TORONTO (Reuters) - Canadian mining company Lundin Gold Inc (LUG.TO) said on Thursday it will pay the government of Ecuador an advance royalty of $65 million under an agreement setting out the financial terms for development of its Fruta del Norte project.
A windfall tax will not apply until Lundin has recouped its development investment, said the company, which has negotiated the right to develop and produce gold from the project for 25 years, with renewal rights.
Lundin Gold said the terms are "significantly better" than those previously considered and it will now finalize its feasibility study and project financing. Its shares were 10 percent higher, at C$4.16, on the Toronto Stock Exchange.
"We believe a legislation change to allow for VAT (Value-Added Tax) recovery and a modestly smaller upfront royalty payment help to improve the economics of the project," said RBC Capital Markets analyst Stephen Walker in a note to clients.
Ecuador passed legislation in December allowing recovery of a 12 percent Value-Added Tax, Walker wrote. He added that Lundin Gold's upfront royalty payment was reduced to $25 million from $40 million previously, while the total remains at $65 million.
Kinross Gold Corp (K.TO) sold its halted project for $240 million in late 2014, after acquiring it in 2008 with its friendly $1.2 billion takeover of Aurelian Resources.
Kinross had suspended work on Ecuador's largest gold project when the government refused to compromise on a windfall tax.
Lundin Gold said the windfall tax will be calculated if market prices exceed stipulated base prices for gold and silver. The government will tax the difference between net smelter revenue and what revenue would be using a base price, at a rate of 70 percent.
The agreement also stipulates that the government's share of cumulative benefits from the mine will not be less than 50 percent, with Lundin paying an annual adjustment for any shortfall.
A net smelter royalty remains at 5 percent at a gold price of under $1,500 an ounce, but that rate will no longer increase with higher gold prices, Walker wrote.
Reporting by Susan Taylor; Editing by Chizu Nomiyama, Bill Rigby and Chris Reese