Lundin Gold (TSX: LUG) has been handed a US$154 million assessment by Ecuador’s tax authority covering the sovereign adjustment owed on its Fruta del Norte mine for the 2023 fiscal year, a bill the company says rests on a reading of its contract that it does not accept.
The Servicio de Rentas Internas put the proposed amount payable at US$73 million and attached a further US$81 million in potential fines and penalties. The penalties, in other words, are larger than the tax they attach to. Interest is excluded from that total, so the final figure would be higher still if the assessment survives.
The sovereign adjustment is a feature of the Exploitation Agreement Lundin signed with Ecuador. It guarantees the state no less than 50% of the cumulative benefits generated by Fruta del Norte, with the government’s share measured as the present value of income taxes, royalties, windfall tax, labour profit sharing, non-recoverable VAT and any prior sovereign adjustment payments. The company’s side is cumulative free cash flow from the project, net of the investment sunk into it before the agreement was signed. When the state’s share slips below the line, Lundin pays the difference.
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Lundin’s position is that the assessment is not consistent with how that calculation is written. The Exploitation Agreement, alongside the Investment Protection Agreement, establishes the fiscal, legal, tax and dispute resolution framework governing the mine, which gives the company a contractual route to contest the finding rather than a purely administrative one.
“Lundin Gold has a positive and constructive relationship with the Government of Ecuador and we intend to work through the appropriate channels to resolve this matter,” said Jamie Beck, president and chief executive officer.
The company said Fruta del Norte continues to operate normally and that the assessment does not affect current operations, previously issued guidance, exploration and expansion plans, or its capital return strategy. Further updates will come as the matter progresses.
The year under review was a strong one at the mine. Fruta del Norte produced 481,274 ounces of gold in 2023 and sold 474,365 ounces at an average realized price of US$1,958 per ounce, generating US$902.5 million in revenue and US$179.5 million in net income. All-in sustaining costs came in at US$860 per ounce and operating cash flow reached US$519.4 million.
Lundin also made a US$25 million voluntary advance income tax payment to Ecuador in the fourth quarter of that year. Measured against that base, the assessment as filed is worth roughly 86% of what the company earned in the year it covers.
Lundin Gold last traded at $97.61 on the TSX.
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