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12/5/11

Ecuador and Kinross (K.to) (KGC)

This hit four minutes ago. Here's the paste-out:


TORONTO, ONTARIO--(Marketwire -12/05/11)- Kinross Gold Corporation (TSX: K.TO - News)(NYSE: KGC - News) announced today it has reached a non-binding agreement in principle with the government of Ecuador regarding key fiscal and legal parameters for the exploitation of the Fruta del Norte (FDN) deposit in Ecuador's Zamora Chinchipe province.
A number of additional steps are required to conclude a final and binding agreement, including: the completion and approval of the project feasibility study by Kinross; a change in project status from economic evaluation to exploitation in accordance with Ecuadorian law; and, following the completion of negotiations, entering into definitive exploitation and investment protection agreements in a form satisfactory to the parties.
"This agreement represents an important milestone in the development of FDN," said Kinross President and CEO Tye Burt. "Key objectives are to develop the mineral resources at FDN in a socially responsible manner and to work closely with the government and local communities to establish FDN as a flagship mining project in Ecuador."
The key terms of the agreement in principle include the following:
 

--  An obligation to maintain the government's share of project economic
    benefits at a minimum of 52%. Project economic benefits are defined as
    the cumulative sum of the Government's share (comprised of the royalty,
    corporate income tax, the state portion of the profit sharing
    contribution, and windfall profit tax, as described below, plus a 12%
    value added tax applied to customary project expenditures) and Kinross'
    share (comprised of the after tax free cash flows of the project),
    calculated annually;

--  A sliding-scale net smelter return royalty linked to the realized gold
    price, with a royalty of 5% for gold sold at a price of $1,200 per ounce
    or less, 6% for gold sold above $1,200 up to $1,600 per ounce, 7% for
    gold sold above $1,600 up to $2,000 per ounce, and 8% for gold sold
    above $2,000 per ounce. The net smelter return royalty is calculated on
    the basis of revenues after the deduction of windfall profits tax
    payments (see below) and customary transportation and refining charges;

--  Advance royalties of $65 million credited against future royalty
    obligations and payable in two installments, subject to various project
    development conditions;

--  A corporate income tax rate of 22%, to be fixed under the proposed terms
    of the investment protection agreement;

--  A profit sharing contribution equal to 15% of earnings before tax, to be
    fixed under the proposed terms of the investment protection agreement.
    This 15% contribution includes two components, with 12% to be paid to
    the State and 3% to be paid to employees. Profit sharing contributions
    are deductible expenses for the purpose of calculating corporate income
    tax;

--  A windfall profits tax, whereby 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 $1,650 per ounce and the
    spot gold price at the time of signing of the definitive exploitation
    agreement. 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;

--  An exemption from customs duties payable on capital goods to be
    purchased during construction, as approved by the Ecuadorian government;

--  Electrical power to be provided from the national grid at the industrial
    customer rate (currently 6.8 cents/KWH);

--  Disputes arising between the parties will generally be subject to
    customary dispute resolution mechanisms including binding arbitration in
    Chile under UNCITRAL Rules;

--  If new Ecuadorian laws are passed that adversely impact the fiscal and
    economic parameters of the exploitation agreement, the right of Kinross
    to seek amendments to the fiscal parameters of the exploitation
    agreement to preserve the original economic equilibrium and/or seek any
    remedies, pursuant to customary dispute resolution mechanisms;

--  Kinross undertaking various social infrastructure initiatives to benefit
    local communities, including the construction of a road and training
    center, airport improvements, and contributions to local social programs
    through domestic and international not-for-profit partners selected by
    Kinross.
Kinross is finalizing a project feasibility study, expected to be completed at year-end 2011. As previously disclosed, the Company is experiencing industry-wide escalation on FDN project costs, and both capital and operating costs for the project are expected to be approximately 25-30% higher than estimates included in the project pre-feasibility study. Kinross and the Ecuadorian government are currently completing negotiations and drafting of the definitive exploitation and investment protection agreements.

UPDATE: For whatever reason, I've been mailed a couple of times since this post went up and asked an opinion on the deal as stands. Well for one, it isn't a deal, not yet anyway, which is made crystal clear by the NR itself. It's a "non-binding agreement in principle"...and hey, only 18 months and umpteen delays and postponements to get that, too. Second, the terms may well be workable...just about...for a big project with loads of high grading gold such as at FDN, but it's a poor precedent to set for the exploration sector in general and will put off far more companies about the country than will attract. As for the details, the 52% overall burden (minimum) isn't a big surprise, but the 70% windfall tax is very user-unfriendly and we're supposing that gets put on top of the overall 52% minimum, of course.

The bottom line is that for juniors, this deal sucks. And it still isn't a done deal.