Metallica tumbles on lease woes (April 14, 2004)

Shares in Metallica Resources (MR-T) went into freefall in early trading on April 14, after the company said that a Mexican court has nullified its land lease agreement for the Cerro San Pedro heap-leach gold-silver project.

The Agrarian Court in San Luis Potosi state nullified the lease originally inked in 1997 with the Ejido of Cerro San Pedro (a group representing the historic occupants of the land), but stopped short of calling for a cessation of construction, or an order to vacate the ground. The court also quashed the authority of the signing ejido representatives.

Metallica says it, and the original ejidatarios, are appealing to a Federal Court to freeze the lower court decision. The company also says that the group contesting the lease comprises several non-residents who obtained membership to the ejido based solely on family lineage.

If its appeal fails, Metallica would have to negotiate a new lease with the ejido with no guarantee as to the outcome. Metallica says it is also looking at “other options aimed at establishing a long-term legal basis for using the land.”

Metallica began construction at Cerro San Pedro in mid-February, with plans begin leaching operations in September 2004; the recovery plant is slated for completion in October, followed by the first gold pour in November. The operation is expected to produce an average of 90,500 oz. gold and 2.1 million oz. silver annually for 8.3 years.

Construction of the mine and processing facility carries an estimated price tag of US$28.2 million. Another US$98 million is required to fund contract mining.

At last count, reserves stood at 61.1 million tonnes grading 0.59 grams gold and 24 grams silver, based on a gold price of US$325 per oz. and a silver price of US$4.62 per oz.

Shares in Metallica were trading 71, or nearly 30%, lower at $1.85 in early action in Toronto following the news on April 14.