Goldcorp Gets Tarnished Again

It's been a rough few weeks for Goldcorp (NYSE: GG  ) , suffering as it has setback after setback to operations throughout the Western hemisphere, and now investors can add two more to the list: the threat of a lawsuit over its Penasquito mine in Mexico and a multimillion dollar fine for health and safety violations at its Cerro Negro project in Santa Cruz.

Penasquito mine, Mexico. Source: Goldcorp

Located in the state of Zacatecas, the massive Penasquito mine was expected to become Mexico's largest open-pit mine, producing as much as 390,000 ounces of gold this year along with 21 million ounces of silver, 305 million pounds of zinc, and 160 million pounds of lead. But it has run into numerous roadblocks as it was challenged by a group of local landowners called Cerro Gordo Ejido, who successfully stripped Goldcorp of its lease earlier this year and had the property returned to them, only to have the ruling overturned. Since then, the miner has been in negotiations to settle the dispute.

In a SEC filing yesterday, however, Goldcorp said it received a letter from a Canadian law firm purporting to represent Cerro Gordo Ejido and threatening litigation in Canada if the miner didn't negotiate. Reuters reports the lawyers say Canada's "more rigid" legal system afforded a better shot at success than the Mexican system did, but Goldcorp says it's already dealing with the group's proper representatives and it completely rejects the new assertions. It intends to fight them tooth and nail should they actually file a lawsuit.

This past summer Penasquito was at the heart of Goldcorp's massive $1.96 billion after-tax charge caused by a reassessment of the mine's potential in the face of falling gold prices. While the miner would have been profitable without the charge, it recorded a loss of $1.9 billion compared to a $268 million profit a year ago. Even after adjusting for the loss and other one-time expenses, Goldcorp still came up woefully short of expectations, reporting non-GAAP earnings of $0.14 per share compared to the $0.21 per share Wall Street was anticipating.

Mexico is giving all miners a headache these days as it just approved a 7.5% tax on profits of all resource miners, plus an additional 0.5% on those mining precious metals. Goldcorp said while it won't abandon its projects in the country, it also won't be investing any more capital expenditures. Southern Copper's (NYSE: SCCO  ) parent, Grupo Mexico, also said it would be "obliged" to look elsewhere to invest its limited resources.

In Argentina, Goldcorp has apparently run afoul of local ministers again who chafed at its repeated disregard for their health and safety regulations. They fined Goldcorp $3.26 million, noting it was the fourth time in two years it has been cited for such infractions at Cerro Negro.

Goldcorp recently said it was deferring spending at the project and suspending all exploration activity there because of a 1% annual resource tax Santa Cruz just imposed. Considering it's been unable to get the permits it needs to advance the project and has been wracked by labor strife, which these fines are the latest product of, it wouldn't be surprising if this fine was a bit of tit for tat.

After all, Yamana Gold (NYSE: AUY  ) just said it was looking to strike gold in Santa Cruz as it plans to invest upward of $450 million at its richly mineralized Cerro Moro project and an eye toward beginning production in 2015. 

When it rains it pours, they say, and Goldcorp is caught in a torrential downpour with its shares at their lowest level in five years. Like all miners everywhere though, it's been pressured by the fall in gold's value, the rise of indigenous people attempting to clawback payments for resources taken from their lands (or prevent their extraction to begin with), and an increase in resource nationalism where governments try to rewrite their own rules to gain more profit from the work of others.

It's a tough environment in which to operate, but because of the structural faults world bankers have built into their financial systems, I remain bullish on the long-term prospects for gold. And Goldcorp, as the world's largest miner by market cap, will ultimately prosper down the road.

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