Lundin Gold achieves commercial production, stock up

The processing plant under construction at Lundin Gold’s Fruta del Norte mine in Ecuador. Source: Lundin Gold Inc.

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Lundin Gold Inc. [LUG-TSX, Nasdaq Stockholm] has achieved commercial production at its Fruta del Norte gold project in Ecuador.

The shares advanced on the news, rising 10% or $1.10 to $12.21 on volume of 572,664. The shares trade in a 52-week range of $5.02 and $11.75.

“Lundin Gold has successfully built the first large-scale underground gold mine in Ecuador and has reached commercial production ahead of schedule and on budget,” said Lundin Gold President Ron Hochstein. “We are now focused on ramping up to name plate production and optimization,” he said. “In addition, as soon as we receive the necessary permits, we will start exploration drilling at our high priority Barbasco target.”

Fruta del Norte is a rich Honduran gold discovery that Lundin group company Fortress Minerals acquired in October 2014 from Kinross Gold Corp. [K-TSX;, KGC-NYSE] for $240 million.

The goal was to make Fruta del Norte the cornerstone asset of newly formed company Lundin Gold.

Lundin was able to acquire Fruta Del Norte for a fraction of the $1.2 billion that Kinross paid for the asset after Kinross was hit with a 70% revenue-based windfall profits tax and halted development after spending US$225 million on drilling.

Confident that he could secure more favourable terms, Lundin Gold Chairman Lukas Lundin won the right to produce gold at Fruta del Norte for 25 years under an (potentially renewable) exploitation agreement that allows Ecuador to tax the difference between net smelter revenue and what the revenue would be using a base price at a 70% rate. The base price, to be determined on a monthly basis, will equal the trailing 10-year average of the daily price of gold and silver.

The agreement gives Lundin Gold the right to recoup its cumulative costs before the tax kicks in.

“It’s a great orebody. It is going to be a very low cost producer, sub US$500 an ounce. It will go in any kind of gold environment,” said Lundin, during an interview with Resource World Magazine.

Lundin previously said he expects the mine to cost around $700 million to develop and produce between 300,000 ounces and 350,000 ounces of gold annually.

In declaring commercial production, the company said management considered a number of factors, including completion of substantially all construction activities in accordance with design and a production ramp up period which achieved an average throughput of 70% of mill capacity for a period of 90 consecutive days.

Management plans to provide guidance for Fruta del Norte when it reports its first quarter 2020 results

The new mine produced a total of 28,678 ounces of gold by the end of 2019. Of that amount, 3,411 ounces was in the form of doré bars, the balance of 25,267 ounces was produced as concentrate.

Initial production of both gold concentrate and doré was exported to a smelter and a refinery in Finland, in December, 2019, generating in $20.9 million of concentrate sales.

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