June 10, 2013 / 9:59 PM / 4 years ago

UPDATE 2-Canada's Kinross cancels Ecuador gold project

By Allison Martell

June 10 (Reuters) - Kinross Gold Corp said on Monday it is halting development at its Fruta del Norte gold project in Ecuador after failing to reach an agreement with the government over a windfall tax on revenues.

Chief Executive Paul Rollinson said Ecuador had refused to budge on the 70 percent tax, and had indicated that it would not approve a sale or extend the company’s license beyond an August 1 deadline.

“It’s been a tough negotiation,” Rollinson told Reuters. “Sometimes the best deal is the one that you don’t sign, and that seems to be the case here.”

The move is a blow to Ecuador, where the government is drafting a new mining law meant to encourage investment. Ecuador does not have a significant mining sector, but it is largely unexplored and could have major deposits.

Kinross acquired Fruta del Norte with its C$1.2 billion ($1.2 billion) friendly takeover of Aurelian Resources in 2008, and has called it “one of the most exciting gold discoveries of the past 15 years.”

But political risk was a factor right from the beginning - Kinross only bid after fears about the investment environment sent Aurelian’s shares down 93 percent over about four months.

President Rafael Correa, who won re-election in February, is keen to cut his country’s dependence on oil exports. After his election, Correa told Reuters he expected to sign a contract with Kinross within six months.

Kinross said it will write down the full net carrying value of the project, taking a $720 million charge in the second quarter, of which about $700 million will be a non-cash charge.

Asked whether there is any way for the miner to recover some of the value of the project, Rollinson said the two sides seem to be at an impasse.

“I would hope, maybe, if we can have a collaborative transition process, maybe there’s something there. But they have told us they would not support a sale or provide an extension to the license,” he said.

Rollinson said the recent drop in the price of gold did not drive the decision - the proposed tax at the center of the dispute would only kick in under relatively high prices, he said. He connected the move to that tax, and Kinross’s commitment to “capital discipline.”

Facing a backlash from their investors over pricey takeovers and cost overruns, mining companies the world over have vowed to focus on profits, instead of growth at any cost.

In April, Rollinson said the Kinross would consider cutting its output to focus on profit margins.

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