Goldcorp Gets Green Light at El Morro Once More

Development stage El Morro gold and copper project in Chile. Source: New Gold

As one door closes, another opens. Fresh from licking its wounds at having failed to acquire the rich Canadian Malartic gold mine in Quebec, Goldcorp (NYSE: GG  )  learned the other day that its on-again, off-again El Morro copper and gold project in Chile is back on. A Chilean appeals court rejected the latest attempt by local indigenous populations to stop the miner from advancing the project, though the groups will likely appeal the decision to the Supreme Court.

El Morro is Goldcorp's only major asset in Chile, holding an estimated 8.4 million ounces of gold and 6.1 billion pounds of copper. Having aquired a 70% position in 2010, Goldcorp and minority partner New Gold (NYSEMKT: NGD  ) have struggled to get the project moving as one special interest and then another threw roadblocks in their path.

In 2012, the Huascoaltinos indigenous community successfully persuaded an appeals court it had a right to have greater input into the project and could take a bigger piece of the resource pie that will ultimately be mined, a decision affirmed at the time by the Chilean Supreme Court, which subsequently suspended Goldcorp's environmental permit. 

Last August, though, Goldcorp submitted a new compensation plan for the project, giving the indigenous Diaguita ethnic population, which owns surface rights to El Morro, thousands of hectares across the region. That led the Supreme Court to restore the environmental permit. But the group appealed again, arguing the consultation, based on an International Labor Organization convention, wasn't properly conducted and raising concerns the mine would be built on sacred ancestral lands, livestock would be harmed, and scarce water supplies would be restricted.

This all set up the decision the other day in which the appeals court chose not to hear the case, determining the Diaguita community wasn't affected by the project and saying Goldcorp and New Gold had fully complied with the order to consult with the Huascoaltinos.

Now the case will likely move again to Chile's highest court, where Goldcorp anticipates a mid-2014 ruling. In the interim, all project field work executed under its environmental permit will remain suspended, though activities not related to construction, such as detailed engineering, design work, and architectural planning, continue apace.

El Morro promises to be a world-class mine once finally approved, but the delays caused Goldcorp to seek out a quality asset that was already producing in a politically stable region, hence the Malartic acquisition attempt.

Most of the Goldcorp's projects are located in Mexico, where 40% of its proven and probable reserves are clustered and which produced more than half of its gold last year. While it is more stable than either Chile or Argentina, Mexico recently enacted a windfall profit tax of 7.5% on natural resources miners, plus an additional 0.5% on those extracting precious metals. The levy raises Goldcorp's effective tax rate to more than 40%.

Based on its 70% stake in El Morro, Goldcorp's claim on the mine's proven and probable reserves amounts to 6.7 million ounces of gold and 4.9 billion pounds of copper.

Pricing for the metals, however, remains pressured. Gold is below $1,285 an ounce again after the Federal Reserve continued to taper its quantitative easing program. Copper, which has been struggling to maintain the levels it hit as recently as last year, is turning south once more as China imposes restrictions on commodities-backed financing deals. Iron ore was especially slammed, but copper, which is more easily stored and is more portable, has weakened as well.

With the initial capital expenditures at El Morro estimated to be $3.9 billion, of which Goldcorp would be responsible for 70%, metal pricing weakness could end up being a flashing red light for the miner even if the courts say "go."

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