Swiss-Canadian mine financier Lukas Lundin says he is ready to kickstart a potentially large gold mining project in Ecuador that was stalled by a dispute between the Ecuadorian government and the project’s former owner.
The pledge comes just weeks after Fortress Minerals Ltd. (TSX: V.FST.H, Stock Forum) – a company in the Lundin family stable – agreed to buy the Fruta del Norte mine from Kinross Gold Corp. (TSX: T.K, Stock Forum) for US$240 million.
This is an asset that cost Kinross US$1.2 billion to buy in 2008, and is estimated to host almost 10 million ounces of gold in indicated and inferred resources
The deal has raised eyebrows not only because of the low purchase price, but also because Kinross halted development last year after the Ecuadorian government slapped a 70% revenue-based windfall profits tax on the project.
That was after Kinross invested another US$225 million on drilling before taking a US$720million write-down on its investment last year.
The Lundin family, which has a stable of 10 companies engaged in mining and oil and gas, is renowned for going into politically risky areas of the world, capturing a share of large assets, and waiting for the climate to improve before developing the asset themselves or selling out to the highest bidder.
But some analysts still wonder what persuaded Lundin that Fortress can succeed in Ecuador where Kinross failed
In an interview with Stockhouse, Lundin said Ecuador is wrongly perceived as a risky area for mining.
“I have spent a lot of time in Ecuador and the government is very keen to get the mining business going.’’
The Fortress President and CEO insisted that the decision by Kinross to put the project on hold may not have been soley the fault of the government.
“What happens in our business is that when something goes wrong, you always blame the country. But mining is sometimes a two-way street.’’
“The company kind of screwed up and pushed too hard. Blaming the country only, that’s half the story.’
He also hinted that Fruta del Norte may have been stalled because Kinross had a lot on its plate and didn’t develop the mine as quickly as the government had hoped.
“Kinross got cold feet and got extended with a lot of different projects,’’ Lundin said.
With Fruta del Norte as its flagship asset, Fortress will take a different approach by requiring its President to move to Quito, Ecuador’s capital city. The company will also change its name to Lundin Gold.
“This is not a case of giving the government a bigger share. It’s a case of commiting to it,’’ he said.
Veteran analyst John Ing, the President of Maison Placements Canada in Toronto, said Lundin emerged on the scene following rumours that a Chinese company was willing to buy the Fruta del Norte assets, but backed out after failing to do a deal with the Ecuadorian government.
“Lukas stepped in and the much feared tax has been modified,’’ Ing said.
Lundin said Fruta del Norte is one of the world’s most significant gold finds in recent years.
It is an asset that fills a gap in the holdings of the Lundin group of companies, which are focused on base metals, diamonds, uranium and oil and gas.
Fruta del Norte marks the family’s first foray into gold since another Lundin company, Red Back Mining Inc. was sold to Kinross Gold for $7.1 billion in August 20, 2012.
Red Back’s flagship asset was the Tasiast mine in Mauritania, which ironically turned out to be a terrible investment for Kinross, forcing the company to take a $2.49 billion write down, a move that may have prompted the dismissal of former Kinross CEO Tye Burt in August 2012.
Fortress said it can move quickly through feasibility to a construction decision, leveraging the considerable amount of historical exploration, development, mine planning and permitting work completed so far.
“We can hopefully start construction in the next 24 months,’’ said Lundin. “ We hope to be in production by 2018,’’ he said, adding that Fruta del Norte is expected to produce 600,000 ounces of gold annually during the first five years of production.
Lundin said Kinross had previously estimated that the mine could be developed for $900 million. “But I think [the cost of development is] going to be much lower, he said.
Maison’s John Ing described the purchase as a “tremendous opportunity.” “It’s a great time in the mining cycle to be buying it,’’ he said.
“It will be a low cost asset at a time when the all-in costs in the gold industry are above US$1,100 an ounce.’’
Fortress Minerals shares closed at $4.06 Wednesday, leaving a market cap of $60.2 million, based on 14.8 million shares outstanding. The 52-week range is $6.10 and $2.81.
Meanwhile, analysts say the Fruta del Norte purchase is another sign that that good assets are becoming available as major mining companies move to reduce debt.
Three weeks before the deal was announced, another Lundin company Lundin Mining Corp. (TSX: T.LUN, Stock Forum) agreed to acquire an 80% stake in the Candelaria/Ojos del Salado copper mine in Chile from Freeport-McMoRan Inc. (NYSE: FCX, Stock Forum) for US$1.8 billion in cash.
Lundin said Candelaria will be transformative for the company and will diversify its political risk profile.
He was referring to the fact that Lundin’s key money spinning asset is its 24% equity stake in the Tenke Fungurume copper/cobalt mine in the Democratic Republic of Congo.
Candelaria is expected to produce 156,000 tonnes of copper, with attractive gold (97,000 ounces) and silver (1.9 million ounces) by-products in 2014 on a 100% basis.
In a separate development, Lundin said commercial production has begun at the Eagle Mine, a high grade nickel-copper mine located in the Upper Peninsula of Michigan, U.S.A.
This is an asset that Lundin bought in June 2013 from an affiliate of Rio Tinto Plc for US$325 million.
“It’s going to double the cash flow for Lundin Mining and make the company a lot of money,’’ he said.
Lundin Mining shares rose 2.8% to $5.42 Wednesday, leaving a market cap of $3.9 billion, based on 718.1 million shares outstanding. The 52-week range is $6.57 and $4.03.
Read more at https://www.stockhouse.com/news/newswire/2014/12/04/lukas-lundin-bets-on-gold-and-mining-tax-reform-ecuador#LWxLmFhTIiYmt5qb.99