Goldcorp overcomes Barrick’s legal challenge

VANCOUVER — Canadian miner Goldcorp (G-T, GG-N) has emerged the victor following a lengthy legal tussle with competitor Barrick Gold (ABX-T, ABX-N) over a majority interest in Chile’s massive El Morro copper-gold deposit. Goldcorp is also facing environmental delays with the project, but the company’s first challenge was to establish ownership.

On June 27, Ontario Court Justice Herman Wilton-Siegel dismissed Barrick’s attempt to block a deal completed in 2010 that saw Goldcorp acquire a 70% stake in El Morro from Swiss-based Xstrata PLC (XTA-L).

Barrick had entered into a sale agreement with Xstrata for US$465 million in October of 2009. Minority stakeholder New Gold (NGD-T, NGD-X) — which holds a 30% interest — subsequently exercised a right of first refusal, purchasing the remaining share in El Morro for US$463 million before transferring the 70% interest to Goldcorp in exchange for US$50 million in cash. Barrick claims that New Gold illegally exercised its right, while receiving the necessary proceeds for the sale directly from Goldcorp. Barrick’s claim sought to declare the transaction “unlawful and ineffective”, citing Goldcorp, New Gold, and Xstrata as defendents.

New Gold maintains it holds a shareholder right to match any offer tendered for the majority stake in El Morro, and acted lawfully when negotiating with Goldcorp to nullify Barrick’s initial deal.

“The decision affirms our position that we validly exercised our right of first refusal,” stated New Gold’s executive chairman Randall Oliphant. “El Morro’s significant gold and copper mineral resources, continued exploration potential and strategic location make it one of the best undeveloped projects in our industry. As it was our company that originally discovered El Morro, we believe we are in a great position with a significant, fully funded interest in this world class project.”

The agreement with Goldcorp carries a few extra perks for New Gold that helps explain why the smaller company moved to block Barrick’s acquisition. On top of the US$50 million cash payment, New Gold also benefits from a lower interest rate on funding advances at 4.99% and construction performance guarantees.

Goldcorp approved a US$3.9-billion development plan for El Morro in January, which would include a five-year construction period followed by full production in 2018. The company estimates the mine will produce 210,000 oz. of gold and 200 million lbs. of copper per year over its life at cash costs of roughly US$550 per oz. on a co-product basis.

 “We are pleased that the court has confirmed our position that our acquisition of El Morro was completely proper and consistent with the relevant agreements and Chilean law,” commented Goldcorp president and CEO Chuck Jeannes. “Goldcorp’s ownership share of the project has now been clarified for our shareholders.”

Barrick was keen on El Morro due to potential cost-saving synergies it contemplated with other major operations in the area, including its Pascua-Lama gold-silver mine and Veladero gold operation. Barrick, the world’s largest gold producer, did not release comments on the ruling though the company did say it was looking at a possible appeal on its website.

Though Goldcorp and Barrick have worked on a number of joint-venture projects — including the Pueblo Viejo gold project in the Dominican Republic — the companies maintain the legal proceedings would not affect business relations.

The court ruling had no real market impact on any of the company shares. Goldcorp fell 4.8% or $1.86 to $38.44, while Barrick lost 4.4% or $1.70 to $37.43, and New Gold declined 2.5% or 24¢ to a $9.54 presstime close.

Goldcorp must now deal with a pending environmental review at El Morro, following a judgement by the Supreme Court of Chile that saw the company suspend development activities in late April. Goldcorp has continued with activities unrelated to site construction, but must await a ruling by the Chilean environmental permitting authority before recommencing development.