Lundin Gold reported in mid-January that it has successfully completed negotiations with the government of Ecuador on the definitive form of the exploitation agreement for its flagship Fruta del Norte gold project in southwest Ecuador. The agreement, combined with existing laws and regulations, establishes the fiscal terms and conditions for development of the project. Lundin still has some hurdles to clear before a final exploitation agreement can be signed, as outlined below.
Lundin acquired Fruta del Norte from Kinross gold in late 2014 for $240 million. The project has indicated mineral resources of approximately 23.5 million mt at an average grade of 9.59 g/mt gold, for 7.26 million oz of contained gold, and inferred mineral resources of approximately 14.5 million mt at an average grade of 5.46 g/mt gold, for 2.55 million oz of contained gold.
Lundin is targeting completion of a project feasibility study by the end of the second quarter of 2016. The company anticipates that the project will be developed as a large-scale, low-cost underground mine.
The exploitation agreement provides Lundin with the right to develop and produce gold from Fruta del Norte for 25 years, which may be renewed. The company has agreed to make an advance royalty payment on production of $65 million, with $25 million being due upon formal execution of the agreement. The balance of the payment will be due in two equal disbursements on the first and second anniversaries of the agreement.
Lundin will pay the government a royalty equal to 5% of net smelter revenues from production. The advance royalty payment will be deductible against future royalties.
An extraordinary revenue (windfall profits) tax will be calculated in the event that market prices exceed stipulated base prices for gold and silver. The tax will not apply until the company has recouped all of the cumulative investment made to develop Fruta del Norte.
Lundin must submit an application to change the Fruta del Norte project’s official status from the exploration phase to the exploitation phase by June 17. The company is also required to complete a general work and investment plan based on the results of the feasibility study for government approval. The company has up to six months subsequent to the approval of the phase change application to execute the final exploitation agreement with the government.
Lundin President and CEO Ron Hochstein said, “The completion of the definitive form of the exploitation agreement represents a major accomplishment for the company and for the government of Ecuador. The parties have crafted an agreement in which the fiscal terms are significantly better than those previously considered for the Fruta del Norte project and that ensures that the people of Ecuador will benefit from the project’s future development.”