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Bear Creek plunges deeper on Peru mine dispute

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Shares of Bear Creek Mining Corp. (BCM-X) plummeted further on Monday after the Vancouver-based silver company's mining rights were revoked by the government of Peru, a move that raises the risk for other resource companies doing business in the mineral-blessed South American country.

Bear Creek is threatening a legal challenge against Peru for pulling the rights for its Santa Ana project, saying the action over the weekend “constitutes expropriation” and violates international trade agreements.

“This Santa Ana situation was a poor choice to resolve a political situation ... it's very appealable,” Bear Creek Chief Executive Officer Andrew Swarthout told investors on Monday.

The action by the outgoing government comes amid anti-mining protests that turned deadly in recent days. Bear Creek says a decree issued in 2007 for the mine was reversed because it was no longer considered in the “public and state’s best interest.”

Bear Creek maintains nothing has changed, and that the mine, set to begin production in 2012, will help bring jobs and economic spinoffs to the country.

Peru is South America’s fastest-growing economy, driven by surging commodity prices, but the rural poor have benefited little from mining and complain it contaminates their water and crops. The incoming government must balance the interests of international resource firms, whose production is a huge source of national wealth, alongside those of protesters who argue mines have a devastating impact on the environment.

The recently approved Santa Ana project in southern Peru has become a symbol for thousands of protesters opposed to mining and energy projects in the run-up to the recent election, which was won by left-wing nationalist and former army rebel Ollanta Humala. Protesters are using forceful demonstrations to pressure Humala’s administration as it decides on changes to legislation for resource firms after it takes office on July 28.

The company has been working for more than a decade in Peru with some challenges, but Swarthout said this is the first time its mining rights have been pulled.

The Santa Ana mine was expected to produce about 47 million ounces of silver over its 11-year mine life, and represented about 20 percent of Bear Creek’s value, behind its flagship Corani project, also located in Peru. The company says it has had no issues at Corani, located northeast of the Santa Ana project, which is set to begin production in 2014.

“This is a rather unique situation and we are scratching our heads,” Swarthout said in an interview with the Globe on Sunday, calling the move by the outgoing government of Peruvian president Alan Garcia “the wrong reaction to a political situation.”

Bear Creek is not the only victim, BMO Nesbitt Burns analyst Andrew Kaip noted in a report Sunday, “with protesters demanding that concessions be revoked for all mining companies over concerns about potential pollution.” He cited permits for the Inambari hydroelectric development project that were recently revoked under similar circumstances.

While Bear Creek’s stock has already been hit hard as a result of the protest in recent weeks, having fallen more than 50 percent since April, BMO said it expects the decision to “spook the market, with investors questioning the security of the company’s larger Corani project.”

Peru's action casts doubts on other resource operations in the country, which relies heavily on foreign investment and receives about 70 percent of its GDP from the mining industry.

Other Canadian companies with operations in Peru include mining giant Barrick Gold Corp. (ABX-T), which has two mines in the country. Canadian miners such as HudBay Minerals Inc. (HBM-T), First Quantum Minerals Ltd. (FM-T), Sulliden Gold Corp. Ltd. (SUE-T) and Trevali Mining Corp. (TV-T) all have projects under way there. While none of them have reported problems with their projects in recent weeks, investors are expected to express caution.

“I think it’s safe to say the whole investing world is waiting to see what the government does,” Swarthout said. “What happened isn’t going to calm anyone’s nerves.”

Mr. Swarthout is still hoping for a solution, but said his company is threatening legal recourse if the government’s decision isn’t reversed. The company stated that it plans to “immediately and vigorously defend its rights” through action under the Canada-Peru Free Trade Agreement as well as Peruvian appeal processes.

Its legal team is working on what actions the company could take and this will be decided within the week, Swarthout said. “We are acting as quickly as possible,” he said.

The company will also reach out to the new government to try to come up with the solution.

Bear Creek said there are up to 15 other foreign companies investing in mineral exploration projects under similar decrees to the one it had revoked, and that it plans to discuss the problem with them.

“I expect that many exploration and mining companies are very concerned about this precedent, and we will be reaching out to all of them,” Swarthout said.

Some companies operating in Peru say they aren’t worried about similar actions against their operations.

“These are specific issues related to specific projects,” said David Garofalo, CEO of Toronto-based HudBay, which recently entered Peru with the purchase of Norsemont Mining Inc.’s Constancia copper project last year.

HudBay’s project, now in the pre-construction phase, is in a remote region and hasn’t been the target of grassroots protesters, he said.

“I don’t think it speaks to the receptivity of mining in Peru,” he said.

Swiss-based Xstrata plc said there has been no unrest at the company’s operations in Peru.

Xstrata said its $4.2 billion US Las Bambas copper project and its $1.47 billion Antapaccay project “are both advancing according to plan,” a company spokesperson said in an e-mail on Sunday.

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