New Gold’s Cerro San Pedro mine closed ‘definitively’

Vancouver – The day after New Gold (NGD-T) shares lost 15% on news the company has been ordered to cease operations at its producing Cerro San Pedro mine in Mexico, it seems the company has little room to appeal a decision that the Attorney General of the Mexican environmental enforcement agency (PROFERA) is calling definitive.

Patricio Patron Lavadia, Attorney General of PROFERA, announced that his office is terminating the Cerro San Pedro mine definitively, that New Gold will be responsible for remediating the open pit operation, and that it is launching a legal inquiry into the circumstances surrounding the issuance of the mine’s environmental impact permit.

To understand the situation at Cerro San Pedro requires going back to 2004, when Mexico’s Noveno Tribunal Colegiado en Materia Administrativa ordered the Federal Tribunal of Administrative Justice to cancel the initial environmental impact permit issued to Minera San Xavier (MSX) in 1999.

MSX is the Mexican company that owns Cerro San Pedro and that is now a New Gold subsidiary. The Noveno Tribunal represents that final court of appeal in administrative law in Mexico and its decisions are not open to appeal.

It took another 16 months before the Federal Tribunal carried out the ruling, but in October 2005 the court cancelled MSX’s environmental impact permit. In its ruling the court noted that “under no condition could an environmental impact permit be accorded for this project.”

Despite this, the Ministry of the Environment and Natural Resources (SEMARNAT), in April 2006, issued a new environmental impact permit for the mine, based on a new environmental impact assessment. The new permit carried with it almost 100 conditions regulating the operation of the mine.

Opponents of the mine appealed the second permit and the appeal process led, once again, to a unanimous decision by the Noveno Tribunal that the permit was illegal. This decision, in April of this year, instructed the Federal Tribunal to require SEMARNAT to revoke the second permit, in a process described as “complete and without appeal.”

On Sept. 24, the Federal Tribunal carried out its sentence. In a translated and abbreviated form, its ruling stated the following.

“Be it resolved…that the authorization accorded to Minera San Xavier…by the Director General of Environmental Impacts and Risks at the Ministry of the Environment and Natural Resources (SEMARNAT) is null and void. By our order SEMARNAT, which has already ignored a previous ruling by the court on the 5th of October 2005, has 20 days to advise the affected party and carry out the sentence.”

On Nov. 13, SEMARNAT formally informed MSX and New Gold that their permit was revoked.

Actual enforcement of permitting issues falls to PROFERA, the enforcement agency, and on Nov. 17th local representatives from PROFERA went to the mine to enforce the revocation.

A 12-hour inspection followed, in which PROFERA developed a timetable for the shutdown: mining operations ceased immediately but the leach pads will be allowed to complete their cycles, after which time the entire operation will be terminated.

Laviada, the PROFERA Attorney General, made his comments about the situation the next day. And PROFERA, which as said is launching a legal inquiry into SEMARNAT’s issuance of the second permit, is not the only one pursuing legal remedies – lawyers for the local coalition opposed to the mine, known as FAO, are preparing criminal charges and civil suits against New Gold and MSX.

In addition, on Nov. 10, the FAO, seeing that New Gold had not made public the material information of its pending permit revocation, filed a complaint with the British Columbia Securities Commission and the Toronto Stock Exchange accusing the company of withholding and misrepresenting information that “is of central importance to shareholders.”

Those who live in the area have mixed opinions about the mine. Those opposed to the operation say the blasting regularly puts cracks in the walls of buildings in the area, including homes as well as an heritage church, and believe cyanide from the leach pads is seeping to the aquifer that supplies drinking water to locals and to the million-plus inhabitants of the state capital, San Luis Potosi, which is 20 km away. Others locals support the operation, as it has provided a much-needed source of employment.

The mine shutdown seems to have pushed some of those differences to a boiling point: the FAO says mine workers, left unemployed for the foreseeable future, attacked three villagers whom they blame for the mine’s closure.

Cerro San Pedro, one of New Gold’s three operating mines and its only Mexican operation, poured its first gold in 2007. New Gold says it has appealed the decision, though through what avenue is not clear, and the company says it intends to pursue all legal avenues with respect to the actions of the environmental agencies. The company is seeking “immediate remedies.”

“This is a continuation of a decade of challenges from a group of individuals, largely from outside the area, who are opposed to the mining operations at Cerro San Pedro,” said New Gold CEO Robert Gallagher in a statement. “We are taking all possible steps to respond to challenges to our legal ability to operate the mine and believe that we will resume full operations.”

Gallagher recently referred to Cerro San Pedro as the company’s best mine.

In 2008 the mine produced 84,600 oz. gold and 1.1 million oz. silver, at an average cash cost of US$432 per oz. gold. Proven and probable oxide reserves still contain 1.3 million oz. gold and 51 million oz. silver; the underlying sulphide resource is largely unexplored but considered prospective.

For the last two years the mine has been rated the safest mine of its size in the country by Mexico’s Chamber of Commerce.

On news of the cease-operations order New Gold’s share price fell 69¢ in a day to close at $3.85. The company has a 52-week trading range of 94¢ to $4.76 and has 390 million shares outstanding.

[Many thanks to Dr. Davinen Studnicki-Gizbert, a history professor at McGill University, who is studying the San Luis Potosi region and provided much of the information in this article]