Kinross Gold Corp. (K), Canada’s third-largest producer by revenue, decided to stop developing the Fruta del Norte mining project in Ecuador after it couldn’t agree with the government on economic and legal terms.
Kinross will take a charge of about $720 million in the second quarter, the Toronto-based company said yesterday in a statement. Kinross informed the government of its decision ahead of the expiry of the exploration concession on Aug. 1, Chief Executive Officer J. Paul Rollinson said in a phone interview.
“We’ve been at the negotiating table for two years,” Rollinson said yesterday. “Sometimes the best deal is the one you don’t sign, and we believe that’s the case here.”
Kinross bought the Fruta del Norte project in 2008 when it acquired Aurelian Resources Inc. in a C$614 million ($603 million) all-share deal. Rollinson, who replaced Tye Burt as Kinross’s CEO in August, is among gold producers seeking to lower production costs and curb spending in a bid to boost profits as gold trades near a two-year low.
Discussions with the government were hampered by authorities’ “hardline” approach on a proposed 70 percent, revenue-based windfall profits tax that Kinross wasn’t prepared to agree to, Rollinson said. The government indicated it would not extend the concession or agree to Kinross seeking a partner or buyer for the project, the company said.
Kinross fell (KGC:US) 6.4 percent to C$6.03 at the close in Toronto, the biggest drop since April 17. The shares have declined 38 percent this year.
“The market largely anticipated that Fruta del Norte was not really going to go ahead,” Paolo Lostritto, a Toronto-based analyst at National Bank of Canada (NA), said by phone today. Kinross’s decline today is probably related to the gold price, which earlier fell to its lowest in more than two weeks, said Lostritto, who rates the shares the equivalent of a buy. Investors also are wondering if the Fruta del Norte decision has implications for Kinross’ possible expansion at the Tasiast mine in Mauritania, he said.
Ecuador’s Non-Renewable Natural Resources Minister Pedro Merizalde said the government will “accelerate” the development of Fruta del Norte without Kinross, according to a statement from the ministry e-mailed yesterday.
“We haven’t ceded in the face of the transnationals’ proposals,” Merizalde said in the statement. “The state maintains sovereignty over the management of its natural reserves.”
The country’s industrial mining industry halted operations in 2008, a year after President Rafael Correa took office, when the government suspended projects and Congress started drafting new rules giving the state greater control over natural resources. The regulations took effect 19 months later, requiring companies to renegotiate contracts before they could resume mining.
Kinross was the only foreign company holding talks with the government, after Ecuacorriente SA, a 50-50 venture of China Railway Construction Corp. and Tongling Nonferrous Metals Group Holdings Co., China’s second-biggest copper producer, signed a deal with the government.
The decision to walk away from Fruta del Norte was “difficult but in our view correct,” Greg Barnes, a Toronto-based analyst at TD Securities Inc., said in a note today. Management displayed impressive “discipline and decisiveness,” he said.
Kinross said it expects about $700 million of the charge on Fruta del Norte will be non-cash and about $20 million represents accrued severance and closing costs.
The company also said yesterday it extended the maturity dates of its $1.5 billion revolving credit facility and $1 billion term loan.
The extensions were “hugely important in giving themselves the balance sheet flexibility to negotiate this lower gold price environment,” Lostritto said in the interview.
Barrick Gold Corp. (ABX) and Goldcorp Inc. (G) are the largest Canadian gold miners by sales.
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