Canyon Resources files ‘takings’ suit against Montana

Canyon Resources (CAU-X) has filed a “takings” lawsuit against the state of Montana, seeking to overturn the anti-cyanide initiative I-137, which put a halt to the development of the McDonald gold deposit.

The Denver-based company is seeking damages to compensate for the value of the deposit, which it estimates could reach US$500 million.

Situated along the Blackfoot River, near Lincoln, the McDonald deposit contains a resource of 9.9 million oz. gold and 30 million oz. silver, which could be economic at gold389 million tons of both crushed and dump-leachable material averaging 0.019 oz. per ton, equivalent to 7.2 million oz. Capital costs for the operation total US$225 million.

Ballot initiative I-137, passed in November 1998, bans all new surface gold and silver operations that use cyanide. The initiative won only 53% of the vote and may have been defeated had it not been for a previous initiative, I-125, which prohibited for-profit companies from participating in the electoral process. As a result, neither Canyon nor any industry-supporters were allowed to campaign against Initiative I-37. Initiative I-125 was declared unconstitutional, but only six days before the passing of I-137.

After extensive testing and analysis of alternative mining and recovery technologies, Canyon has determined that the only economical way to develop McDonald is by open-pit mining and heap leaching.

Canyon claims that I-137 violates the company’s constitutional right not to be deprived of property without due process, the right to equal protection of the laws, the right to be protected against laws that impair existing contracts, and the right to be protected against laws that impose retrospective liability with respect to existing transactions.

The suit also asserts that Montana breached its contractual obligations and covenants of good faith and fair dealing. Since 1986, the state has granted six mineral leases for the project; it amended those agreements in 1994 with the understanding that the deposit would be developed by open-pit, heap-leach methods. The project, then a joint venture with Phelps Dodge (PD-N), also submitted a plan-of-operation and operating permit application. In all, the joint venture has spent more than US$70 million on the property.

In September 1997, Phelps Dodge sold to Canyon its 72.25% interest in the Seven-Up Pete joint venture, near the McDonald deposit. The selling price was US$150 million, most of which was due on production. Two years later, Canyon amended the purchase agreement with Phelps Dodge, so that Canyon would be required to pay Phelps Dodge US$10 million on issuance of all permits for construction or one-third of any proceeds from the lawsuit.

At the same time, Canyon received financing of US$3.5 million from Franco-Nevada Mining (FN-T) in return for a 4% net smelter return royalty on any production, or another third of any proceeds from the lawsuit.

Most of the deposit is subject to another 5% royalty, covering land owned by Montana. The royalty, which could amount to as much as US$85 million, is payable to the state school lands trust, the principal beneficiary of which is the University of Montana (Montana Tech), in Butte.