El Salvador Faces CAFTA Suit Over Mine Project

A multinational mining company's suit against the Salvadoran government may be the opening salvo of a larger struggle against the consequences of free trade agreements in Central America. The legal battle could also have serious political consequences in the country's March 15 presidential elections.

February 6, 2009

A multinational mining company's suit against the Salvadoran government may be the opening salvo of a larger struggle against the consequences of free trade agreements in Central America. The legal battle could also have serious political consequences in the country's March 15 presidential elections.

In December, Pacific Rim Mining Corp., a Canadian firm, announced its intention to sue the government for hundreds of millions of dollars in damages if it is not allowed to mine for gold and silver in a rural region of northern El Salvador. The claimed damages stem from the government's refusal to issue permits after the company submitted an environmental impact assessment. Pac Rim threatened to sue under Chapter 10 of the Central American Free Trade Agreement (CAFTA), which was passed in 2004. The company is operating through its U.S. subsidiary, Pac Rim Cayman, LLC, in the suit.

Site of the planned El Dorado mine. (Courtesy Pacific Rim)

The subject of the suit, the El Dorado mine, is located 65 kilometers from the capital, San Salvador, in the village of San Isidro, Cabañas. Pacific Rim’s CEO Tom Shrake says the mine will give a much-needed boost to the local economy, estimating the project will bring a total of 2,000 jobs. Shrake adds the mine will also generate revenue for the government, which is entitled to a 3% tax on the mine's gross sales. Pacific Rim estimates the mine contains 1.2 million ounces of gold and 7.4 million ounces of silver.

The company claims that between 2002 and 2006 it invested $77 million in exploration and infrastructure, making El Dorado the company's largest investment in El Salvador. The company wants the government to pay back this money as well as "hundreds of millions of dollars" in damages.

Despite promises of jobs and development, the controversy surrounding the project reflects a growing concern about mining and free trade in El Salvador. "I think that in the 1980s, when the country was coming out of a long civil war, there was less awareness about the effects of these types of projects and therefore less resistance,” says Burke Stansbury of the Committee in Solidarity with the People of El Salvador (CISPES). “After decades of failed neoliberal policies and environmental concerns, there's strong skepticism on the ground."

This skepticism was turning into a potentially costly political issue for the incumbent right-wing National Republican Alliance (ARENA) party and its allies, who are generally supportive of the mining sector, with the approaching presidential election. One of ARENA's allies introduced a draft mining law that would have updated the country's regulatory framework. Supporters of the bill say the new framework would have brought El Salvador’s mining laws into compliance with international standards. If approved, the far-reaching legislation could have revived the El Dorado project. Opponents counter that the proposed framework would have created an autonomous authority in charge of granting concessions, reducing government oversight and environmental standards.

While the legislation was being debated, 24 mining concessions, including Pacific Rim's, were suspended in anticipation of the law's passage. But it failed to pass, leaving the mining companies' contracts in limbo. “Usually the ARENA administration would push the law through regardless," says Stansbury, "but they were unwilling to sponsor an unpopular law before the [presidential] election."

Polls show Mauricio Funes from the left-wing Farabundo Martí National Liberation Front (FMLN) party well ahead of his rival from ARENA. The FMLN, once a revolutionary guerrilla organization, became a legal party with the signing of the peace in 1992, ending decades of civil war. If victorious, Funes would be the country’s first FMLN president.

Burke Stansbury says the timing of the suit and Funes’ lead in the polls has raised suspicion that Pac Rim is trying to use the elections as leverage for a favorable resolution of the suit. The government and Pacific Rim have until March 9 to resolve the dispute, just days before the election. Stansbury suggested the lawsuit could be used to sway the election in favor of ARENA by painting the FMLN as supposedly bad for foreign investment.

Conservative columnist Anastasia O'Grady of the Wall Street Journal lashed out against President Antonio Saca. She criticized the current President’s handling of the project, demanding that he push the project through or risk isolating future hopes of investment in the region. O’Grady writes that Saca’s actions “have earned him a reputation for undermining democratic capitalism though the abrogation of contracts.”

Protests against the mine have been numerous. (By Izote News)

Although the government has not issued an official reason for the delay, environmentalists point to the disastrous impact the mine would have on local water resources. The U.S.-El Salvador Sister Cities, a solidarity network, told Upside Down World that El Dorado will require huge amounts of ground water – 900,000 liters of water every day. In a country where more than a quarter of the population lacks access to clean drinking water, environmental groups charge the mine will exacerbate the water shortage.

If gold mines elsewhere are any indication, the mine in El Salvador could contaminate existing water supplies. Gold mines use cyanide heap leaching to extract gold from the ore. The process trickles cyanide-laced water down through piled up ore, pulling out the mineral as it filters through the heap. Mines elsewhere have leaked mercury, arsenic, zinc and aluminum, along with cyanide, into the ground water. The town of San Sebastian in eastern El Salvador continues to suffer from hazardous materials produced by a nearby mine operated from 1950 to the 1981 by the Commerce Group Corporation.

Florian Erzinger, an environmental chemist who specializes in aquatic systems at the Federal Institute of Technology in Zurich, Switzerland, told IPS that pollution from the El Dorado mine could evaporate into the atmosphere, contaminating water supplies across Central America.

Pac Rim’s lawyers in Washington, D.C. are confident that there is strong legal precedent for their case. In a conference call to investors, Timothy McCrum, who represents Pac Rim, pointed to a case filed through NAFTA’s Chapter 11 between California-based Metalclad and Mexico. When the government tried to block Metalclad from developing a toxic waste dump in an environmentally protected area, the company successfully sued the Mexican government and was awarded $15.6 million in damages. This is the same investor protection clause being used by Pac Rim under Chapter 10 of CAFTA.

While the El Dorado case is not the first time investor protection provisions in CAFTA have been exercised to defend corporate interests, a successful suit for Pac Rim would lay another precedent for future claims.

Zach Dyer is a NACLA Research Associate.

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