Industry Trend Analysis - Fruta Del Norte Development To Change Tide - OCT 2016

BMI View: Ecuador ' s nascent mining industry will receive a boost as rising gold prices encourage investment into the country ' s gold sector. Gold output will be primarily driven by the key Fruta del Norte project over our forecast period to 2020 .

Despite the country's history of resource nationalism and regionally high tax rates, Ecuador will present itself as an increasingly attractive mining investment destination over the coming years. We have highlighted government efforts to attract investment previously, and now, with a bullish view on the price of gold, we expect to see an acceleration in project development ( see 'Gold Sector To Gain Momentum', January 15). Indeed, we forecast gold to average USD1,300/oz in 2016 and steadily increase to USD1,500/oz by 2020 ( see ' Gold: Weaker Growth Outlook Bolsters Bullish View ' , August 4). With regards to investment, on August 9, Swiss-Canadian miner Lundin Gold closed a second round of equity offering to raise a total of CAD94.9mn for the engineering and optimisation of capital costs estimates at the Fruta del Norte project.

The firm expects to begin construction in 2017 and production in 2020. The key development in Lundin's efforts came in January 2016, when the firm reached an agreement with the government over the mining windfall tax - implemented as part of the Mining Mandate in 2008 - which had stymied the progress of previous Fruta del Norte owner, Kinross Gold. Under the agreement, Lundin will not be subject to the 70% revenue tax unless precious metal prices exceed a stipulated amount.

The precedent set by Lundin Gold in avoiding the windfall tax will encourage development at long-held but inactive mining concessions in Ecuador. Further lending support to the government's commitment to developing the mining sector is the newly created (as of February 2015) Ministry of Mines to manage and facilitate large-scale mining projects. On August 3, Canadian firm Obin Mining announced plans to acquire Ecuador Copper & Gold, a Canadian exploration and mining company focused on the Condor gold project in southern Ecuador.

Rising Prices Boost Prospects
Global Gold Price (USD/oz)
f = BMI forecast. Source: BMI, Bloomberg

Mining Industry Looking Up, But Long Way To Go

While we highlight recent events as reason to expect improvement in Ecuador's mining industry outlook, the country faces a long path to a developed mining industry due to challenges such as local opposition to mining and ongoing regulatory uncertainty. As such, our mineral production forecast reflects only the Fruta del Norte project. We forecast Ecuador's gold output to increase from 100 thousand ounces (koz) in 2016 to 268koz by 2020. While this growth rate will see Ecuador's output nearly triple, the country's gold volume will remain minimal in comparison to top gold producing neighbours Peru and Colombia. Further, while the government announced new mining concessions earlier this year, our Operational Risk team emphasises the lack of short-to-medium term economic benefits of this endeavour.

Local opposition to mining projects will remain a key downside risk to Ecuador's mining industry value growth, as protests delay projects and deter investment. For instance, Ecuacorriente, a joint-venture between Chinese firms China Railway Construction Corp and Tongling Nonferrous Metal, continues to face opposition to the USD2.0bn Mirador copper project. Ecuacorriente halted exploration at the firm's larger copper deposit, Panantza San Carlos, in 2006 due to land ownership disputes with local communities.

Ecuador - Key Mining Projects
Commodity Mine Company Capex (USDmn) Notes
Source: Company announcements, BMI
Copper Mirador Ecuacorriente 2,000 Reserves - 3.5mnt
Copper San Carlos Panantza Ecuacorriente 1,300 Reserves - 6.4mnt; Stalled
Gold Fruta del Norte Lundin Gold 932 Estimated production 340kozpa; expected 2020
Gold Loma Larga INV Metals 750 Estimated production 80kozpa
Gold Rio Blanco Junefield Resources 120 Resources - 661koz gold, 4.8moz silver
Gold, copper Condor Ecuador Gold & Copper - Resources - 8.0moz gold; 28.5moz silver; 363kt copper
Gold, copper, silver, zinc La Plata Toachi Mining - Exploration stage
Gold Jerusalem Dynasty Metals & Mining - Resources - 422koz gold, 2.4moz silver; exploration stalled
Copper, gold Dynasty Goldfield Dynasty Metals & Mining - Resources - 1.0moz gold, 8.5moz silver; exploration stalled
Gold Cangrejos Odin Mining - -
Copper Llurimagua Enami, Codelco - -