TORONTO (miningweekly.com) – Canada’s Kinross Gold is squaring up for tough negotiations with the Ecuador government, as the company seeks to get a sweeter tax and royalties deal for the mine it hopes to build there than the one it initially agreed to in December.

CEO Tye Burt told investors on a Thursday conference call that the company simply will not go ahead with the $1.2-billion-plus FDN project unless Quito agrees to fewer economic benefits from the operation.

Ecuador Energy Minister Wilson Pastor wasted no time in responding, warning the company that its demands were “a bit over the top”.

“It's possible we may not sign a contract with Kinross,” Reuters quoted Pastor as saying.

Kinross and the government reached an agreement in principle in December, which gave the State at least a 52% share of the project’s economic benefits, made up by tax, royalties, profit sharing and a windfall tax. If metals prices breached certain thresholds, even more of the mine’s profits would go to the fiscus.

The Toronto-based miner fell out of favour with investors after saying in January it would have to write down some of the book value of its Tasiast project in Mauritania, with its shares shedding over one-fifth of their value on the day it made the announcement.

It also said that soaring capital costs had prompted what it called a “capital optimisation process”, meaning lengthy delays to at least some of its biggest projects, including FDN and Tasiast.

Burt said on Thursday, Tasiast – which the company bought through its much-criticised $7.1-billion buyout of Redback Mining in 2010 – remained the company’s top priority. He stressed this a number of times throughout the call to drive the point home, calling the operation “the cornerstone asset in our growth strategy”.

FDN and Lobo-Marte, in Chile, however, will get pushed back as Tasiast absorbs a greater share of Kinross’ capital spending.

When Canada’s third-biggest gold miner announced the preliminary investment agreement at FDN, it raised a number of eyebrows, with investors worrying that it could set a new norm for the industry – where governments get a greater share of the profits than the companies building the mines.

Ernst & Young last year flagged resource nationalism as the mining industry’s biggest threat, backing up earlier remarks from Xstrata CEO Mick Davis. Soaring metals prices and debts rising just as fast have prompted governments around the world to seek larger pieces of the extractive sector pie.

Announcing the agreement in principal with the Ecuador government, Burt said it “represents an important milestone in the development of FDN”, but stopped short of praising the proposed terms.

Jeffries analyst Peter Ward in a research note agreed with Kinross’ decision to delay the project.

“The current development agreement with the government of Ecuador appears quite egregious in terms of taxes and royalties,” he said.

Another bit of information that Burt shared regarding FDN was that Kinross was considering bringing in a strategic partner, and had informed the government of this.

It may not be a bad move, as it would allow the company to spread the risks involved in such a large project – set to cost at least 25% more than the $1.1-billion anticipated in a prefeasibility study.

But first, Kinross needs to complete the feasibility study under way and finalise the economic agreement with the government.

Reuters said Pastor hoped this would be forthcoming in “the short term”.
 

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