After 3 years of negotiations and court rooms, Bear Creek Mining (BCM:TSXV) has received a very positive court ruling which states that their rights were violated when the Peruvian government passed a supreme decree in 2011 that essentially took all legal rights away from Bear Creek with regards to their Santa Ana project. The Lima First Constitutional Court stated, among other things, that:
- The company's rights are to be unconditionally returned as stipulated under supreme decree No. 083-2007-EM, which originally granted the right to Bear Creek, as a foreign company, to operate the Santa Ana concessions, located within the 50km border zone of Peru.
- Bear Creek is to be recognized as the titleholder of the Santa Ana mining concessions and, therefore, is enabled to perform all the rights arising from the said titles.
After having participated in the conference call this morning (hosted by Andy Swarthout and Cather McLeod-Seltzer, President/CEO and Chairman, respectively), the company is not completely in the clear yet, although it is in a much better position today than it was 24 hours ago. The government of Peru can still appeal the decision, which would be typical of these types of situations.
Under Peruvian Law, the government has 3 days to appeal after filing of ruling. Mr. Swarthout said they will know within 3 weeks whether the government will appeal. If they do appeal, then the deadline of August 7, 2014 which was set out in Bear Creek's notice of intent to file formal arbitration will come into effect. Essentially the two sides will have until August 7th to come to a resolution or it will move to formal international arbitration which could take up to 5 years to complete.
With regards to where Santa Ana stands today, Mr. Swarthout stated that the ESIA (environmental permit) is currently on standby, but is 95% complete. The company intends to elaborate on the social commitments as well as hydrological studies. He estimates this to take one month and to not be expensive.
On the social license front, Mr. Swarthout does expect a new public hearing will be commenced which could take 9-12 months. They intend to follow the same protocol the company did with Corani (their other project which is 5x the size) whereby the company went above and beyond the minimum social benefits. Mr. Swarthout believes this will be $2 million more expensive than in 2011.
Overall, he sees capex remaining the same as in 2011 given a drop in the cost of liner and a plant. Operating cash costs he believes will be $2.5/oz more today than in 2011, from $7.5/oz to $10/oz.
The call also provided clarity on what the company sees for a development schedule for both Santa Ana and Corani. Originally, the plan was to build the smaller Santa Ana and use the cash flow to develop the much larger Corani. However, given the supreme decree in 2011, the company continued to move Corani ahead.
Now, the potential exists for two projects to be developed under the same timeline (very difficult for a junior to do). Mr. Swarthout stated that if Santa Ana moves ahead through social licensing quickly, then it could be back to the original plan of building it first then using cash flow to develop Corani.
At $16/oz silver, the Santa Ana project is a $130 million NPV (5%) project with a 34% IRR. It hosts 63.2 million ounces of silver in 2P reserves at an average grade of 53g/t silver. Prior to this decision the market was assigning zero value to this project. Now, they are perhaps giving 10% value.
More clarity is needed in terms of the Peruvian government's position on this surprising court ruling and whether they will appeal.
Shares breached $11/share in 2011, prior to the supreme decree revoking their rights at Santa Ana. This morning, shares are up $0.60/share (40%) at the time of writing to $2.08 per share.
With the two projects, Bear Creek holds over 333 million ounces of silver in 2P reserves and has the potential to be a large-cap silver producer, producing 15-20 million ounces per year by 2017/2018.
If a full settlement is reached with the Peruvian government, Bear Creek shares have material upside from these levels.
Read: Bear Creek Announces Favorable Judicial Decision in the Santa Ana Amparo