Kinross Gold Highlights Ecuador as Latest Mining Sinkhole

In the end, Kinross Gold (NYSE: KGC  ) had little choice but to walk away from its massive Fruta del Norte gold mining project in Ecuador. Like other nations with significant natural resources in its boundaries, the government of Ecuador has greedily decided it wants a bigger-than-usual slice of the riches and in the process is yet another South American country putting up a "Closed for Business" sign.

Ecuador has said it wants to attract large-scale mining projects, and though it's just a bit player now in the mining industry, being largely unexplored the potential for vast discoveries remains a potent lure.

When Kinross bought the Fruta del Norte project in 2009 for $1.2 billion when it acquired Aurelian Resources, it was described as "one of the most exciting gold discoveries of the past 15 years." As of the close of last year, Kinross said it had 6.715 million ounces of gold in proven and probable reserves, as well as 67,000 ounces of measured and indicated gold resources. Silver was also in relative abundance, with proven and probable resources of 9 million ounces with measured and indicated resources totaling 1.412 million ounces.

IAMGOLD (NYSE: IAG  ) still has an interest in the Quimsacocha gold mine it sold to INV Metals last year, which has an indicated mineral resource estimated at 3.3 million ounces gold. China's Ecuacorriente is also pursing a major copper project at Panantza-San Carlos, and International Minerals will seek out gold and silver at Rio Blanco.

But actions speak louder than words. Where Ecuacorriente chose to pay $200 million up front for royalties on resources yet recovered, IAMGOLD's exit from Ecuador indicates it saw hard battles ahead perhaps not worth fighting.

In Kinross Gold's case, the government attempted to expropriate wealth through an excessively burdensome windfall profits tax that seizes 70% of all profits above the negotiated base price for the metals mined. Such a stipulation makes it uneconomical for major miners to pursue any business there.

The Ecuadoran congress may have passed a law that somewhat encourages small and medium-sized miners to come to the country -- they don't have to sign an exploitation contract with the government and trigger the windfall profits tax so long as they stay below certain thresholds -- but the government still ensures it takes most of the profits by requiring 50.1% of the earnings flow into state coffers. As a result, the country ensures it will never be more than a two-bit petty player in the mining world.

Other governments in South America might not be as rapacious as Ecuador, but the impact of their policies has the same effect. Barrick Gold (NYSE: ABX  ) was brought up short in Chile after it was forced to halt development of its Pascua-Lama project after clashes with the government and indigenous tribes; Newmont Mining had its potentially lucrative Conga gold project stopped in Peru; and Vale was forced to abandon its iron ore project in Argentina where Yamana Gold seems to have regular bouts of trouble.

Kinross was left with little wiggle room in trying to avoid the grasping nature of the Ecuadoran government, but it's a scene we're going to see played out with other miners that have assets in South America and investors should brace themselves for the tumble that always follows.

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  • Report this Comment On June 18, 2013, at 12:57 PM, eyelidssopen wrote:

    Um, it could also highlight Kinross as a mining sinkhole. Company has a long history of looking after management ahead of shareholders - remember the TVX/Echo Bay shlemozzle?

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