Posted on Silicon Investor DMM forum yesterday ...

http://www.siliconinvestor.com/readmsg.aspx?msgid=27806512

"A windfall profits tax, whereby the government would receive 70% of the
excess of the realized gold price above an agreed base gold price. The
base gold price is defined as the greater of $1,650 per ounce and the
spot gold price at the time of signing of the definitive exploitation
agreement. The base price is indexed to the United States Consumer Price
Index (CPI) on a monthly basis. The windfall profits tax would be
deductible for the purpose of calculating royalties, profit sharing
contributions and corporate income taxes;"

Not sure if I'm interpreting this properly but let's look at this per each section and in order of taxation.

The actual WIndfall Profit Tax only kicks in after a minimum price obtained from sales of gold over a minimum fixed price of $1650 per ounce. And the actual threshold has not yet been established as it will be "the greater of" $1650 and the spot price the day the agreements are signed.

So, say gold was at $1725 per ounce when the exploitation contract is actually signed, I think this says the windfall profit tax will only kick in after $1725. So if any company sells their gold at the following levels these would be the WP taxation rates per ounce sold.

There would be no Windfall Profit Tax below the $1725 sale price per ounce based on the hypothetical example I'm using.

$1800 - $1725 = $75 x 70% = $52.50/oz
$1850 - $1725 = $125 x 70% = $87.50/oz
$1900 - $1725 = $175 x 70% = $122.50/oz
$1950 - $1725 = $225 x 70% = $157.50/oz
$2000 - $1725 = $275 x 70% = $192.50/oz

And so on and so on. It also says the Windfall Profit Tax is deductible for the calculating of the corporate profit sharing contribution, the corporate income tax and the royalty payments. So I take it to mean that should any company in the circumstance I'm playing with here sells gold at $1850 after the effective exploitation signing date with gold selling for $1725 the day they signed ... they'd have to pay $87.50 for every ounce sold right off the top at that price.

Now, as this tax is deductible for the calculation of all the other "taxes" the next issue is the corporate profit sharing distribution ...

-- A profit sharing contribution equal to 15% of earnings before tax, to be
fixed under the proposed terms of the investment protection agreement.
This 15% contribution includes two components, with 12% to be paid to
the State and 3% to be paid to employees. Profit sharing contributions
are deductible expenses for the purpose of calculating corporate income
tax;


It says here that the profit sharing portions of the agreement (12% for the state, and 3% paid directly to the employees) are also deductible for the calculation of the corporate income tax. So it looks like the corporate income tax of 22% will be paid based on the reductions from profit of the windfall profit tax and the profit sharing contributions.


-- A sliding-scale net smelter return royalty linked to the realized gold
price, with a royalty of 5% for gold sold at a price of $1,200 per ounce
or less, 6% for gold sold above $1,200 up to $1,600 per ounce, 7% for
gold sold above $1,600 up to $2,000 per ounce, and 8% for gold sold
above $2,000 per ounce. The net smelter return royalty is calculated on
the basis of revenues after the deduction of windfall profits tax
payments (see below) and customary transportation and refining charges;


So the 8% rate doesn't kick in until the price of gold hits $2000 MINUS the deduction of the windfall profit tax and the other stated expenses ... Keeping in in line with the hypothetcial situation... if the company sells gold at $1850, the royalty rate will be used on the actual price of ($1850 - $87.50 - transportation and refining charges) or ($1762.50 - transp. and refining fees) x 7% or less than $120.00 per ounce.

Carrying on further ,,,

-- A corporate income tax rate of 22%, to be fixed under the proposed terms
of the investment protection agreement;


According to all the above, the corporate income tax rate is paid on what's left after all the other taxes and deductions are taken into consideration. Seems pretty straight forward ? It'll favour Ecuador if gold prices sky rocket after the exploitation contracts are signed, it might favour the mining companies more if the agreements aren't signed if the price of gold starts to run up.


The formulas for the royalty and taxation of each ounce of gold would roughly equate to the following ...


(Price per ounce - Windfall Profit Tax [if any] ) x the appropriate royalty rate = Royalty payment

(Price per ounce - Windfall profit Tax [if any] - royalty payment) x 15% profit sharing = Profit sharing expenses

(Price per ounce - Windfall Proifit Tax [if any] - Profit sharing contribution - royalty payment - cash costs - admin ) x 22% = Net .



Only thing I'm not too sure of is how the VAT would affect Dynasty as they've already built their mill ...

-- An obligation to maintain the government's share of project economic
benefits at a minimum of 52%. Project economic benefits are defined as
the cumulative sum of the Government's share (comprised of the royalty,
corporate income tax, the state portion of the profit sharing
contribution, and windfall profit tax, as described below, plus a 12%
value added tax applied to customary project expenditures) and Kinross'
share (comprised of the after tax free cash flows of the project),
calculated annually;


Seems OK considering I was expecting at least 53% plus the unknown windfall profit tax calculation. I think the companies can live with it, as long as there's some guarantees Ecuador will abide by the agreement in the future, which is what Kinross has stated.

Would appreciate comments and other's opinions on this. Hopefully we'll hear something from Dynasty in the near term regarding the potential affects the Kinross agreement has on us.

-------------------------------------------------------------------------------------------------

And an interesting looking spread sheet posted a little later on SI .

http://www.siliconinvestor.com/readmsg.aspx?msgid=27806691

Click on the link in the post to see the spread sheet.