Ecuador recently scared off a potentially huge investment from Kinross, which had been set to develop the massive Fruta del Norte gold mine.
Steve Todoruk, at Sprott Global Resource Investments Ltd., says Ecuador may yet revive its mining sector, which could be good news for investors in the country.
The tiny country of Ecuador sits surrounded by Peru, Columbia, Chile, Brazil and Argentina, which have large mineral deposits. Many of these countries have seen high amounts of investment in mining, but Ecuador has seen comparably little. Of course, the actual geology that creates these deposits doesn’t know one country from another. So the same mineral riches probably exist to the same extent in Ecuador as they do in more pro-mining countries surrounding it. The problem isn’t geology, but strong restrictions and taxes on mining in the country.
In around 2005, the country began loosening up controls on mining. As a result, exploration expenditures in Ecuador picked up. A year later, in 2006, Aurelian Resources Corp. discovered the major Fruta del Norte deposit, which turned out to be one of the biggest gold deposits in the world.
The political winds soon changed with the new President, Rafael Correa, coming to power in 2007. He swiftly announced that the country would revise its taxes and regulation codes on mining. This brought most exploration activity in the country to an immediate halt.
In 2013, Kinross Gold Corp.’s frustration with the new regime erupted. The Fruta del Norte, which they had acquired at a cost of $1.5 billion, would not be built (we visited the project in 2006). Unable to reach an agreement with Correa’s government on terms for building and operating the new mine, Kinross walked.
Kinross’ new mine would have created numerous jobs and ample tax revenue for the State, so its withdrawal from the project caused shock waves – which were felt even by mining opponent Rafael Correa. It seems like Ecuador’s president has once again changed his tune, announcing a new overhaul of the country’s mining laws and taxes, this time to attract miners and exploration companies back into the country.
If Correa is serious, it could favorably impact the prospects of miners and exploration companies with projects in Ecuador and attract new players to the area.
Legendary mining investor Ross Beaty, founder of Pan American Silver Corp., is already acting on the assumption that Correa will favorably reform the country’s mining laws.
Beaty is known for his outstanding track record in South America. He announced in June that he would acquire a controlling interest in Odin Mining and Exploration Ltd through a $5,000,000 private placement at $0.06 a share1. Odin owns an attractive gold property in Ecuador, which saw some promising drilling results in the early 2000’s while owned by Newmont.
Though this project is in Ecuador, investors have been following Beaty’s lead, pushing the share price of Odin up to its current level of C$0.39 (it went as high as C$0.70 on July 30)2.
Odin isn’t the only company from Ecuador that’s worth watching.
Two companies have recently discovered a promising new mineral deposit. The two companies, Cornerstone Capital Resources Inc. (which we also visited in 2006) and Solomon Gold PLC had continued their exploration work while interest in Ecuador had waned.
Their new copper-gold discovery comes at a time when Ecuador could be becoming a more attractive jurisdiction.
Hot off the press comes word that another one of the most successful mining entrepreneurs, Lucas Lundin, has announced that one of his companies, Fortress Minerals Corp., has reached an agreement with Kinross to buy the Fruta del Norte deposit for C$240 million.3
A presentation by Lundin mining suggests that the total tax burden on the Fruta del Norte will be around 52% — a hefty sum.4 This stems from an article in Correa’s mining law that states the Ecuadorian government must make at least as much as the miner does on any project. Ongoing negotiations with the government may help alleviate this demand.
Lundin is planning for this prized deposit to be the flagship mine in his new mining company, Lundin Gold Inc. This follows in the footsteps of Bob Quartermain’s C$450 million acquisition of the Valley of the Kings Brucejack project project (now Pretium Resources)5 and Kevin McArthur’s US$500 million purchase of the Escobal project in 2010.6 Both have been high-profile successes.
Most geologists believe that Ecuador could hold significantly more mineral riches, making it fertile ground for exploration firms.
Lundin and Beaty are expecting that Ecuador is about to become more mining-friendly. A stable environment for mining legislation, if Correa’s government keeps its word, could yield many exciting new projects from Ecuador.
If they’re right, we should keep an eye out for the ‘next Fruta del Norte’ as exploration dollars get deployed in one of the world’s most prospective – and underexplored – regions.
If you would like Steve to review your junior mining portfolio, please call him at 1.800.477.7853 or e-mail him at [email protected].
Get a chance to look at some of the ‘site visits’ mentioned above? We recently profiled another prospective and underexplored region – West Africa — here. You can take a look at recent site visits to West African operations here and here.
Steve Todoruk worked as a field geologist for major and junior mining exploration companies after he graduated with a B. Sc. in Geology from the University of British Columbia, in 1985. Steve joined Sprott Global Resource Investments Ltd. in 2003 as a Senior Investment Executive.
Companies discussed above are used for examples only and do not constitute an endorsement or recommendation. If you would like more information, please contact a Sprott Global Resource Investments Ltd. broker.
1 The Northern Miner online: Ross Beaty to Invest in Odin Mining. June 24, 2014
2 Bloomberg online
3 News Release: Kinross announces sale of Fruta del Norte project in Ecuador. October 21, 2014.
5 Bloomberg online: Silver Standard to Sell Snowfield, Brucejack to Pretium for $450 Million. October 29, 2010
6 Reuters online: Goldcorp sells Escobal silver project to Tahoe. May 3, 2010
This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.
Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment. Because of significant volatility, large dealer spreads and very limited market liquidity, typically you will not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.