Lundin, Beaty bullish on Ecuador’s prospects

VANCOUVER — There are some savvy investors who are banking on a profitable shift in the Ecuadorian government’s approach to mineral exploration and development. The country has been high on the socio-political risk ladder over the past few years, but recent overtures by President Rafael Correa and his government seem to indicate a strategic shift aimed at attracting international mining capital.

Ecuador is the smallest member of the Organization of Petroleum Exporting Countries based on total production, but it relies on oil to supply roughly a third of its federal budget.

Prices for Ecuadors’s Oriente crude have fallen significantly since congress approved Correa’s annual budget proposal in late November, which has forced the government to cut funds for new schools and police stations in order to maintain outlays on oilfields and other strategic projects ear-marked to generate revenue.

And mining offers Ecuador one viable alternative to such an energy-reliant economy. 

The country’s mineral prospectivity remains extremely high given its underexplored status and geographic position between the prolific mining jurisdictions of Peru and Colombia.

In recent years Ecuador is best known in the global mining community for the 70% windfall tax it attempted to impose at Kinross Gold’s (TSX: K; NYSE: KGC) high-grade Fruta del Norte gold-silver deposit back in 2011, which effectively derailed the producer’s attempt to develop the project. 

But if the latest new flow of  foreign capital into Ecuador’s fledgling mining industry is any indication, a few high-profile investors believe the country is actually earnest in its claims of becoming more mining friendly.

The first sign of activity came in July 2014 when prolific mine financier Ross Beaty decided to roll the dice on a sizable investment in Ecuador. Fresh on the heels of the $470-million sale of Lumina Copper and its Taca Taca copper project in Argentina, Beaty invested $5 million in explorer Odin Mining (TSXV: ODN; US-OTC: ODMEF), which controls the Cangrejos gold-copper porphyry project in Ecuador’s El Oro province.

“We simply looked at [Odin’s] assets and saw an incredibly undervalued company where the market was saying Ecuador would never change its anti-mining policies,” Beaty commented when reached by email. 

“We think Ecuador is on the road to change. The rhetoric is good, the initial steps are positive and we hope to participate in a new era, where the mining industry can be part of efforts to reduce poverty and improve well-being as our industry has done in so many other countries in Latin America. Ecuador’s policy for mining is the major risk in the company since the fundamental gold asset is strong,” he added.

At the time of writing Beaty is positioned as Odin’s largest shareholder with a 22.1% equity stake. The company currently has 119 million shares outstanding and the share price has jumped 300% since the investment to close at 40¢ at press time. 

In late January Odin announced a 15,000 metre drill program at Cangrejos targeting lateral and depth extensions of known mineralized zones, and surface geochemical anomalies.

Cangrejos’ mineralization is associated with a sequence of intercalated porphyritic-dioritic intrusions and hydrothermal breccias. Gold grades tend to correlate with potassic alteration and chalcopyrite-bornite occurring as fine disseminations and in quartz veins.

But the biggest investment dropped five months later when Lukas Lundin picked up Fruta del Norte for US$240 million and proceeded to make it the flagship asset for the aptly-named Lundin Gold (TSX: LUG; US-OTC: FTNMNF) vehicle. If Beaty’s investment was a toe in the water then Lundin jumped right in to Ecuador.

The price doesn’t look too extreme considering Kinross originally paid US$1.2 billion for Aurelian Resources and Fruta del Norte in 2008, but the Lundin family personally chipped in roughly US$100 million of the investment. The project is among the largest and highest-grade undeveloped gold projects in the world, with an indicated resource of 23.5 million tonnes grading 9.59 grams gold per tonne for 7.3 million contained oz.

“Quite frankly this is the type of deposit where we aren’t really sensitive to what the gold price looks like. It’s one of the best gold deposits, and we feel it will be one of the lowest-cost producers. Those are the type of assets you want to have, and that’s why the Lundin family is committed to the project and Ecuador,” explained Lundin Goldpresident and CEO Ron Hochstein during a phone interview.

“We’ve been in the country a couple of months now, and we believe they want to see a growing mining industry. All indications, including the announcement of the mining ministry, seem to be signs that Ecuador views mining as strategic. Part of this process will definitely take time, and we have to show that the mining climate in the country has definitely shifted,” he continued.

Under Ecuadorian mining law Lundin must release a feasibility-level study at Fruta del Norte within 18 months, with geotechnical drilling already underway according to Hochstein. The company will initially focus on the primary deposit, but will eventually address exploration upside on an impressive land package that totals around 86 sq. km.

“We see our growth coming from the project via exploration on that land package. Ultimately this is the new gold vehicle for the Lundin family, however, so at some point we’ll definitely be looking at growing the company,” Hochstein elaborated.

Lundin Gold has traded in a window of $3.73 and $5 over the past three months, and closed at $3.89 per share at the time of writing. The company has 385 million shares outstanding and reported cash of $71 million at the end of 2014.

The changing political winds in Ecuador are also being monitored by other members of the investment community. 

Sprott Global Resource Investments executive Steve Todoruk’s most recent financial foray into Ecuador was an investment in junior Cornerstone Capital Resources (TSXV: CGP), which has a portfolio of six properties in the country covering 455 sq. km. The company is targeting epithermal gold-silver and porphyry copper-gold deposits.

“I had a stake in Aurelian before all the chaos erupted in Ecuador. Since then I’ve been monitoring the situation to see what juniors have remained active in the country. The reason for that is based purely on geological prospectivity. Ecuador is surrounded by jurisdictions with world-class deposits, and geology doesn’t stop at borders,” Todoruk explained when reached by phone.

“I’ve maintained that Correa will have to change the country’s approach to mining to fuel growth, and the drop in oil revenue has definitely sped up the process. Seeing groups like Lundin and Beaty involved in the country really backs up that investment thesis,” he added.