Pascua Lama project. Source: Barrick Gold

Chile's Supreme Court began hearings yesterday on whether the country's environmental regulator erred in lumping together the dozens of violations Barrick Gold (GOLD -1.02%) was charged with creating at Pascua-Lama into a handful of broad categories and assessing fines against them, rather than fining the miner for each individual transgression. The outcome could result in fines that are substantially higher than the record level penalties originally assessed. 

Over a year ago, Chile's Superintendent for the Environment found Barrick violated its environmental permit in 22 specific instances and ordered work at the massive gold and copper mine brought to a halt. Barrick was also required to build a water management system that would contain the contaminated effluence before work could even be considered beginning again. He then grouped the violations into five categories -- 19 of the violations fell into just two groups -- and imposed penalties totaling $16 million, which was the maximum fine possible.

But earlier this year an environmental court revoked the fines, charging the superintendent had no basis for grouping the infractions, though all of the other conditions of his decision still stood. The court said construction is still halted and the water containment systems must still be built, but also the miner must be subject to penalties for each and every one of the 22 violations.

Barrick appealed that ruling, though, saying the original decision was done in accordance to the law. If the Supreme Court rules against it, the miner faces fines that could run 10 times higher than the $16 million that was previously imposed and would further seal the fate of what had once was thought to be the next great gold and silver mine.

Pascua-Lama is one of the world's largest gold and silver resources, expected to produce an average of 800,000 to 850,000 ounces of gold and 35 million ounces of silver in its first five years of operation, and it has an expected mine life of 25 years. The site is said to possess nearly 18 million ounces of proven and probable gold reserves and 676 million ounces of silver, with all-in sustaining costs of just $50 to $200 per ounce. Last year, Barrick produced nearly 7.2 million ounces of gold with an AISC of $915 per ounce, and adjusted operating costs of $566 per ounce. For the company as a whole, it has AISCs of $975 per ounce.

But last October Barrick waved the white flag on the project and indefinitely suspended all work at the site. Even though it's invested some $5 billion into Pascua-Lama, the collapse of gold's pricing and the forces arrayed against the mine necessitated its effective abandonment for the time being at least as it tries to rein in costs and lower its substantial debt load.

The move, though, also required Barrick renegotiate its contract with Silver Wheaton (WPM 0.15%) because it was contractually required to have 75% of the construction completed by the end of 2015. The miner's failure to attain that goal could have allowed Silver Wheaton to demand it be refunded the upfront payments it had made in anticipation of taking 25% of the silver streams from Pascua-Lama, but instead they agreed to extend the deadline for the mine's completion until the end of 2017, and in the meantime will continue receiving until the end of 2016 silver production from three of Barrick's South American mines.

With hundreds of millions of dollars hanging in the balance, if the scales of justice tip against Barrick Gold, the curtain could be brought down at last on what could have been a premier gold and silver mine.