Pacific Rim suspends drilling in El Salvador

Pacific Rim Mining (PMU-T, PMU-X) is suspending drilling in El Salvador and shifting its exploration efforts to Costa Rica and Guatemala, countries that are “more politically stable for mining investment,” the company says.

The Canadian junior says the move is a necessary step until it receives its “long sought after” mining permit for its flagship El Dorado gold project. The company holds two other gold properties in the Central American nation, Santa Rita and Zamora-Cerro Colorado.

Pacific Rim “cannot continue to invest millions of dollars annually in advancing its El Salvador gold projects, particularly El Dorado, until such time as the government of El Salvador signals its willingness to proceed with development of El Dorado,” the company said in a press release.

The company submitted its final environmental impact study on the El Dorado property in October 2006 but is still waiting for an environmental permit and mining licencefrom the Environmental and Natural Resources Ministry.

While Pacific Rim is not abandoning its assets in El Salvador, it feels the time has come to play hardball. Since 2002, it has invested US$48 million on exploration in the country, virtually all of which has been spent on El Dorado.

Pacific Rim entered El Salvador “cautiously and prudently” and was encouraged by the highest levels of government, the company said. “Unfortunately, the government of El Salvador is now stalling the process without regard to the company’s rights deriving from its substantial investments in the country.”

The National Assembly of El Salvador is currently mulling reforms to its existing mining law that will strengthen regulation of the industry, requiring stricter environmental standards and mandating social investment in the mining communities.

But the real reason behind the permitting delay according to Thomas Shrake, Pacific Rim’s president and chief executive, is the upcoming national election that is slated for April 2009.

A decision won’t be made on El Dorado’s permits until after the election, Shrake contends, because the ruling party does not want to lose votes.

“I think there’s a feeling within the president’s circle that it will cost them in the upcoming election so they’re just stalling,” Shrake says from Reno, Nev.

“It’s put us in the unfortunate position that we have to cut back. It makes no sense to shareholders to raise capital — that’s just diluting existing shareholders. Our stock is severely discounted by this inaction on the part of the government, so it makes no sense to continue to invest these sums in El Salvador.

“Nothing has moved in the mining industry for two years,” he says. “They have basically just shut the whole thing down.”

Shrake adds that the Ministry of Environment and Natural Resources has told the company for more than a year that there are no technical issues with its mine plan at El Dorado. “It’s just a matter of getting the political will.”

According to a survey of 1,500 Salvadoran adults in October 2007 published in the newspaper La Prensa Grafica, the governing National Republican Alliance (ARENA) had lost some ground to the left-leaning Farabundo Marti National Liberation Front (FMLN).

The survey showed that about 28.1% of respondents polled would support the conservative ruling party and 25.5% would support the FMLN.

While ARENA candidates have won all four of the country’s previous presidential elections, some people believe the vote could actually go to the FMLN this time around.

Reutersnews agency reported last month that recent surveys by the University of Central America and CID-Gallup have given Mauricio Funes, a former CNN journalist and Salvadoran talk show host, a lead of up to 20 points over his rival, Rodrigo Avila, the ruling party’s candidate and a former police chief.

Whichever candidate wins, however, Shrake believes the proposed mine at El Dorado should go ahead, eventually.

“It’s a question of how long they’re going to drag it out and how much money we’re going to lose in the process,” he says.

Shrake notes that even the opposition party is essentially proforeign investment and free trade and has moved toward the political centre.

“Even the opposition recognizes that gold mining represents significant jobs and tax revenues,” he argues. “They are a changed party (and) have gone out of their way to morph into a more moderate political position and platform. The last thing they want to project to the world is demonstrations and the usual activities of the opposition that have gone on in the past.”

Nevertheless, Shrake concedes the FMLN still has a radical constituency that adheres to the Cold War Marxist doctrine of the party’s past and that foreign-funded NGOs have managed to whip up some opposition to Pacific Rim’s mining project.

According to a February report by Inter Press Service, a global news agency that focuses on stories about civil society, poverty and sustainable development, peasant farmers in the northern Salvadoran province fear that mining operations will consume tens of thousands of litres of water daily, drawn from the same sources that currently provide them with water. They also worry about cyanide contamination to groundwater and soil.

But Shrake dismisses the claims outright, calling them “hogwash.”

“We’re going to collect our own water during the wet season and we’ll recycle and use it. We’re not even going to drill a single production well so that notion is complete nonsense.”

Shrake explains that there is no aquifer in the area and while there are some springs, they are limited in number. “We’re going to use our own water. . . The rain comes down in bucket loads during the rainy season.”

As far as cyanide contamination is concerned, Pacific Rim says it plans to double-line its tailings system. It also will use the INCO process to get rid of cyanide. The technology destroys cyanide by altering it to the point where it is benign before it is put into the tailings system. In addition, Pacific Rim says it will build a water treatment plant.

But in the meantime, additional layoffs are likely if the permit issue is not “resolved imminently,” the company said. Since June 30, 42 El Salvador-based employees have been laid off.

Shrake wishes it were otherwise. In recent months, the drill program at El Dorado, focused on the Cerro Alto and La Luz veins, has intersected many blind gold-bearing veins.

He says Pacific Rim’s exploration team is responsible for discovering several, previously unknown, epithermal gold systems.

“If nothing else, we have demonstrated that this is a fantastic, untapped gold belt,” Shrake says. The gold belt, which includes a couple of mines in Guatemala, extends across the northern half of the country.

“We’ve identified two virgin epithermal gold systems in the last two years that we can talk about,” he says. “We found two others that we have applied for concessions on but which have been ignored by the Ministry of the Economy.”

Pacific Rim recently completed an updated resource estimate on El Dorado, which incorporates the Balsamo deposit into the resource base.

Six defined deposits make up El Dorado and contain estimated resources of 1.4 million gold equivalent oz. in the measured and indicated categories, and an additional 300,000 gold-equivalent oz. in the inferred category.

Limited exploration work will continue at El Dorado, Santa Rita and Zamora-Cerro Colorado to maintain the company’s claims in good standing. Recently, Pacific Rim wrapped up a 9-hole firstphase drill program at Santa Rita.

The company is moving ahead with a feasibility study on El Dorado, which had been put on hold in February 2007 in order to conduct definition drilling at the Balsamo gold deposit, quantify its gold resources and include them in the updated study.

The feasibility study will include a mine plan for El Dorado based on the updated resource es
timate, an underground mine plan for the Minita, South Minita and Balsamo deposits, plus processing facility and tailings impoundment designs, and an economic analysis of the combined operation. It is expected to be complete by December.

In the meantime, Pacific Rim will also start shifting its focus to Costa Rica and Guatemala, two “geologically similar” jurisdictions.

Costa Rica recently reopened its doors to gold mining and Pacific Rim has already filed for two large exploration concessions in the Las Juntas de Abongares and La Union mining districts, both epithermal vein systems with historic gold production. The company will evaluate drill targets there in the coming months.

In Guatemala, two gold mines (both epithermal vein systems similar to the El Dorado and Santa Rita systems) have moved into production in the past few years along the same Central American gold belt that hosts Pacific Rim’s El Salvador gold deposits. The country has seen little modern exploration investment.

News of Pacific Rim’s decision to stop exploration in El Salvador sent its shares down 24, or 30%, to close at 55 a share on a trading volume of almost 965,000.

Over the last year, the company’s shares have traded from 75-$1.30. Pacific Rim has 116.9 million shares outstanding.

From Shrake’s perspective, it’s not only Pacific Rim shareholders who are losing out from the delays.

“The entire northern half of the country lives in extreme poverty,” he says. “Their greatest hope of feeding their families is getting across the U. S. border. These people live below the extreme poverty line on average and (mining) is the only hope of gaining jobs and staying at home.”

A mine at El Dorado — which would take at least two years to build –would be the “single largest revenue creator for the government” in a country that is facing a severe debt crisis and a shortfall in tax revenues, Shrake adds.

“The longer they delay us, the longer it takes for those revenues to come in.”