Aurelian Resources Was Stolen By Kinross and Management But Will Not Be Forgotten
The company whose shareholders were better than its management
Message: EMN - Q&A with James Crossland, Kinross Senior VP
http://www.ecuadorminingnews.com/new...
Q&A
By Silvia Santacruz
Ecuador Mining News
Washington, D.C., September 24, 2008
Kinross succeed in its offer to acquire Aurelian Resources, and now it is Kinross’s responsibility to develop the gold-rich Fruta del Norte (FDN) project. Some analysts were expecting other offers from majors such as Newmont and Barrick that had expressed interest in such a discovery, but it didn’t happen. Why is Kinross willing to incur risk in a country with no mining operations as a consequence of the Assembly mandate, no mining law, a constitutional referendum this Sunday, and a likely windfall tax?
Kinross invested considerable time and resources in primary research on Ecuador and in developing an understanding of the socio-economic factors shaping political and policy trends in the country. We developed a view that Ecuador’s senior leadership understands that it is possible to develop Ecuador’s rich natural resources in socially and environmentally responsible ways that will generate significant new jobs, opportunities, and other economic benefits for the people and country of Ecuador. We also believe that Ecuador’s leadership sees that the private sector can play an important and positive role in building a more prosperous economic future for the country. There is also tangible evidence, for example the proposed new mining law, that Ecuador is putting in place a legal framework, which will provide the degree of certainty and predictability necessary to attract responsible non-speculative private sector investment.
Kinross is the first major mining firm that will start operations in little Ecuador. Do you think your presence will attract other majors and may revamp mining operations in the South American country with no large-scale mining operations? Has your company put Ecuador back on the mining map?
We are confident that working with the government of Ecuador, and with the communities in the area of the deposit, that we can develop FDN as a world class project that will showcase the opportunities that Ecuador offers the mining industry, and the economic and social benefits that responsible mining can create for the people of Ecuador. In that sense, Kinross’ investment in FDN has the potential to serve as a pathfinder project for Ecuador. Ultimately, it will be up to the government and people of Ecuador to determine if the full potential of the project and the full economic potential of their country’s resource base are developed for the economic betterment of the country.
The latest draft of the new mining law was recently made public. The document creates exploitation contracts (Art. 24) that will automatically apply a 70 percent windfall tax, issued in the Reformed Tributary Law, for natural resources firms holding contracts with the state. The industry didn’t expect the WFT to be applied to them because firms currently only hold concessions. Does Kinross fear the WFT? Is it too high in comparison with the 30 percent Income Tax? Is the WFT too unpopular among investors? Is this situation manageable because the WFT is deductible for other taxes?
From our perspective it is the overall total tax burden on a project, rather than any one specific tax, that is relevant in assessing and determining the economic viability of any project. Based on our research, we believe that the tax regime under consideration in Ecuador will allow for the development of a viable, responsible mining industry.
One of the questions that analysts have been wondering about is the timing of the ARU offer—made at a time when there was no mining law, halted operations, and with an upcoming referendum, and elections. One of the theories is that the WFT was the main reason ARU decided to sell, and Kinross to buy. Was it the main reason the transaction was completed? Would Kinross be in a better position than Aurelian to negotiate the WFT base price with the Ecuadorian government?
We initiated our offer to purchase Aurelian because of the quality of the FDN deposit, which is one of the best gold finds in the world in the last ten to fifteen years, and because of our confidence in our view on Ecuador. The transaction, which was unanimously endorsed by the Aurelian Board, succeeded because the vast majority of Aurelian shareholders recognized that our offer would allow them to participate in, and to benefit from, Kinross’ growth strategy, including the responsible development of the FDN deposit in cooperation with the people and government of Ecuador.
Draft mining law Art. 78 creates a variable and progressive royalty over production of between 3 and 8 percent, higher than the proposed 5 percent maximum announced in the initial draft. Is this royalty acceptable for FDN? How does Ecuador’s royalty scale compare to that of other countries where Kinross has operations?
The precise impact of the proposed royalty regime will not be known until the production thresholds for the various rates are established. However, as previously noted, it is the overall total tax burden on a project, rather than any one specific tax, that is relevant in assessing and determining the economic viability of any project. Based on our research, we believe that the tax regime under consideration in Ecuador will allow for the development of a viable, responsible mining industry.
Is FDN a strategic project for Kinross’s future? Your company is increasing its cash flow significantly due to the production of three large new mine construction projects in development, but it needed a new project for its future. What is Kinross’s projected date to mine FDN—2011? Will FDN help Kinross’s portfolio and help it remain the NYSE’s top-performing major mining company?
Part of our strategy of delivering disciplined growth is to maintain a pipeline of high quality, high margin projects. As a high grade (7.23 g/t) mine with inferred resources of nearly 14 million ounces of gold and very positive exploration potential, the FDN deposit is an excellent strategic fit for the company and extends our growth curve out beyond the 2011 period. At this stage, it is too early to predict when production might start at FDN, as we still waiting to see the impact of the new Ecuadorian mining law, and need to conduct a project feasibility study.
Leftist Correa is close friends with Venezuelan President Hugo Chavez, and Ecuador has faced vocal environmental opposition from the indigenous umbrella organization Conaie, among others. Does Kinross think the government will succeed in developing mining despite extreme opposition to the sector? The Constituent Assembly, with a vast majority of Alianza Pais party members, was responsible for the mining mandate. In light of this, does Kinross trust Correa will continue favoring mining operations?
President Correa has been and continues to be consistent in his support for the development of a responsible mining industry in Ecuador. We believe that the President’s view that it is possible to develop a socially and environmentally responsible mining industry that will make a positive contribution to the country’s future economic prosperity will prevail.
Kinross CEO Tye Burt said in a recent interview with Bloomberg that the company was studying some junior firms, and it was true that majors are in a better financial position than juniors to form JVs and make acquisitions. Was this exactly what happened with Aurelian? Was ARU going to face difficulties in negotiating financing due to the credit crunch, and more so with the WFT, and due to uncertainty with royalties while Kinross does not have these problems?
There is no doubt that current liquidity and credit problems in the market have made it difficult for junior companies to secure financing. This creates opportunities for other companies not similarly constrained to make investments and acquisitions. In the Aurelian case, our offer succeeded because the vast majority of Aurelian shareholders recognized that our offer would allow them to participate in and to benefit from Kinross’ growth strategy including the responsible development of the FDN deposit in cooperation with the people and government of Ecuador.
In what way did Kinross study Ecuador and FDN for two years? Approximately how many times did your company travel to Ecuador? Did Kinross have an investigator/geologist team working alongside Aurelian?
Kinross has had its own exploration team working in Ecuador for about the past three years so we have a sound knowledge of the geology of the country. In addition, as part of our due diligence, we undertook an extensive analysis of the geology and metallurgy of the FDN deposit. On other fronts a number of our senior executives and our country risk analysis team made numerous trips to Ecuador and met with a wide range of Ecuadorian government officials, mining industry participants, representatives of non-governmental environmental and indigenous associations, academics, and other groups and individuals knowledgeable about the country.
James Crossland
Senior VP Government Relations & Corporate Affairs Kinross Gold Corporation
By Silvia Santacruz
Ecuador Mining News
Washington, D.C., September 24, 2008
Kinross succeed in its offer to acquire Aurelian Resources, and now it is Kinross’s responsibility to develop the gold-rich Fruta del Norte (FDN) project. Some analysts were expecting other offers from majors such as Newmont and Barrick that had expressed interest in such a discovery, but it didn’t happen. Why is Kinross willing to incur risk in a country with no mining operations as a consequence of the Assembly mandate, no mining law, a constitutional referendum this Sunday, and a likely windfall tax?
Kinross invested considerable time and resources in primary research on Ecuador and in developing an understanding of the socio-economic factors shaping political and policy trends in the country. We developed a view that Ecuador’s senior leadership understands that it is possible to develop Ecuador’s rich natural resources in socially and environmentally responsible ways that will generate significant new jobs, opportunities, and other economic benefits for the people and country of Ecuador. We also believe that Ecuador’s leadership sees that the private sector can play an important and positive role in building a more prosperous economic future for the country. There is also tangible evidence, for example the proposed new mining law, that Ecuador is putting in place a legal framework, which will provide the degree of certainty and predictability necessary to attract responsible non-speculative private sector investment.
Kinross is the first major mining firm that will start operations in little Ecuador. Do you think your presence will attract other majors and may revamp mining operations in the South American country with no large-scale mining operations? Has your company put Ecuador back on the mining map?
We are confident that working with the government of Ecuador, and with the communities in the area of the deposit, that we can develop FDN as a world class project that will showcase the opportunities that Ecuador offers the mining industry, and the economic and social benefits that responsible mining can create for the people of Ecuador. In that sense, Kinross’ investment in FDN has the potential to serve as a pathfinder project for Ecuador. Ultimately, it will be up to the government and people of Ecuador to determine if the full potential of the project and the full economic potential of their country’s resource base are developed for the economic betterment of the country.
The latest draft of the new mining law was recently made public. The document creates exploitation contracts (Art. 24) that will automatically apply a 70 percent windfall tax, issued in the Reformed Tributary Law, for natural resources firms holding contracts with the state. The industry didn’t expect the WFT to be applied to them because firms currently only hold concessions. Does Kinross fear the WFT? Is it too high in comparison with the 30 percent Income Tax? Is the WFT too unpopular among investors? Is this situation manageable because the WFT is deductible for other taxes?
From our perspective it is the overall total tax burden on a project, rather than any one specific tax, that is relevant in assessing and determining the economic viability of any project. Based on our research, we believe that the tax regime under consideration in Ecuador will allow for the development of a viable, responsible mining industry.
One of the questions that analysts have been wondering about is the timing of the ARU offer—made at a time when there was no mining law, halted operations, and with an upcoming referendum, and elections. One of the theories is that the WFT was the main reason ARU decided to sell, and Kinross to buy. Was it the main reason the transaction was completed? Would Kinross be in a better position than Aurelian to negotiate the WFT base price with the Ecuadorian government?
We initiated our offer to purchase Aurelian because of the quality of the FDN deposit, which is one of the best gold finds in the world in the last ten to fifteen years, and because of our confidence in our view on Ecuador. The transaction, which was unanimously endorsed by the Aurelian Board, succeeded because the vast majority of Aurelian shareholders recognized that our offer would allow them to participate in, and to benefit from, Kinross’ growth strategy, including the responsible development of the FDN deposit in cooperation with the people and government of Ecuador.
Draft mining law Art. 78 creates a variable and progressive royalty over production of between 3 and 8 percent, higher than the proposed 5 percent maximum announced in the initial draft. Is this royalty acceptable for FDN? How does Ecuador’s royalty scale compare to that of other countries where Kinross has operations?
The precise impact of the proposed royalty regime will not be known until the production thresholds for the various rates are established. However, as previously noted, it is the overall total tax burden on a project, rather than any one specific tax, that is relevant in assessing and determining the economic viability of any project. Based on our research, we believe that the tax regime under consideration in Ecuador will allow for the development of a viable, responsible mining industry.
Is FDN a strategic project for Kinross’s future? Your company is increasing its cash flow significantly due to the production of three large new mine construction projects in development, but it needed a new project for its future. What is Kinross’s projected date to mine FDN—2011? Will FDN help Kinross’s portfolio and help it remain the NYSE’s top-performing major mining company?
Part of our strategy of delivering disciplined growth is to maintain a pipeline of high quality, high margin projects. As a high grade (7.23 g/t) mine with inferred resources of nearly 14 million ounces of gold and very positive exploration potential, the FDN deposit is an excellent strategic fit for the company and extends our growth curve out beyond the 2011 period. At this stage, it is too early to predict when production might start at FDN, as we still waiting to see the impact of the new Ecuadorian mining law, and need to conduct a project feasibility study.
Leftist Correa is close friends with Venezuelan President Hugo Chavez, and Ecuador has faced vocal environmental opposition from the indigenous umbrella organization Conaie, among others. Does Kinross think the government will succeed in developing mining despite extreme opposition to the sector? The Constituent Assembly, with a vast majority of Alianza Pais party members, was responsible for the mining mandate. In light of this, does Kinross trust Correa will continue favoring mining operations?
President Correa has been and continues to be consistent in his support for the development of a responsible mining industry in Ecuador. We believe that the President’s view that it is possible to develop a socially and environmentally responsible mining industry that will make a positive contribution to the country’s future economic prosperity will prevail.
Kinross CEO Tye Burt said in a recent interview with Bloomberg that the company was studying some junior firms, and it was true that majors are in a better financial position than juniors to form JVs and make acquisitions. Was this exactly what happened with Aurelian? Was ARU going to face difficulties in negotiating financing due to the credit crunch, and more so with the WFT, and due to uncertainty with royalties while Kinross does not have these problems?
There is no doubt that current liquidity and credit problems in the market have made it difficult for junior companies to secure financing. This creates opportunities for other companies not similarly constrained to make investments and acquisitions. In the Aurelian case, our offer succeeded because the vast majority of Aurelian shareholders recognized that our offer would allow them to participate in and to benefit from Kinross’ growth strategy including the responsible development of the FDN deposit in cooperation with the people and government of Ecuador.
In what way did Kinross study Ecuador and FDN for two years? Approximately how many times did your company travel to Ecuador? Did Kinross have an investigator/geologist team working alongside Aurelian?
Kinross has had its own exploration team working in Ecuador for about the past three years so we have a sound knowledge of the geology of the country. In addition, as part of our due diligence, we undertook an extensive analysis of the geology and metallurgy of the FDN deposit. On other fronts a number of our senior executives and our country risk analysis team made numerous trips to Ecuador and met with a wide range of Ecuadorian government officials, mining industry participants, representatives of non-governmental environmental and indigenous associations, academics, and other groups and individuals knowledgeable about the country.
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