Resource Icons The Lundins Are About To Build The World’s Best Gold Mine

 | Dec 18, 2014 01:40AM ET

The Lundin Group is one of the most accomplished resource development groups on the planet. They have a long history of going into tough political jurisdictions, taking advantage of the discounts created by the perceived risks and turning a huge profit thereafter.

For Lundin Gold (LUG.TSX), which today announced the closing of the acquisition of the Fruta del Norte (FDN) project from Kinross, their toughest challenge may be yet ahead.

FDN is in Ecuador which is a ‘no no’ for most resource investors, but offers the types of opportunities contrarian investors, like the Lundins, look for.

FDN caused Kinross a boat load of pain after they acquired the project by buying Aurelian Resources for $1.2 billion in 2008. In 2013, after struggling to come to terms with the Ecuadorian authorities on a fair tax regime and taking a $720 million write-down on the asset, Kinross announced it would be walking away from developing the project.

Fast forward to a couple of months ago and the Lundins, who have remained relatively underweight gold, agreed to acquire FDN from Kinross for just $240 million in cash and stock ($150 million cash and approximately 26.2 million shares).

The company completed a $240 million financing which included a $100 million investment by the Lundin Family Trust and a $40.24 million convertible note to London’s “commodities queen” Carmel Daniele (CD Capital).

After the acquisition, Lundin Gold has over $90 million in cash to advance the project toward a development decision which it says could come in Q2/2016, but I wouldn’t be surprised to see that fast tracked to even sooner.

Although Lundin Gold says the political landscape in Ecuador is improving, the country still has a devastating 70% windfall tax and other problematic fiscal policy issues.

The Lundin Group are familiar with Kinross. In 2010 they sold their African gold producer Red Back Mining to Kinross for $9.2 billion which generated huge profits for the Lundin Group and its investors. (Since then Kinross has taken a series of write-downs totalling 80% of the acquisition price).

In the FDN project, Lundin Gold gets one of the largest and highest grade undeveloped gold projects in the world. The project holds 23.5 million tonnes at 9.59 g/t gold containing 7.26 million ounces of indicated resource and another 2.55 million ounces of inferred (14.5 million tonnes @ 5.46 g/t gold). This means they paid $33 per indicated ounce in the ground or $24.50 per total resource ounce in the ground. This puts the deal in line with precedent transactions, and it could prove to be a steal if they can advance the project and work with the authorities to figure out a fair way forward.