Fortuna Silver to fight ‘unprecedented’ Mexico permit rejection

Fortuna Silver is advancing all options to fight an "unprecedented" decision by Mexico’s environmental authority Semarnat to reject a permit extension for the San José mine, one of the country’s biggest silver producers.

Semarnat denied a permit extension for the Oaxaca state asset this week, pending an evaluation relating to 73 ancillary infrastructure facilities at the mine site, according to Fortuna.

The ministry also said Fortuna had failed to submit requested information, which the company denies.

A 12-year environmental permit at San José expired on October 23, but the company has secured a provisional injunction allowing it to continue operating while it seeks a permanent injunction.

“Mexico is country with a long and proud mining jurisdiction and we view this decision by Semarnat as unprecedented,” CEO Jorge Ganoza told an earnings call.

“We are pursuing all avenues to solve this as soon as we can.”

The ruling comes amid a permitting clampdown under President Andrés Manuel López Obrador (AMLO), who has pledged to prioritize the needs of communities and environmental protection.

A string of permit applications for development projects have been refused by environment ministry Semarnat since AMLO took office in December 2018, with hundreds of projects stalled due to permitting delays.

San José is Fortuna’s biggest silver producer, with output forecast at 5.8-6.5Moz in 2021, along with about 40,000oz gold.

TWIN-PRONGED APPROACH

Fortuna is seeking to resolve the issue through dialogue, with meetings planned with high-ranking Semarnat officials, aimed at reversing the rejection.

At the same time, the company is pursuing legal avenues, including seeking a permanent injunction to allow it to continue operating San José, which Ganoza said could be secured in a matter of days.

“There is an administrative path and a legal path in the courts and we are pursuing both,” the CEO added.

Ganoza suggested that budget cuts at Semarnat could have contributed to the decision, stating that the company had submitted the requested information to the ministry on three occasions.

“Someone is not doing their work there,” the CEO said.

Fortuna, which also has mines in Peru, Argentina and Burkina Faso, employs about 1,200 people at San José.

“The company is reviewing the reasons for the denial with its advisors, but believes that it is fundamentally in compliance with all material aspects of the San José EIA and is entitled to an extension,” according to the company MD&A.

COMMUNITY CONSULTATION

Semarnat has not commented on the reasons for the permit rejection, but issued a release saying it is organizing a consultation with indigenous Zapotec communities in Oaxaca’s central valleys as part of the environmental permit application by Fortuna’s local subsidiary Minera Cuzcatlán.

“This consultation will allow indigenous communities to decide, in a democratic and legitimate process, about their territory, without undermining the protection of the environment and natural resources in the region, protecting the environment and human health,” the ministry said.

The consultation will be conducted in accordance with the ILO (International Labour Organization) Convention 169, Semarnat added, which relates to the rights of indigenous communities over developments on their lands.

Mexico’s government has signaled plans to hold consultations over mining projects in areas with indigenous communities present, but this has been held back by the lack of a legal framework setting out how they will be conducted.

“The company is not opposed to any consultation procedure that adheres to the mechanisms provided in the EIA which are very clear and supported by jurisprudence in Mexico,” Ganoza told the earnings call.

FINANCING IMPLICATIONS

As well as raising doubts over future operations at San José, the permit rejection also has implications for Fortuna’s liquidity.

The company secured a US$200mn amended credit facility with a syndicate of banks led by BNP Paribas earlier in November and drew down US$120mn.

If an EIA extension or new permit is not approved by January 23, 2022, the facility will be reduced to US$100mn, according to the MD&A.

Fortuna must obtain a permanent injunction allowing it to continue operating the mine by November 20 under the terms of the amended credit facility.

If an EIA is not in place by April 23, available credit under the facility will be reduced to nil, the report added.

OUTLOOK

While questions remain over Fortuna’s ability to secure a permanent injunction and EIA for San José, Scotia Capital analyst Trevor Turnbull said a disruption of operations is unlikely.

“The mine is operating with court approval and we expect it will succeed in getting its EIA reaffirmed without a production interruption,” he said in a note.

SGM DEAL

In a separate development, Fortuna said it had agreed to settle a royalty dispute with the Mexican geological service (SGM) relating to one of the mining concessions at San José.

Under the agreement, the company paid SGM US$9.6mn plus VAT to end any prior dispute, and agreed to pay SGM a 3% royalty on an ongoing basis from May 1, 2021.

“The terms of the settlement are confidential and the company has not admitted any liability,” the MD&A said.

The settlement and royalty was unexpected but will have only a marginal impact, according to Scotia Capital’s Turnbull.

“We had not factored in a settlement or new royalty, but the impact to valuation is only 1.9% for San José,” he said.