UPDATE 2-Lundin Gold completes development agreement for Ecuador project

(Adds analyst comment, updates stock price)
TORONTO, Jan 14 (Reuters) - Canadian mining company Lundin
Gold Inc LUG.TO said on Thursday it will pay the government of
Ecuador an advance royalty of $65 million under an agreement
setting out the financial terms for development of its Fruta del
Norte project.
A windfall tax will not apply until Lundin has recouped its
development investment, said the company, which has negotiated
the right to develop and produce gold from the project for 25
years, with renewal rights.
Lundin Gold said the terms are "significantly better" than
those previously considered and it will now finalize its
feasibility study and project financing. Its shares were 10
percent higher, at C$4.16, on the Toronto Stock Exchange.
"We believe a legislation change to allow for VAT
(Value-Added Tax) recovery and a modestly smaller upfront
royalty payment help to improve the economics of the project,"
said RBC Capital Markets analyst Stephen Walker in a note to
clients.
Ecuador passed legislation in December allowing recovery of
a 12 percent Value-Added Tax, Walker wrote. He added that Lundin
Gold's upfront royalty payment was reduced to $25 million from
$40 million previously, while the total remains at $65 million.
Kinross Gold Corp K.TO sold its halted project for $240
million in late 2014, after acquiring it in 2008 with its
friendly $1.2 billion takeover of Aurelian Resources.

Kinross had suspended work on Ecuador's largest gold project
when the government refused to compromise on a windfall tax.
Lundin Gold said the windfall tax will be calculated if
market prices exceed stipulated base prices for gold and silver.
The government will tax the difference between net smelter
revenue and what revenue would be using a base price, at a rate
of 70 percent.
The agreement also stipulates that the government's share of
cumulative benefits from the mine will not be less than 50
percent, with Lundin paying an annual adjustment for any
shortfall.
A net smelter royalty remains at 5 percent at a gold price
of under $1,500 an ounce, but that rate will no longer increase
with higher gold prices, Walker wrote.