Colombia gold mine decision rattles investors

Thu Apr 29, 2010 6:45pm EDT

Related Topics

* Greystar ordered to rework gold project

* Investor group worried about legal stability

By Diana Delgado

BOGOTA, April 29 (Reuters) - Gold miners in Colombia's nascent industry are fretting after the environment ministry ordered Canada's Greystar Resources Ltd GSL.TO to redesign its key Angostura gold project to conform to new mining regulations.

Mining companies, who shunned Colombia for decades because of rebel violence and kidnapping, have returned thanks to better security under President Alvaro Uribe and the country's rich unexplored deposits.

But the decision to redesign an advancing project is raising investor questions about Colombia's legal framework and the clarity of its regulations for mining activities.

"Legal stability for gold companies is at stake," said Aurelio Martinez, president of the Latin American Mining Organization, which represents 14 countries in Latin America and the Caribbean. "This decision is sending confusing signals to the industry."

The environmental ministry ordered Greystar to resubmit a new environmental assessment study following the approval of a new mining code which forbids mining in Paramo ecosystems high in the Andes between upper forest limits and the lower edges of the snow line.

The government told Greystar its Angostura project must occupy an area below 3,200 meters altitude but most of Angostura's project facilities and infrastructure are located above that height.

The request would require the Angostura project, which is in the middle of completing a definitive feasibility study, to completely redesign its plans.

Greystar plans to file an appeal on Thursday against retroactive application of the modified mining law, Chief Executive Steve Kesler said. The ministry of environment will have 15 working days to respond.

"We are confident that the Colombian government will consider our appeal from a broad perspective," Kesler told Reuters.

The environmental minister did not return calls seeking comment. But the Ministry of Mines and Energy disagrees with the environment ministry on Greystar reworking a whole new environmental study.

Beatriz Duque, director of mines at the Ministry of Mines and Energy, told Reuters not all Greystar's mining is located in paramo ecosystems.

"It had the leaching zone in Paramo and that can change but that doesn't justify the request of a new environmental study," she said. Leaching in a process used for the recovery of gold.

NEW MINING CODE

Greystar carried out scoping, prefeasibility and environmental studies before Congress approved the new mining law last year.

Martinez said that as a result, Greystar should be governed by the previous mining code, which does not prohibit gold exploration and mining above 3,200 meters.

If the company loses the appeal, Greystar will have to start a new prefeasibility study from scratch putting the project back.

"The effect on the schedule would be significant especially if we have to undertake environmental impact assessment studies... and undertake new land acquisition," Kesler said.

Greystar planned to start construction of its gold and silver mine in Colombia early 2011. The company projected to spend $1 billion in capital expenditures including $600 million to build the mine and $3 billion in operating expenses over the life of the project.

So far Greystar has invested $135 million on exploration, land acquisition for mining and infrastructure, engineering and environmental studies, among other costs.

Output of gold and silver was expected to begin in the second half of 2012 with an average output of 2.3 million ounces of silver per year over a 15-year mine life.

It is not the first time government agencies have disagreed over projects. The environmental ministry has opposed advanced projects in the huge coal industry, citing the need to protect other sectors such as tourism.

"Colombia will never have a mining development if this keeps altering the industry," Alfonso Escobar, Colombia representative for Latin American Mining Organization.

(Editing by Patrick Markey in Bogota and David Gregorio in New York)

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