This chronicle of a disagreement was foretold. After two years of negotiations and barely a month before its concession was up, Kinross Gold Corp. (NYSE:KGC), the Canadian-based mining giant, decided to pull up stakes and abandon a project to develop the Fruta del Norte mining site in Ecuador over intractable disagreements with the Quito government on economic and legal issues. The Canadian gold mining company will take a charge of about $720 million in the second quarter on the deal.
Kinross’ exploration concession at Fruta was set to expire on Aug. 1, but the company decided to inform the Ecuadorian government of the decision ahead of time. “Sometimes the best deal is the one you don’t sign, and we believe that’s the case here,” Chief Executive Officer J. Paul Rollinson told Bloomberg.
Kinross' troubles with the government started in 2008, one year after President Rafael Correa took office. The Ecuadorian Congress started drafting a new mining law, which would allow the state to control a higher percentage of natural resources revenues. The law affected Kinross’ project, which began earlier that year when it purchased Aurelian Resources Inc. in a $600 million deal. Ecuador demanded a 70 percent, revenue-based windfall profits tax on the mining site that Kinross was not ready to agree to. The government also told the company that it would not renew the concession if it sought partners or buyers for the project.
Fruta del Norte, set in the Amazon province of Zamora Chinchipe in northern Ecuador, is the biggest gold site in the country, with an estimated reserve of 6.8 million ounces of gold and 9.1 million ounces of silver, as reported by Ecuadorian newspaper El Universo. The largely unexplored reserves in Ecuador attracted Kinross, but the lack of consensus was apparent from the beginning of their work in the area.
Ecuador had been expecting Kinross to pull out since as early as last year, when then-Minister for Resources and Energy Wilson Pástor expressed his concerns to the media. “The demands [of Kinross] look a little outrageous to us, and we have sent them a message that there are things that we cannot accept because there are laws that cannot be changed,” he told El Universo.
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Upon hearing the news on Monday, the Ecuadorian government announced it will take charge of the site. Minister for Energy Pedro Merizalde, who replaced Pástor in May, said he is auctioning the concession to a foreign company that will act as a partner of the National Mining Company.
According to Quito newspaper Hoy, the government is considering companies from Chile, Qatar and China to take over the project. Andres Schipani at the Financial Times argues that Chinese investment has been well received in Ecuador, with China-backed Ecuacorriente signing onto a large-scale mining project in the Mirador copper deposit for $1.4 billion. The Chinese presence in Ecuador has been steady for five years, particularly in the oil industry. “As Ecuador has been shut out of international debt markets since it defaulted in 2008, the Chinese have fill the funding void by lending the country over $7 billion – partly in exchange for oil,” Schipani wrote.
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