Newcrest’s US$250-million investment (at $5.50 per share) gives it the right to appoint two members to Lundin Gold’s board of directors, and Orion has the right to appoint one board member.

In addition, Newcrest and Lundin have signed a binding agreement to form a joint venture to explore eight early-stage concessions the junior holds in Ecuador. Under the deal, Newcrest can earn up to a 50% interest by spending US$20 million over five years and will manage the exploration. The concessions exclude Lundin’s large block of concessions surrounding the Fruta del Norte project.

Newcrest’s equity investment and exploration farm-in marks its second big commitment to the country, as it already has a 14.54% stake in SolGold (TSX: SOLG; LON: SOLG), which owns 85% of the Cascabel project, a porphyry copper-gold deposit in northwestern Ecuador’s Imbabura province.

“Their investment is not only confirmation of the technical merits of Fruta del Norte, but also a further indication of Newcrest’s commitment to Ecuador,” Ron Hochstein, Lundin Gold’s president and CEO, said on a conference call. “With the exploration earn-in, the Lundin Gold team can focus on the concessions surrounding FDN, while Newcrest works the prospective concessions to the north and south of FDN.”

Sandeep Biswas, Newcrest’s managing director and CEO, said in a press release that Fruta del Norte’s epithermal orebody has many similarities with its Gosowong gold mine on Halmahera Island in Indonesia’s North Maluku province. He also noted that the equity investment in Lundin Gold “aligns with our aspiration of being exposed to five tier-one orebodies by 2020.”

The expanding Las Penas camp at Lundin Gold’s Fruta del Norte gold-silver project in Ecuador. Credit: Lundin Gold.

Newcrest, one of the world’s largest gold producers, has mines in four countries: Australia (Telfer and Cadia Valley); Papua New Guinea (Lihir); Côte d’Ivoire (Bonikro); and Indonesia (Gosowong).

“This transaction does more than just fund the development of our large, high-grade Fruta del Norte gold deposit,” Hochstein told analysts and investors on the conference call. “Through the private placement, we gain a strategic investor in Newcrest.”

A worker in a core storage facility at the Fruta del Norte project. Credit: Lundin Gold.

In fiscal 2017, Newcrest produced 2.38 million oz. gold and 84,000 tonnes copper at all-in sustaining costs of $787 per ounce.

The Australian miner’s growing investment in Ecuador comes at a time when recent political developments in the Andean nation have concerned some foreign investors, as well as local geologists in the country.

In late January, President Lenin Moreno accepted the resignation of Javier Cordova, the Minister of Mining, who had been in the post since February 2015, and replaced him with Rebeca Illescas Jimenez, Cordova’s previous deputy minister of mining. (The new minister has not responded to requests from The Northern Miner for comment or an interview.)

Cordova, appointed by the government of Ecuador’s former president, Rafael Correa, was known as a pro-mining advocate and a big supporter of mining investment as a way to diversify away from the government’s reliance on revenues from the oil and gas sector.

While some in the mining community interpreted his resignation as a negative sign, others saw it as a simple political move.

Cordova was one of — if not the last — minister from the previous administration left standing under President Moreno, who was elected last year, and many believed it was just a matter of time before he stepped down.

A national referendum on Feb. 4 also worried some investors.

While the key question on the ballot involved changing the Constitution to place term limits on the office of the presidency — motivated by Moreno’s wish to prevent Correa from ever running for another term as president — the referendum also included a question on whether the Constitution should be reformed to include the prohibition of mining in urban centres (and being added to the existing ban on mining in protected areas, mainly national parks) and “intangible” areas (such as the Amazon basin, where indigenous tribes have little to no contact with the modern world).

The answer to both questions was yes, and municipalities will now need to determine the limits of urban centres and the use of land within their jurisdictions.

Other recent changes under incoming president Moreno have included the temporary closure of the national mining cadastre, or the granting of new mining concessions, and the decision to eliminate a clause in the tax code that allowed mining companies to defer payment of windfall taxes for a period of four years.

Under the previous administration, mining companies didn’t have to pay the windfall tax for four years after they recouped their investments. Now that four-year deferral has been eliminated. (The 70% windfall tax is based on the 10-year average price of the metal, plus one standard deviation.) Christian Kargl-Simard, president and CEO of Adventus Zinc (TSXV: ADZN), which is earning a 75% interest in Salazar Resources’ Curipamba base metals project in west-central Ecuador, says in an interview that “closing the application process for new concessions is a negative step, but one that was likely required, because it was just getting too crazy.

“This application process was definitely overheated, with hundreds of millions of dollars of announcements of exploration dollars tied to new applications announced over the last year … modifications to the process are likely warranted. When companies are offering to spend $20 million or $50 million or more over four years on a concession that has seen little or no exploration, you start scratching your head.”

Workers assemble for a daily morning meeting at Lundin Gold’s Fruta del Norte gold project in Ecuador. Credit: Lundin Gold.

He also noted that while former mines minister Cordova “was instrumental in making many of the positive moves for mining in Ecuador” and “did a great job being transparent to the markets, and encouraging mining investment in the country,” he said it should be business as usual under Cordova’s successor. “Mining Minister Rebeca Illescas is very qualified — she follows on from Javier Cordova,” he says. “The new Ecuadorian government is trying to create its own democratic legacy.”

While the recent cancellation of the four-year deferral on the windfall tax payment is negative, he adds, the country has made several positive changes in its tax regime for miners since Lundin Gold acquired Fruta del Norte from Kinross Gold (TSX: K; NYSE: KGC) for US$240 million in December 2014. One such change has been the tax exemption relating to currency outflows and accelerated depreciation.

Other moves have been the refund of the value-added tax and including a mining company’s cost of capital and time value of money (including the exploration phase) in assessing what the sovereign adjustment should be. (The sovereign adjustment involves sharing a mining project’s overall economics between the mining company and the government).

“With these modifications, it has significantly improved the overall tax package and made Ecuador’s tax regime competitive with its neighbouring countries, like Peru and Chile, because now you have a 22% income tax rate with a 4–8% [commodity-dependant] royalty rate,” Kargl-Simard says in an interview. “All these tax changes have made Ecuador more competitive, hence more companies are going into the country.”

Kargl-Simard adds that in the case of Adventus Zinc’s Curipamba project, where it will spend US$25 million over the next five years, the net effect of the tax changes has been an improvement in the project’s rate of return, which he says has gone from 30% to over 40%, without changing any other inputs. He also points to Ecuador’s abundant and inexpensive electricity, which costs around 7¢ per kilowatt hour, making it one of the lowest rates in South America.

Workers underground in the K’isa decline at Lundin Gold’s Fruta del Norte gold-silver project in Ecuador. Credit: Lundin Gold.

“Ecuador is the place to be right now,” he says. “It has excellent rocks. It’s pro-mining, has relatively cheap power, reasonable infrastructure and a workable tax regime.”

He also emphasizes that while Ecuador has similar rocks to Peru, it does not have a single major mine in production yet (although three are in construction: Fruta del Norte and two Chinese-owned copper projects, Mirador and Rio Blanco. A fourth project owned by INV Metals [TSX: INV] called Loma Larga and Adventus-Salarzar’s Curipamba project could be next, he says).

“There is a lot of catch up that needs to be done to get to Peru’s level,” he says. “Ecuador is like Peru was more than 100 years ago. That’s why you’re seeing such a staking rush and discoveries such as what SolGold has found at Cascabel.”

News of Lundin Gold’s US$400-million equity financing and exploration farm-in with Newcrest raised the company’s shares by 19¢, or 3.4%, to $5.

“Lundin Gold has now raised US$1.08 billion for the project, and other than a US$75-million overrun facility, financing for the project is essentially complete,” Kerry Smith of Haywood Securities writes in a research note, after the financing was announced.

The mining analyst says he models a full year of production at Fruta del Norte in 2020, with annual gold production of 340,000 oz. at an average total cash cost of US$530 per oz. over a 16-year mine life.

Fruta del Norte has an indicated resource of 7.35 million oz. gold (23.8 million tonnes grading 9.61 grams gold per tonne) and an inferred resource of 2.13 million oz. gold (11.6 million tonnes grading 5.69 grams gold).

The deposit is within a 150 km, copper-gold, metallogenic sub-province in the Cordillera del Condor region, 139 km east–northeast of the city of Loja, the fourth-largest city in Ecuador.