Lundin Gold Has Shown You Can Build and Operate Mines in Ecuador (Ron Hochstein & Elisa Morán)

Lundin Gold’s Fruta del Norte (FDN) gold deposit in Ecuador is one of the few multi-million ounce, high-grade gold assets in production. The company just recently achieved commercial production in February 2020 ahead of schedule.  In this show recorded at PDAC 2020, Lundin Gold CEO Ron Hochstein shares why Lundin Gold purchased FDN in 2014 and why they saw opportunity in Ecuador.  Ron discusses his company’s experience raising $1 billion of capex and working in Ecuador to develop FDN over 5 years. Ron answers several concerns some investors have voiced concerning Ecuador as a mining jurisdiction.

In the second half of this show, Elisa Moran, an advisor to the Ministry of Energy and Non-renewable Natural Resources in Ecuador, provides an overview of the Ecuadorian mining laws and regulations. Elisa also addresses investor questions about Ecuador and discusses the need to engage the local communities.

Ron Hochstein:

0:15 Introduction

3:05 Background on Fruta del Norte (FDN)

5:45 Lundin Gold’s discussions with Ecuador before buying FDN

8:02 Will positive changes in Ecuador be sustained?

10:06 What jurisdictional objections came up while raising $1B capex?

11:46 Must have good, local community support

12:51 Lundin Gold trades at a premium to peers outside of Ecuador

14:00 Need a state-backed miner to push forward Ecuador projects?

15:40 Final advice to miners operating in Ecuador

Elisa Morán:

17:18 Introduction

18:04 Overview of Ecuadorian mining laws & regulations

21:12 Any Wood Mackenzie suggestions still to be implemented?

22:26 Will positive changes in Ecuador be sustained?

24:27 Local community engagement is important

27:09 Local community’s involvement in exploration permits?


Bill Powers: I am here at PDAC 2020 and I have the opportunity to sit down with Ron Hochstein. He is the president and CEO of Lundin Gold. And as investors in the gold space, we want to see the companies we invest in discover gold. After they discover it, some of those deposits don’t always make it into production. So as gold investors, we want to rejoice and be aware of those deposits that actually make it into commercial production and start selling the product for a profit.

Ron leads a company, Lundin Gold, that just declared commercial production on February 20th. They had their first gold dore bar poured in November of last year. I’m talking about the deposit Fruta del Norte, where the average grade is over nine grams per ton, 5 million plus ounce in growing reserves. This is in Ecuador with an all-in sustaining cost of about $621 an ounce. And if you think about where gold has been trading recently, about a week ago, that would have been about $1,000 of profit per ounce of gold. This is the first large scale mine development in Ecuador. You can find more about the company at, and the ticker symbol is LUG.

So Ron, thanks for joining me and I want to congratulate you on achieving commercial production. And for investors that aren’t familiar with the story of this deposit, could you give us a little background on what was the genesis of what brought us to here?

Ron Hochstein: First of all, thank you very much for providing this opportunity. Fruta del Norte was originally found in 2006, by a company called Aurelian Resource. And it was an amazing discovery because there was no expressions of this on surface, so it was a total blind discovery. Then Kinross in 2008 acquired Aurelian for $1.2 billion, spent about $275 million on the project. But then Kinross also acquired many other companies at the same time and so they found themselves with a stable of projects and without enough capital to choose all of them. In addition, Kinross had had a little bit of difficulty with the Ecuadorian government. So this is when and they said, “Okay, we can’t do this.” That was in 2013.

In 2014, we were having discussions with Kinross and Fruta del Norte came up. Lukas Lundin and myself and a couple of advisors went to Ecuador in June of 2014. And the Lundin family got the comfort that yes, first of all, there was no doubt Fruta del Norte was an amazing asset, as you’ve mentioned the grades but could you do things in Ecuador? The family got the comfort level and we went ahead. So that was December 2014, when the deal closed. And as you said, fast forward to this year, so in five years we’ve done the feasibility study, raised $1 billion and completed construction now, with the first Western-style scale mine in the country, in five short years. And in some jurisdictions, you say five years is pretty quick, even in very developed mining jurisdictions.

It’s been quite an exciting journey, challenging at times. But we have shown that Ecuador is a country that you can build mining operations and you can operate mining operations. We acquired a significant amount of our materials from Ecuador, all our structural steel, our camp, a lot of cement, and fuel. The productivity of the labor force was much higher than we anticipated. We forget that Ecuador has quite a large oil industry, so well-trained tradespeople and then the infrastructure that the country put in place, the airports, the roads, power. We’ve been on the power grid now since October of last year without any interruptions. The infrastructure is fantastic in Ecuador. The geological potential is there, as can be seen by Fruta del Norte and other discoveries. So it’s a great country to be involved in and very exciting to be the first operation in Ecuador.

Bill: Ron, on this show we’ve featured Lumina Gold and Luminex Resources, your friendly peers there in Ecuador. And as I’ve gotten feedback from my listeners, the main objection has to do with Ecuador as a mining jurisdiction. When you were looking at this project in 2014 before you purchased it, what were those discussions like with the government?

Ron: Those discussions focused on, has Ecuador changed? Because your listeners are right about the history of Ecuador, it has been tainted. But the thing that a lot of investors forget to realize is that Ecuador is a U.S. dollar economy. We’re not talking about, it’s not tied to the U.S. dollar, it is a U.S. dollar economy. They need foreign investment because they can’t do anything else with their currency. They used to have oil, but now we’ve seen with oil markets fundamentally changing with climate change and other factors, the government realizes they need mining. They know they have the potential. So the government has done a lot of work. They brought Wood Mackenzie in, in 2013, to help the government understand how they can make their fiscal regime more competitive with their neighbors, Columbia, Peru and Chile. And by doing that, that was the firm start and then they’ve continued to improve their regulatory regime.

And now with Fruta del Norte in production and another mine called Mirador, which is just to the North of us, a large copper porphyry, similar to Cangrejos and others, although, I think Cangrejos is higher grade. It shows now the government is seeing that the mining can develop royalty income for the country, but in addition they’re realizing that mining actually has a much broader economic development in local areas than oil.

They thought oil and mining were the same, but they’re very different. Mining generates a lot more jobs, much longer term and buys a lot more things from local suppliers, and so we have a much broader impact on the local economic areas. And if you look at the areas where Cangrejos is, where Fruta del Norte, Mirador and others, these are in areas that have not had a lot of economic development because they’re not oil producing areas. Therefore, this is a really significant impact for a lot of the economic development and broadening the economic development throughout the country rather than focused on the cities and where oil is located.

Bill: How can investors be assured that the positive changes that have been occurring in Ecuador the last six plus years are going to be sustained? They can look at Peru or Chile and maybe see a longer mining history. And an investor looking at an Ecuador investment might say, how do I know it’s going to continue to be good?

Ron: I think that what investors can look at is the regime that we have in place, the supportive regime, the track record that we are starting to build, and if you look at that we have signed agreements with the government that have a term of 25 years and they don’t provide any special benefits. What they essentially did is said the economics, the fiscal regime, the regulatory regime, when you made the investment, it’s frozen for 25 years. That’s really important because we don’t have special tax holidays or other things like this. Government will start to see revenues very quickly. That is really important in the new age. Historically, investors want to tax holidays and that, but then governments don’t see any money for a long time and that creates issues. Ecuador, I think for investors, the stability comes from these agreements that they’re willing to sign.

The fact that now you do have a couple mines up and running. Somebody has to be first and once the government starts to see, and in particular responsible mining, when the government starts to see that responsible mining can be done, the economic benefits that I spoke about earlier, these are all things that are making the government of Ecuador realize the potential that mining can bring. For example, in Peru and Chile, as you said, long-term, mining represents 20-25% of the GDP. Fruta del Norte alone in the early years will have an impact change 1.4% on GDP. It’s not very often one mine can do that. It’s things like that, and the economic development and showing we can do it responsibly, are giving Ecuadorians in general, and the government a lot more comfort.

And as I said, the geological potential with the Lumina Gold projects and many others. Some of Luminex Resources’ new finds south of us show that there is a tremendous amount of potential in this country as well.

Bill: You raised $1 billion to put this mine into production. What were some of the jurisdictional objections that you encountered through that fundraising process, and what did you share with those investors?

Ron: It’s interesting, the jurisdictional issues came up mostly on the equity. We did a stream and a gold prepay as one tranche or $300 million. That was instrumental because that was with Orion and Blackstone. Blackstone is a very large U.S. fund. Their due diligence they did on us, on the country, was significant. Blackstone has done other projects with Orion, only in Canada. Ours is the first one that Blackstone and Orion have done outside of Canada and it was Ecuador. And I think Blackstone coming in to our investors, other investors, was almost like the good housekeeping stamp of approval because their due diligence was significant. They went into government, they built personal dossiers on all our management. We even heard about them sending people to local villages and asking them about mining and what it meant. That was a huge step forward.

The banks, it was pretty standard. I think the benefit was the economic stability agreements that we had signed with the government and the quality of the asset. We ended up having to go with strategic investors because the equity market was very difficult. Again, we were first movers, so that meant we had bigger challenges. But the fact that we’ve done it is giving people a lot more confidence in moving forward in Ecuador in the future.

Bill: And in Ecuador, I understand it’s important to really have a good relationship with the locals, not just the federal government, but doesn’t it vary from jurisdiction to jurisdiction locally?

Ron: It does very much. That’s a very good point. And that’s not alone to Ecuador, that’s anywhere in the world today. You need that strong community support. We were very lucky that the previous owners of Fruta del Norte, Aurelian and Kinross, had very strong community programs. So we started from a good foundation but it is so critical, and it is very different. We’re very lucky in that we had no relocation issues. We are not on cultural land and we do not impact, although, we do have a good relationship with the local people nearby.

So it is really unique and again I think that’s were Lumina and Luminex … Luminex has properties closer to us. They’re going to be able to build off of our relationships that we built. And Lumina where their Cangrejos Project is, again, it’s not in indigenous land. It’s not on any cultural soil, so I think that where they’re at actually they’ll have less issues than other projects more in the Amazon do.

Bill: When you do a evaluation of your company, do you see the so-called “Ecuador discount” built into your evaluation? How does your reserves and your production profile compared to others?

Ron: Actually, we’re almost the opposite because if you look at it, and I’ve heard Marshall Koval (CEO Lumina Gold) and others talk about the Ecuador discount, I think that’s more an issue with some of the developers in that. But now that we’ve built the project on budget and on time, in terms of our first gold pour, and we announced commercial production at least a month, we said Q2, and we announced it in mid-February. So we’re well month and a bit faster ahead of schedule, as a result, our stock price has done very well.

So we actually don’t see an Ecuador discount. We’re actually seeing a premium. We’re trading at a higher ratio to NAV than other single asset gold producers. So in some respects it’s more you if you say what you’re going to do and you get it done, that Ecuador discount will disappear. And I think it’s unjustified for the good work that Lumina and Luminex are doing.

Bill: Some investors through the feedback I’ve gotten have articulated that if you really want to make sure a project is going to move forward in certain jurisdictions that are maybe more politically unstable and that don’t have a long-term favorable inclination towards mining in the country, that you would want to see like a Zijin Mining or a state-backed mining company come in to kind of push around a potential smaller country to make sure things move forward. What would you say to investors that think that needs to happen for a project to move forward?

Ron: I think you need the right strategic investors. Like with us, we obviously had the Lundin family right from the start and with the name on the front door. But then also us being able to bring Newcrest in as part of the equity raise, Newcrest came in for $250 of the $400 million we needed in equity for our financing and they now own 32% of the company. That was important and helped give us, but more important for other investors then Ecuador. Ecuador really looked at us as Lundin and the people that were there as part of our team and had confidence in what we were doing. It didn’t really impact the government’s decision. It’s more important that you build a strong team locally, which Lumina and Luminex have done, and that you continue to show that you’re doing what you said you’re going to do in terms of working the ground, in terms of community investment, in terms of … I mean there are many other aspects of the project. The big strategic was more for outside financing than it was for any impact on Ecuador.

Bill: What final advice would you give to the junior miners operating in Ecuador based on your experience?

Ron: Advice I’d give is, as I have said, do what you’re say you’re going to do, be transparent, open door. Don’t be afraid to say we can’t do something this year and we’re going to do it next year, you have to be very open. And community license, social license, however we want to call it is key and it’s so important in a country like Ecuador. The people are great, but it’s how you move forward is building up a relationship that is built on trust and communication. That’s the best advice you can have, is you need to be open and have an open door policy and be willing to talk about things with your project. But also be honest, don’t promise what you can’t deliver.

Bill: And your final advice for the investors listening to us talk about Ecuador?

Ron: Invest in Ecuador. The geological potential is phenomenal. We’ve just scratched the surface. Geologists are great. I’m not a geologist, I’m an engineer, but they are great, but they can be a bit lazy. Ecuador is jungle-covered, so it is more challenging, but it is the geological potential that we’ve just scratched the surface. And so my message to investors: invest in Ecuador.


Bill Powers: I’m at PDAC. This is Bill Powers with Mining Stock Education, and I have the pleasure of sitting down with Elisa Morán. She is an advisor to the Ministry of Energy and Non-renewable Natural Resources in Ecuador, advisor to the government of Ecuador there. She’s also an employee in this role with the Ecuadorian government. And I asked to sit down with her to get her take on the happenings in the mining sector in Ecuador for investors that have inquired and are interested, especially in the geological potential of Ecuador, but have some concerns regarding Ecuador as a mining jurisdiction. Alisa, thank you for sitting down with me. And as we begin, could you provide an overview of some of the key aspects of the Ecuadorian laws and regulations as it relates to the mining sector?

Elisa Morán: Yes, hello, Bill. And nice to be here with you in this interview to talk about Ecuador in mining. Well, our country now I can tell you has a better understanding of the industry, because Ecuador is now in knowledge of their high potential in mining. We are trying to reinforcement all our regulations to give better conditions to the investors.

In Ecuador, we have a long tradition of exploration, very long tradition, and that is a quiet activity. Now that we have found a very good big foundation, we are going on to give better conditions. And for example, we eliminate the windfall tax. We used to have the windfall tax in our regulations, but these ones are thinking to be done to apply to oil.

But, when we started developing the mining industry this has to be applied to mining because these relations says about all the exploitation in nonrenewable natural resources. Now we have already understand that this is not very good for the investors, that we have to give them better conditions. We eliminate as governmental windfall tax that is very, very good for the projects.

Also, we have a reduction of the capital gains because also we have a tax over that of the gain of the capital. Now we understand also, and we have a reduction. Also, we have a very important reduction of the royalty for the exploitation in that big scale mining activities. We used to have 5% to 8% percent and now we reduced to three to eight. And it’s negotiable in that expectation agreement.

Also, we have a recovery of the VAT of the VAT. Since 2018, and this is very good also, because companies spend a lot in VAT and we used not to to these these treatment to these type of tax of recovery. Now we have, as you see, we are start understanding the industry, better conditions to them. And we have all these regulations and creating a modification and regulations, because we are understanding better in exploitation. Exploration is different activity. Now, conditions for exploitation has to be better.

Bill: When you as in the government of Ecuador saw that you wanted to increase mining activity, and you brought in Wood Mackenzie to advise the government. Were there any suggestions that Wood Mackenzie proposed to the government that Ecuador has not yet implemented but possibly could implement in the future?

Elisa: Yes, Wood Mackenzie has a lot of recommendations. They start advising us in the fiscal issues then and taxes. Now we are going to have these today at feedback we are going to have an interview and meeting with them, because there is a lot of issues that part of their recommendations now has to be a done. Yes, we are open to do that. They know a lot about how is operating that exploitation agreement. And the benefits that needs the state from the constitution. We are going to do these changes and implementation of the recommendations. I think that working with McKenzie was, and is really good and helpful for that industry in Ecuador.

Bill: When North American investors look at Ecuador, and they can look at some of your peers like Peru or Chile, and they see a long storied history of mining, so they know what to expect. With Ecuador because there was a downturn before there was a positive upturn in 2014, some investors are concerned about the future that if there was a change in government in three to five years, perhaps the laws and regulations would not be as favorable. What would you say to those investors? That now we have a different thinking from other governments. We are open to the investors, for any investors because Ecuador needs to know more about these a mining activities and business, and that is very important for us. We want to work, and we are working in these [inaudible 00:06:10] that our peers in Latin America have.

Elisa: And something that is very important, the long tradition in other countries as Peru, as Chile, it generates less risk but a less reward. Now Ecuador has a high risk, but a high reward, because the weather has not been totally explored. We are open to receive them in better conditions. There are some issues that all countries have, but we are working in that. We know that we have to put actions, and that is very, very good because Ecuador now wants to have the mining as a very important activity for the economy of our country. That is our option after oil, we are working in that. That’s why we are advising people that know about the country and about the industry. That is very important to have this comparison with the peers is important. We have to understand better practices for better conditions.

Bill: When it comes to local issues, I understand even if the federal government is a very favorable to a company or a project, the mining companies still need to be very mindful with their engagement with local issues. Can you educate us on what miners and the investors thinking about investing in a mining company need to observe and know about how to deal with the local communities in Ecuador?

Elisa: Well, yes, there are two big issues that they have to know. The first one they have to fulfill the national regulations that I have already told you. But also, it’s very important to work in the mining sites. There are regulations from the mayors. There are regulations from the communities. They have to be open, they have to explore and make a good due diligence of their communities around them. They are open, they are expecting of the benefits of mining issues, it’s very important to tell them in a very open way what are the benefits that they are going to have. They have to create a very good community relation, a very good community relationship that permits to the community to start a a sustainable development.

With the help of the company, in some activities that are not necessary the [inaudible 00:08:46] the mining. There are a lot of activities that the employees of the mining needs. They have to know about this potential. And the government and the companies, we have to start working in that together so they can be open with this information to a better conditions of their life, better conditions of the life of people of Ecuador.

They have to work in mining sites all around with the people of their understand what they need, and what they are expecting from the mining issues. This is very important and the key of this is that the companies has to start working in these social issues from the beginning, from the exploration. As I tell you, exploration is like a quiet activity. But now, communities are respecting of that also. There are all these stages of the mining activities, that has to be working with social issues. That is very important. If you do it like that, you are going to have a very successful project in Ecuador.

Bill: A few years ago there was a big contesting in Guatemala over the Escobal silver mine and that mine is a very high grade, large silver mine that came into production, but then there was resistance from the local community that said, you didn’t fully consult with us when you issued the mining company the permit. In Ecuador, do you involve the local communities when the federal government issues that exploration permit? Are the local communities involved in the approval or the feedback of even giving the exploration permit, which is a ways away from exploiting the resource?

Elisa: Oh, yes. We are talking about previous consultancy. We are working in that, because we think that first we have to fulfill the international agreement of that [inaudible] the 169. And we are working to regulate this. It’s very important to work with them, open the information to them, to discuss with them. I think that the more hard part of this is to try to try to understand. They have to understand what are the real expectancy of the mining activity, of the project. They have to understand that the mining activities take time, and not all the mining activity has a successful project. You have to teach them, educate them in these ways so they can know what are the real timing of the activities.

I think that is going to be very, very helpful, all the regulations that we are now creating. The stages of these consultancy for at first stage, we have a really good methodology to try to go on with this information up in information. And then we can have like a due diligence of what is going on in the social zone and if there is a communities that you have to make a consultancy.

If there is a that the communities, indigenous communities, how you can go on with the mythology to make it consultancy to them. But, the other people around the mindsets has to be informed also. I think that we are working on that, so we can have also a successful project of the consultancy and social license. We didn’t get to talk about social license, but investors know what are the real understanding of that. That is very important for our communities and in this understanding, I think that the good, good, mining practices are going to be very helpful in this. I invite to these investors to come to Ecuador. We are going to bring them better conditions, and also that we are working in social issues. They can go on with their projects in a better way.

Bill: Excellent. Well Elisa, thank you for joining me on Mining Stock Education today.

Elisa: Thank you, Bill.

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