Following the Chilean Supreme Court’s move to temporarily suspend the environmental permit for the joint El Morro copper-gold project, an analyst opines the project should be shelved until the next decade.
El Morro is held 70% by Goldcorp (G-T, GG-N) and the rest by New Gold (NGD-T, NGD-X). Construction is set to start this September and last five years, at a cost of US$3.9 billion. Initial output had been slated for 2017, with full production in 2018.
Over its 17-year life, El Morro should deliver 210,000 oz. gold and 200 million lbs. copper a year to Goldcorp’s account.
The project touted as a low-cost producer with life of mine cash costs of US$550 per oz. gold on a co-product basis, sounds promising at first glance. But, analyst George Topping of Stifel Nicolaus says otherwise.
“It’s not a great project. Probably when it’s all said and done, it will cost [US]$5 billion to build. So the risk to build it is very high for not much reward.”
From a financial stance, that risk is the project having an estimated internal rate of return of 5% at a gold price of US$1,200 per oz., Topping notes.
“It’s not worth it. They should just can it and deter it to a much further timeframe than 2017-2018, that’s my opinion.”
Following the Supreme Court’s decision in late April, the companies froze all field work being carried out under the environmental permit, which the Chilean environmental permitting agency, the Servicio de Evaluacion Ambiental or SEA, issued on March 14, 2011.
“Activities not related to site construction, such as detailed engineering, design work and architectural planning, will remain underway,” New Gold said in a statement.
The Supreme Court’s ruling is connected to a constitutional action that was filed last May by the Comunidad Agricola Los Huasco Altinos (CAHA) against the SEA to revoke the permit. New Gold and Goldcorp took part in the proceedings as an interested party and beneficiary of the environmental permit.
In February 2012, the Court of Appeals of Antofagasta ruled in favour of CAHA, stating that the SEA had not “adequately consulted nor compensated” the indigenous people, Diaguita nation, that comprise CAHA.
The ruling states that the permit is suspended until “certain deficiencies” are corrected by the SEA.
It’s too early to say when the permit will be reinstated as SEA has not indicated how long it will take to complete the remedies.
Goldcorp says it will meet with SEA officials “to confirm the scope of permitted activities pending SEA’s compliance with the court’s decision.”
Topping says he doesn’t see this permit suspension delaying El Morro’s start up because very little work has been done at the project, which is subject to a court case between its owners and Barrick Gold (ABX-T, ABX-N).
Canada’s largest gold miner claims Goldcorp illegally got its hands on the project in 2010 through minority holder, New Gold, when Barrick had signed an agreement to buy 70% of El Morro from its previous owner, Xstrata (XTA-L), in 2009.
The Ontario Superior Court of Justice is expected to decide on the case soon.
Topping predicts that it is unlikely that the court will rule in favour of Barrick. But if it does, he says it won’t have a lasting effect on Goldcorp’s shares as El Morro accounts for about 1% of the company’s net present value.
For now, Topping maintains gold producers like Goldcorp should focus on paying out dividends instead of funding new projects to boost share prices and attract money into the sector.
“So we are not saying don’t built [El Morro] ever. We are just saying just push it out. The next decade should be good enough.”
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