Gold, lawyers and contaminated rivers.

Two different headlines today are intricately related. On the CNN Money website, the headline was Gold Edges Up to a New Record, which told readers that for the first time in history, the price of gold on international markets closed at $1280 an ounce. In the Salvadoran newspaper DiarioCoLatino, the headline was San Sebastian: The Open Secret of Mining Pollution. This article describes the legacy of pollution in the San Sebastian river, which local residents and activists say stems from a gold mine there. The mine is owned by the US company the Commerce Group, based in Milwaukee, Wisconsin.

It is the record high prices of gold which have led North American gold mining companies like the Commerce Group and Canadian firm Pacific Rim to go to battle with the government of El Salvador. The Salvadoran government currently prohibits both firms from operating gold mining concessions. With gold at record high prices, the conflict between monetary profits and the fear of environmental degradation from mining is a sharp one.

The battlefield for both mining companies is international arbitration under the DR-CAFTA treaty. Pacific Rim and the Commerce Group have each sued the government of El Salvador for tens of millions of dollars, under the foreign investor protection sections of that trade agreement. DR-CAFTA allows investors to bring arbitration claims against a sovereign government and to have the dispute heard in front of a panel of arbitrators at the International Center for Settlement of Investment Disputes (ICSID), a part of the World Bank.

I have previously written about the Pac Rim arbitration, where the arbitrators have denied El Salvador's preliminary objections and the case is now moving on to the next phase. Today's post focuses on the Commerce Group case.

As described on the Commerce Group website, the company owns a gold mine in San Sebastian, in La Union department in the far eastern part of El Salvador. There has been gold mining at this location for more than one hundred years. According to the company, "At the turn of the twentieth century, the [mine] was rated as one of the richest gold mines in the world. The United Nations’ 1969 Mineral Survey Report states that “unquestionably the San Sebastian deposit was the jewel of the El Salvador mining industry and one of the most prolific gold mines in Central America.”

The Commerce Group acquired the mine in 1968. It was not operated during El Salvador's civil war, but operated during the 1990's after the war. It ceased operations for economic reasons in 1999. But now its current plans are to conduct open pit mining operations at the site:

The Company plans to use an open-pit mining method and will truck the lower grade mineralized material to one or more heap-leaching pads developed at the SSGM site. The use of open-pit mining and heap-leaching techniques will enable the Company to process a higher volume of low grade mineralized material.

(Pacific Rim plans a sub-surface mine).

In 2006, the government of El Salvador revoked the company's permits to exploit the gold deposits for environmental reasons. It is that decision which the Commerce Group is challenging in its arbitration.

Salvadoran environmental activists are concerned about existing contamination of the San Sebastian river in the area surrounding the mine. Last Tuesday, September 14, an internet video forum was held where Cidia Cortez and David Pereira of the Center for Investigation over Investment and Trade (CEICOM) described the results of CEICOM's investigation into the environmental effects of the San Sebastian mine. The investigation was performed in conjunction with geologist Dina Larios, a professor at Ohio University. They described findings related to acid drainage from the mine producing elevated levels of heavy metals in the waterway as well as health effects evident in the local population. You can see an archived copy of the video forum at this link. You can also read reports of some of their findings here and here. The photos from San Sebastian below are from today's article in Diario CoLatino.





With the price of gold at record highs, the Commerce Group has every incentive to challenge El Salvador blocking the re-opening of the mine. The allegations of the Commerce Group in the international arbitration are summarized in its response filed on September 17 to El Salvador's preliminary objections:

I. INTRODUCTION AND SUMMARY

1. Commerce Group Corp. (Commerce) and San Sebastian Gold Mines, Inc. (SanSeb) (collectively the Claimants) are affiliated U.S. corporations that have formed a joint venture to undertake gold mining in El Salvador. Both are publicly held corporations that have, in the aggregate, approximately 3,300 shareholders, over 95% of whom reside in the United States. Over the past over 40 years the Claimants have invested over $100 million in their mining activities in El Salvador; they have a history of mining in the country going back to October, 1968.

2. The Claimants mined gold at the San Sebastian Gold Mine in Santa Rosa de Lima. For over 25 years, however, there has been no processing of gold at or near the San Sebastian mine; all of the ore from the mine was hauled to and processed at the Claimants’ mill and plant in San Cristóbal, which is approximately 15 miles from the San Sebastian mine. In the 1990s, the Claimants produced tens of thousands of ounces of bullion through their operations. When the San Sebastian Gold Mine was operating, the Claimants employed hundreds of laborers, geologists, engineers, plant operators and others in El Salvador. During their long history in El Salvador, the Claimants brought not only employment, but also considerable infrastructure improvements to the vicinity of Santa Rosa de Lima, such as roads and bridges, made contributions for the general good, and built a church.

3. In 2003, El Salvador’s Ministry of Economy replaced the Claimants’ existing mining concession with a new 20-year exploitation concession under the new mining law. The concession gave the Claimants the right to mine at the San Sebastian Gold Mine site. A year later, El Salvador extended the concession to 30 years, or in other words, until 2034. In 2003 and 2004, the Claimants obtained two exploration licenses for additional areas. From 2004 onwards, the Claimants continued to invest significant time, effort and resources in developing their mining exploration and production operations.

4. In 2006, the Republic of El Salvador (El Salvador or the Respondent) began a course of conduct that has resulted in the destruction of the Claimants’ investments. In contravention of its domestic and international legal obligations, El Salvador arbitrarily revoked the Claimants’ environmental permits, ordered the closure of their operations and failed to renew their exploration licenses. These measures are manifestations of a broader government practice to terminate all mining activities by foreign investors in El Salvador. In complete disregard of the Claimants’ rights under their exploitation concession and exploration licenses, El Salvador has effectively adopted and maintained a de facto moratorium on metallic mining.

5. As a result of El Salvador’s conduct, the Claimants have been unable to proceed with plans to develop their operations. In 2008, the Claimants entered an agreement with a strategic partner to develop the San Sebastian Gold Mine. After meeting with representatives of the El Salvadoran government, however, the strategic partner withdrew. It was clear that the El Salvadoran government would not allow mining under any circumstances.

The government of El Salvador filed its preliminary objections to the Commerce Group arbitration demand on August 16, 2010. These objections are procedural and jurisdictional. They do not go to the merits of whether or not the Commerce Group should be entitled to operate its mine. The objections are only interesting to lawyers like me, but if the government prevails, the Commerce Group complaint will be dismissed. If the objections are not sustained, then the case will proceed to the merits of whether El Salvador is within its rights to limit gold mining when that mining is linked to environmental damage in the surrounding area.