Appeal denied on Cerro San Pedro

New Gold (NGD-T, NGD-X) has lost an appeal against a Mexican court ruling that cancelled a 2006 environmental impact study on its Cerro San Pedro mine in central Mexico, 20 km northeast of the state capital of San Luis Potosí.

New Gold’s appeal was rejected today by the Fifth Auxiliary District Court in Mexico City.

The news sent shares of the mid-tier producer down 12.01% or 73¢ apiece in Toronto to close at $5.35 per share, with 13.9 million shares changing hands.

“As Cerro San Pedro represents 19% of New Gold’s operating assets a negative outcome could have a meaningful impact,” analysts at UBS Investment Research wrote in a note to clients following the announcement. “Although further appeals are likely and new permits could be granted, we believe the risk surrounding CSP will persist given a vocal and organized opposition.”

In September 2009, the Federal Court of Fiscal and Administrative Justice ruled that Semarnat, Mexico’s environmental agency, should cancel Cerro San Pedro’s environmental impact assessment starting from November. In December, however, the First District Court in San Luis Potosi granted an injunction against the order to suspend mining and Cerro San Pedro has remained fully operational since then.

In a statement today New Gold said it will file an appeal with a Collegiate Appeals Court in Mexico City and may also file an application with the country’s Supreme Court requesting that it hear the case.

The company also defended the Cerro San Pedro operation, arguing that it “complies with the highest environmental standards and should remain operational for the benefit of its local employees and the surrounding communities.”

In a fact sheet posted on its website today, New Gold maintained that the legal challenges it is facing “relate primarily” to a land-use dispute and reiterated its claims that “there are no environmental problems or issues with the Cerro San Pedro mine.” It also noted that all of the mine’s land-use and operating permits remain in effect and pointed out that the mine plans to spend US$6.5 million this year on wages and benefits.

“It’s not over,” Michael Curran of RBC Capital Markets said when asked if it was the end of the line for the mine. “I don’t think they’re at any end point here.” Curran who is neutral on the stock has a 12-month target price of $7 per share.

In a flash note to clients, Trevor Turnbull of Scotia Capital said he believed New Gold “has a strong case and will eventually prevail on further appeal. “

“If Profepa, the government’s environmental enforcement agency, decides to shut down the mine it is likely New Gold will need to obtain a new injunction to maintain operations. We believe no decision will be made by Profepa pending the details of the written decision.”

Turnbull noted that Cerro San Pedro accounts for roughly 25% of New Gold’s estimated production this year and said he is maintaining his one-year target price on the stock of $7.25 per share.

New Gold has traded in a range of $2.67-$6.97 per share on the Toronto Stock Exchange over the last 52 weeks and has 389.9 million shares outstanding.

In addition to Cerro San Pedro, New Gold produces precious metals at its Mesquite mine in the U.S. and its Peak mine in Australia. The company also has two development-stage copper/gold projects: New Afton in Canada and El Morro in Chile.