SANTIAGO/TORONTO (Reuters) - Chile's Supreme Court suspended a key permit for Canadian miner Goldcorp Inc's El Morro copper-gold project, the latest setback for the controversial project and one of the biggest legal blows to a mining project in the world's top copper producer.
El Morro, Goldcorp's only major asset in Chile, had its environmental permit for the $3.9 billion project struck down in February by an appeals court at the request of an indigenous agricultural community. Chile's Supreme Court upheld the ruling on Friday.
Vancouver-based Goldcorp said it has halted all development work at El Morro in light of the ruling. The project, 70 percent owned by Goldcorp and the remainder held by smaller competitor New Gold Inc, was expected to start being built in September and begin initial production in 2017.
El Morro, planned in Chile's mineral-rich Atacama region, is expected to produce about 200 million pounds of copper a year and over 210,000 ounces of gold for Goldcorp.
Goldcorp already faces a legal challenge from Barrick Gold Corp regarding its ownership of El Morro.
Projects in Chile, which produces a third of the world's copper, are facing increased opposition from social groups that are demanding greater environmental safeguards and a bigger chunk of the country's wealth from the mining boom.
The Supreme Court decision means Goldcorp has to solicit local communities' consent and then submit the entire project to environmental approval all over again, the Supreme Court and Chile's environmental evaluation agency said.
Goldcorp presented its original environmental impact assessment in November 2008 and it was approved in March 2011, according to the environmental evaluation agency's data.
The miner said that until the Chilean environmental agency informs it about how it plans to proceed, it cannot provide any views on how long the process might take.
The Supreme Court decision could significantly raise the project's execution and costs, said Gustavo Lagos, a professor at the Catholic University's Mining Center in Santiago.
"Communities are going to feel empowered by this decision," Lagos said. "I think we could see appeals increase. Miners are going to have to display a lot more care and attention, because obviously any delay is very costly."
The Supreme Court's ruling is one of the first that rejects a massive mining project's permit and sets a strong precedent, said Lucio Cuenca, director of environmental group OLCA, which advises several communities fighting planned energy and mining projects in Chile.
"There seems to be a new consciousness," Cuenca said.
The court's ruling has also raised prospects that Brazilian billionaire Eike Batista's $5 billion coal-fired thermoelectric plant, which is also pending a decision in the Supreme Court, could run into hurdles.
The plant aims to provide power to major mining projects in the Atacama desert region, potentially including Antofagasta Minerals' Los Pelambres mine, the Cerro Casale project owned by Barrick Gold and Kinross, and Lumina Copper's Caserones mine.
Shares of both Goldcorp and New Gold dropped on the Toronto Stock Exchange on Monday following the announcement. Shares of Goldcorp fell 1.3 percent to C$37.86, while those of New Gold fell 9 percent to C$8.94.
The permit was ruled invalid on the grounds that Chile's environmental permitting authority had not adequately consulted with the indigenous people affected.
The Huasco Altinos indigenous group that has opposed the El Morro project has argued the mine would harm livestock-rearing, restrict scarce water supply and infringe on sacred and ancestral lands.
Consuelo Labra, a lawyer for Huasco Altinos, cheered the court's ruling.
"This validates the rights of indigenous people. It's a very positive decision ... against a huge project," she said, noting that the country lacks a standardized consultation process.
While Chile's economy has boomed on the back of a copper bonanza, the country was rated the most economically unequal country of the 34-member state Organization for Economic Cooperation and Development, or OECD.
New Gold, in a separate statement, said the companies and the environmental agency are working closely to quickly "address any perceived deficiencies regarding the consultation or compensation of indigenous people in the area of the El Morro project".
The project is believed to host 8.4 million ounces of gold and 6.1 billion pounds of copper.
Analysts believe the project will ultimately win approval.
"Although this provides a near-term hurdle for the project, we expect that the issues can be rectified and the project to be back on track sooner than later," Salman Partners analyst David West said in a note to clients.
The companies said that safety and security staff at the site will continue to work, while activities not related to site construction, such as engineering, design work and architectural planning, will continue.
Goldcorp said the process will involve more meetings with the Comunidad Agricola Los Huasco Altinos - the group that requested the permit review.
A Canadian court is also soon expected to rule on Toronto-based Barrick's legal challenge to Goldcorp's ownership of the project. Barrick had a deal to buy the 70 percent stake from then owner Xstrata Copper, but was bested when Goldcorp swooped in with a side deal after minority stakeholder New Gold rejected the Barrick bid as part of its right of first refusal.
Barrick is suing New Gold, Goldcorp and Xstrata in the Ontario Superior Court of Justice. Final arguments in the matter were heard by the court earlier this year.
(Reporting by Alexandra Ulmer in Santiago, Euan Rocha in Toronto and Aftab Ahmed in Bangalore; editing by M.D. Golan)