Mexican court denies appeal on Cerro San Pedro

New Gold (NGD-T, NGD-X) has lost an appeal against a Mexican court ruling that cancelled a 2006 environmental impact study on its Cerro San Pedro gold-silver mine in central Mexico, 20 km northeast of the state’s capital San Luis Potosi.

New Gold’s appeal was rejected by the Fifth Auxiliary District Court in Mexico City.

The news sent the mid-tier producer’s shares down 12% or 73¢ to close at $5.35 per share on July 7 in Toronto, with 13.9 million shares changing hands.

“As Cerro San Pedro represents 19% of New Gold’s operating assets, a negative outcome could have a meaningful impact,” analysts at UBS Investment Research wrote in a note to clients following the news. “Although further appeals are likely and new permits could be granted, we believe the risk surrounding Cerro San Pedro will persist given a vocal and organized opposition.”

In September 2009, the Federal Court of Fiscal and Administrative Justice ruled that Semarnat, Mexico’s environmental agency, should cancel Cerro San Pedro’s environmental impact assessment starting from November of that year.

In December, however, the First District Court in San Luis Potosi granted an injunction against the order to suspend mining and Cerro San Pedro has remained fully operational since then.

In a July 8 statement, New Gold said it will file an appeal with a Collegiate Appeals Court in Mexico City and may also file an application with the country’s Supreme Court requesting that it hear the case.

The company defended the Cerro San Pedro operation, arguing that it “complies with the highest environmental standards and should remain operational for the benefit of its local employees and the surrounding communities.”

Local opposition groups believe the mine is an environmental disaster and a threat to water resources.

In a recent fact sheet posted on its website, New Gold maintains that the legal challenges it is facing “relate primarily” to a land-use dispute and reiterated its claims that “there are no environmental problems or issues with the Cerro San Pedro mine.”

It also notes that all of the mine’s land-use and operating permits remain in effect and added that the mine plans to spend US$6.5 million this year on wages and benefits.

“It’s not over,” said Michael Curran of RBC Capital Markets, when asked if it was the end of the line for the mine. “I don’t think they’re at any end point.” Curran, who is neutral on the stock, has a one-year target price of $7 per share.

In a note to clients, Trevor Turnbull of Scotia Capital said he believes New Gold “has a strong case and will eventually prevail on further appeal.”

“If Profepa, Mexico’s environmental enforcement agency, decides to shut down the mine it is likely New Gold will need to obtain a new injunction to maintain operations. We believe no decision will be made by Profepa pending the details of the written decision.”

Turnbull notes that Cerro San Pedro accounts for roughly 25% of New Gold’s estimated production this year and maintains his one-year target price on the stock of $7.25 per share.

New Gold has a 52-week trading range of $2.67-$6.97 on the TSX and 389.9 million shares outstanding.

In addition to Cerro San Pedro, New Gold produces at its Mesquite gold mine in California and its Peak gold mine in Australia. The company also has two development- stage copper-gold projects: New Afton in B.C. and El Morro in Chile.