Bear Creek loses Santa Ana

Already hit by a retreat in the silver price, a leftist presidential victory, and rumblings of local discontent, Bear Creek Mining (BCM-V) was broadsided on June 25 by the Peruvian government’s decision to revoke the licence for its Santa Ana silver project.

The move follows weeks of protests in the Puno area of southern Peru, where both of Bear Creek’s projects are located. The most recent protest culminated in activists marching at the region’s main airport, with the ensuing police crackdown leaving six dead and 30 injured.

To diffuse the situation, outgoing president Alan Garcia reversed a decree allowing the Santa Ana project to go forward, and temporarily halted new mining concessions. 

Bear Creek’s stock plunged $1.41 to $3.75 on the Monday following the news, while the next day it traded at a 52-week low of $3.58 before closing at $3.77. The company hit an all-time-high share price of $12 in March.

Analysts were quick to remove Santa Ana from their valuations, with Scotiabank analyst Trevor Turnbull dropping his valuation from $11.22 to $7.66, both from the loss of Santa Ana and the much more dilutive equity financing assumed for the company’s larger and earlier-stage Corani project. BMO Capital Markets analyst Andrew Kaip dropped his price target on Bear Creek from $10 to $6, and Haywood Securities analyst Chris Thompson adjusted his target from $11.15 to $7.30.

 The sudden move hurt other Peruvian mining stocks, with Candente Copper (DNT-T) down 11¢, or 8.8%, to $1.14, Duran Ventures (DRV-V) off 4¢, or 14.6%, at 21¢, Sulliden Gold (SUE-T) down 26¢, or 13.9%, at $1.61 and Fortuna Silver Mines (FVI-T) down 31¢, or 6%, at $4.81. Sulliden and Fortuna bounced back somewhat on the second day of trading, while Candente and Duran slipped slightly further.

Bear Creek chief executive officer Andrew Swarthout said in a conference call that the company is ready to pursue legal options, but still believes that a political solution is possible.

Swarthout said in the call that the reversal was a “poor choice to resolve a political situation . . . it’s very appealable,” and described the move as “not legal, unconstitutional, in violation of Peru foreign investment laws, and constitutes expropriation.”

The company argues that the government has not cited any violations or procedure problems, that Bear Creek in no way threatens the local water supply and that it has led exemplary public consultations.

“We believe the real cause of the reversal,” Swarthout said, “was due to political pressure exerted on a transitional government under extreme pressure to resolve a multi-faceted political and growing general protest in Puno.”

Bear Creek is assuring investors that its flagship Corani project is not affected by the reversed decree, and that it is distinctly different from Santa Ana. Swarthout said that Corani sits at a high elevation in a sparsely populated area with an entirely different culture.

Scotiabank’s Turnbull wrote in a note that he does not believe the Corani asset faces risks similar to Santa Ana, adding that it is in the Quechua area and not the Aymara people’s area where the election protests have taken place.

Corani hosts 139.6 million proven and probable reserve tonnes grading 57.5 grams silver per tonne, 0.94% lead and 0.46% zinc, plus 110.4 million measured and indicated tonnes grading 20.2 grams silver, 0.45% lead and 0.4% zinc. The project, where  Bear Creek is on track to completing a feasibility study with production targeted for 2014, represents 80% of Bear Creek’s silver reserves in the country.

Santa Ana represents the rest, with proven and probable reserves of 37.1 million tonnes grading 53 grams silver, 0.34% lead and 0.58% zinc. Bear Creek expects to start construction in 2012. 

Locals have protested potential environmental contamination, especially potential contamination of Lake Titicaca, and have simultaneously argued that the area has not enjoyed the benefits of Peru’s economic growth.

Swarthout counters that the project will not hurt water supplies, and that water from the mine area does not flow into Lake Titicaca. Swarthout predicts that the mine will help the region.

“Santa Ana is exactly the kind of project that the newly elected Peruvian government needs for its stated objective of reducing poverty,” Swarthout said.