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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 that it was not going to get a deal that would generate good investor returns.
The Ecuadorian 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 that 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.
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