PRECIOUS LANDS

Ecuador 2013 | ENERGY | VIP INTERVIEW

TBY talks to Dominic Channer, Vice-President of Ecuador Kinross Gold Corporation, on the Fruta del Norte gold mine, and the benefits mining will bring to local communities.

When is Fruta del Norte going to enter into production?

Fruta del Norte is a mineral deposit that has fantastic potential for Ecuador. It is expected to be the first major large-scale underground gold mine in the country's history. In order to actually put the mine into production, we have to go through a number of steps, including signing a contract with the government of Ecuador. Apart from that, there are a lot of technical studies, environmental studies, and permits of a wide range in nature that we need to obtain to move the project into the production stage.

What has been the contribution of investments by Kinross in Ecuador?

We have been here almost 10 years. Mining has the curious characteristic that it takes a very long time from when you start exploring to putting it into production. Since 2003, we have explored a large area in the southeast of Ecuador, and in 2006 we found a gold and silver deposit—Fruta del Norte. The deposit is about 200 meters below ground. It is a very high-grade deposit of gold and silver. In a mine, the grade is rated on how many grams of gold you have in every ton of rock. There are many mines around the world now, such as in Chile and the US, for example. Usually those mines have a grade of about 1 gram for every ton of rock. Fruta del Norte has an average grade of approximately 8 grams per ton, which is very high. That is one of the reasons why this deposit is so important. Right now, we have reserves in Fruta del Norte defined at almost 7 million ounces of gold and almost the same amount in silver. Once we discovered the ore deposit, we knew it was big, but we didn't know how big. We needed to find out, so we started drilling. Every time you drill you get a lot of information that can be used to see how much gold is in the drill sample. We have enough information now to go ahead and present a technical feasibility study to the government, which is expected to be enough information to sign a contract. The studies will continue in parallel so that when we start building the mine, we have all the information in place. It is a very complex business to build an underground mine.

“We produce around 900,000 ounces of gold every year in South America, making it a very important region for us on a global basis."

What is the investment blend in the country?

Right now, we have invested almost $300 million. However, from here on, to build the mine and get it into production, it is going to require more than $1 billion. We don't have all the information, but it is a huge project. Our key business objective is to get everything signed in 2013. We started negotiations for the exploitation contract in early 2011. This is the first major contract between Ecuador and a major Western mining company, so there are a lot of issues that need to be worked out. Negotiations go through cycles where things are going well, and then you hit a roadblock, work through it, and keep advancing. It has been difficult, but a transparent and honest process and we now have a very short list of issues left to work out. The biggest issue is the windfall profit tax. That is part of the tax legislation here in Ecuador, and it is calculated on a 70/30 basis. That is a very tough tax for the mining business because it is based on revenues, and it gives you no protection from rising costs. Normally, when the gold price goes up, costs go up as well. When that tax kicks in, the government takes its 70%, but most of the 30% for the mining companies is taken away by rising costs. It is a distortion of tax in favor of the government, and it leaves the industry with very little. We want to fix this by changing to a profit-based tax. That means that if we have a good year, we pay the tax, but if we have a bad year, we don't pay the tax. We should share the risk more equally. In this regard, the government has offered publically to make some reforms to the mining and tax law. These reforms could provide greater legal security to foreign investors, who are always looking for clarity in the rules and stability due to the huge investments they are making.

What is the relevance of Ecuador to the global operations of Kinross?

Kinross has mines in many parts of the world. We have mines in South America, North America, Central Asia, and Africa. Right now, South America represents about 36% of our global gold production from our mines in Brazil and Chile. We produce around 900,000 ounces of gold every year in South America, making it a very important region for us on a global basis. When you add in the potential production from our project in Ecuador, that makes South America even more important for us. Fruta del Norte is a mine that could be producing for 20 years or more. When you see that kind of long-term production of a very high-quality ore deposit, it means Ecuador is important for Kinross.

What does Kinross do to help the local communities?

We have worked with the local communities for a long time. The key fundamental objective is to always have a relationship based on trust and transparency. As part of the relationship, we have developed a very clear, long-term community investment strategy. It is the people of the parish, not us, that say how they want to develop their community over the next five to 10 years. Right now, the region that hosts us in Ecuador is one of the poorest in the country, making our development priorities revolve around good planning execution: building better schools, clean water supplies, stable electricity, and better roads. There is a lot of basic infrastructure that cities take for granted, which the villagers don't have. We help them develop this project and then the plans are implemented. We wanted to get away from the old model where the company was very paternalistic. We are part of the community and we need to contribute in a responsible way to long-term development, but it is their plan, not ours. It is a very constructive way to have the relationship. We have completed many projects on a participatory basis, as letting the community take the lead fosters ownership and accountability. We have had a lot of fantastic experiences, and we have some excellent infrastructure and education projects on the go. For example, an important part of our commitment is to favor local employment. However, generally speaking, the education level in the area is quite low. Our message is that we will help these people finish high school. Nowadays, mining is very hi-tech. It is about managing computers and technology; you need a high level of mathematics, and you need to be able to read and write. There have been amazing stories of people in the communities in their 40s and 50s who get up early to do their farming, then go and study. The commitment and motivation of these people is amazing because they see a better future.

Can you tell me about your project with plans for a university?

Originally, we were planning to build a training center because people need to be trained on how to use mining equipment. As time went on, we had meetings with the Ministry for Coordination of Human Talent and Coordination, and the Minister explained to us that it has a mission to build universities in the Amazon region of Ecuador where we are located. The Ministry wants to build a university halfway between our project and another large project that is being developed by the Chinese. The Minister asked us to sign an agreement to give the Ministry the design of our training center, and the government would build it. We thought it was fantastic to work together. Whenever possible, we want to support government programs rather than being an independent force because we are contributing in a more sustainable way to the long-term development of the country. We signed that agreement not long ago, and we have already delivered on our first commitment to provide the studies and architectural plans for our training center. Eventually, people will be trained in this new university training center that was partly designed by our team. Finding qualified workers is expected to be a huge challenge, and Fruta del Norte is going to need 1,000 people to operate. For every direct employee, the average rule is that there are between two and three indirect employees. There will be a whole network of suppliers and providers around the mining projects. There is high-tech equipment, which will require maintenance and deliveries. The great thing about mines is that since there are so many people living and working there every day, they all need support. There is an amazing network of suppliers and support around these projects. There are several mining projects nearby, so this whole area is going to develop over time.

© The Business Year - March 2013