SANTIAGO Barrick Gold Corp halted construction on its huge Pascua-Lama gold and silver mine in Chile on Wednesday after a local court ordered the suspension to weigh indigenous communities' claims that the project destroys glaciers and harms their water supply.
The appeals court in the northern town of Copiapo said it will analyze the complaints of "environmental irregularities" in connection with Barrick's (ABX.TO) project, which has been plagued by soaring costs and opposition from environmental groups.
Barrick said in a statement that it would continue to work to "address environmental and other regulatory requirements to the satisfaction of Chilean authorities." It also said it was too early to assess the impact of the suspension on the project's overall capital budget or its timetable.
Perched high in the Andes mountains on the Chile-Argentina border, Pascua-Lama is expected to cost between $8 billion and $8.5 billion, and Barrick could now face a long and costly legal battle to complete it.
A court source told Reuters the dispute could take several months to resolve and an appeal to the Chilean Supreme Court is likely.
The suspension of one of Chile's largest mining projects is the latest in a series of setbacks to key metal and energy projects that threaten extensive investment in the world's top copper producer.
Barrick's shares tumbled 8.6 percent to close at C$24.81 on the Toronto Stock Exchange, while its shares sank 8.4 percent to $24.46 on the New York Stock Exchange (ABX.N). The shares are now near a 4 1/2-year low on the both the TSX and NYSE.
The world's biggest gold mining firm, Barrick said construction on the Argentine side, where most of the infrastructure is, will not be affected by the court order. But since roughly 80 percent of the metal reserves are located in Chile, any permanent prohibition would kill the project.
"This looks bad ... horrible," said Winston Alburquenque, professor of natural resource law at the Universidad Catolica in Santiago. He estimated the Supreme Court could end up deciding on the project in about a year.
Chile's Diaguita indigenous communities want to stop the project, which has come under the state environmental regulator's scrutiny in the past. Environmental groups in Argentina are also battling the project, which they say harms pristine glaciers in the Andean mountain range.
It was not immediately clear what legal action Barrick can take to protect its investment in the project.
"At this point, it is somewhat bad news, which has a potential to be very bad news," said David West, an analyst with Salman Partners. "There's a lot of risk. It's really big, but there are some huge rewards here for Barrick. That's why they're going to focus a lot of their resources on getting this back into full construction as quick as possible."
Pascua-Lama was originally expected be one of the largest and lowest-cost gold mines in the world. The mine is expected to produce 800,000 to 850,000 ounces of gold and 35 million ounces of silver in its first five years of production.
In a note to clients on Wednesday, BMO analyst David Haughton said he views the latest delay as a negative.
"Assuming that the current events delay Pascua by a further six months and increase capital expenditure by say US$250 million, Barrick's net present value would be reduced by 56 U.S. cents a share or about 3 percent," Haughton said.
Analysts also warned that the delays could hurt streaming company Silver Wheaton Corp (SLW.TO), which has helped partially fund the project in exchange for allowing it to buy 25 percent of all the silver produced from the project.
The court dispute could also hurt engineering company Fluor Corp (FLR.N), which is the project's primary contractor.
Shares of Silver Wheaton fell 5.5 percent to close at C$28.71 on the Toronto Stock Exchange, while those of Fluor fell less than 1 percent to close at $62.57 on the NYSE.
In July, Barrick delayed its target date for initial production at Pascua-Lama to 2014. In November, Barrick boosted its cost estimate to between $8 billion and $8.5 billion.
Morningstar analyst Elizabeth Collins said Barrick has already sunk roughly half the overall capital costs linked to the project, making it hard for them to pull the plug now.
CHILE MINES UNDER FIRE
Chile produces one-third of the world's copper and has attracted investment with its solid institutions and strong growth. But experts say the country has not been firm enough in regulating its mining and energy industries, leaving billions of dollars worth of projects exposed to the risk of lawsuits by local communities.
Chileans have staged large protests to demand a bigger share of copper earnings. Some critics say a regulatory vacuum is allowing opposition groups to jeopardize approved plans for hydropower projects in Patagonia, thermoelectric plants across the country and major copper mines high in the Andes.
"We're not surprised at all and we think it's good that a court has been able to suspend work while Pascua-Lama fulfills all the requirements the environmental regulator had demanded previously," Interior Minister Andres Chadwick told a local radio station.
Pascua-Lama is a political hot potato in Chile, which is holding a presidential election in November. Environmental group Greenpeace said it "isn't possible to repair glaciers."
Last year, Chile's top court suspended the approval of the environmental permit for Goldcorp Inc's (G.TO) El Morro copper-gold project, saying the company would have to consult with local communities.
Chile is expected to attract $100 billion in mining investment in the next 10 to 12 years, a slightly longer time frame than previously forecast as regulatory uncertainty and energy woes loom as key risks, the Sonami mining association said earlier this year.
(Additional reporting by Euan Rocha, Erik Lopez, Antonio de la Jara, Julie Gordon and Allison Martell; Editing by Kieran Murray, Alden Bentley, Lisa Von Ahn, Kenneth Barry and Bob Burgdorfer)