National Post (National Edition)
Kinross exits Ecuador over tax demands
Kinross Gold Corp. has abandoned plans to develop the massive Fruta del Norte project in Ecuador after refusing to pay a 70% windfall profits tax demanded by the government.
It is a major disappointment for the company. Fruta del Norte was acquired for more than US$1-billion in 2008, and was expected to become one of the Toronto-based miner’s cornerstone operations. But more than two years of fruitless negotiations convinced Kinross it was not going to get a deal that would generate good investor returns.
The Ecuadorean government played hardball with Kinross from the beginning, insisting on the monstrous windfall profits tax and never backing down. That was by far the biggest sticking point in the negotiations, chief executive Paul Rollinson said in an interview Monday. He is certain that walking away is the best move for shareholders.
“It really was a tough decision, but I do think it was the
right decision,” he said. “I’m not prepared to sign anything with a 70% windfall profits tax.”
Since taking over as CEO last year, Mr. Rollinson has put an emphasis on boosting profitability rather than building new mines for the sake of growth. This was clearly a project that could not generate a strong return because of the punitive tax regime.
The Fruta del Norte concession will revert back to the government on August 1st. Kinross said the state will not support any effort to sell the concession to a third party before it reverts, nor will it allow negotiations to continue beyond that date. As a result, the company is going to take a charge of US$720-million in the second quarter as it exits Ecuador.
While governments around the world are pushing for higher taxes on the resource sector, Ecuador is an extreme example. Fruta del Norte is arguably the richest undeveloped gold deposit in the world, and it was still not strong enough to get a green light from Kinross in such a
high-tax environment. Numerous other governments have proposed windfall taxes on mining profits, but they have usually been abandoned or watered down.
Paradigm Capital analyst Don Blyth praised the move to exit the project, stating that there was no reason for Kinross to “throw good money after bad.”
“The government demands would have made this a terrible investment for Kinross shareholders,” he wrote in a note. He suggested the project could be sold to a Chinese buyer, as no one in the Western world is likely to touch it.
Back in 2011, Kinross came close to accepting the windfall tax and moving forward with Fruta del Norte. The company reached a preliminary agreement with the government on a deal that included the tax, but pulled back after shareholders reacted negatively to it.
The CEO at the time was Tye Burt, who was fired last year amid complaints of poor capital allocation by Kinross.
Kinross also announced on Monday that it has extended the maturity dates on a US$1.5-billion revolving credit facility and a US$1-billion term loan by one year and two years, respectively.