A corporate warning to El Salvador: Give up your gold or pay $315 million

SAN SEBASTIAN, El Salvador — Vasita Escobar is certain that chemicals from the abandoned gold mine upriver from her house are slowly killing her family.

“This company that has destroyed life, wanted to keep going,” said Escobar, in reference to Commerce Group Corp., a Wisconsin-based outfit that stopped mining for gold in San Sebastian in 2006 after permit difficulties. “My kids never get better—they’re always skinny. They always breathe the river water, they play in there. When I see my kids suffering, I know others’ are too.”

A 2012 study confirmed Escobar’s fears: the river next to her home is contaminated with 9 times the acceptable limit of cyanide, and 1,000 times the acceptable level of iron. Cyanide is part of the chemical cocktail used on such mining sites to separate precious metals from excavated rock, and can run off into land and water.

In El Salvador as around the world, the process of digging up and crushing rock during gold mining releases naturally-occurring arsenic. But here, some of that arsenic filters through into the nearby river. When swallowed by children, it can lead to poisoning and even death.

The stakes are high: Already, only 2 percent of the country's river water is suitable for aquatic life, according to a recent study.

“That means 98 percent of the total surface water in El Salvador is contaminated,” said Pedro Cabezas, coordinator of the International Allies Against Mining in El Salvador.

Locals have taken note. More than 62 percent of Salvadorans answered “no” to a 2007 survey when asked if El Salvador is an appropriate country for metallic mining.

That opposition to mining is precisely what has gotten El Salvador into trouble: in the province of Cabañas in the country’s north, a foreign mining company is suing the republic of El Salvador, claiming the government unjustly denied a permit to open the proposed El Dorado goldmine.

The company, once called Pacific Rim but recently bought by OceanaGold, obtained the rights to explore for gold in Cabañas in 2002.

But in 2006, the government of El Salvador denied the company a permit to mine and all other administrations have continued to deny permits since. The company claims the denial is an unfair rejection of investors’ rights. Opponents say the denial was legitimate: that the company failed to complete the necessary environmental and feasibility studies required by law.

The case is being decided far from the mines: Not in El Salvador, but in Washington DC by a little-known tribunal loosely attached to the World Bank which oversees such international investment disputes.

They company, “is trying to achieve here in the World Bank what they haven’t been able to achieve in El Salvador,” says Antonio Pacheco, Executive Director and founding member of El Salvador’s Association for Economic and Social Development (ADES), which opposes the mine. Last week in Washington, Pacheco led a coalition of activists in presenting an amicus curiae brief to the World Bank tribunal, calling on it to exonerate the government.

Will the Salvadoran government be forced to pay up to $315 million in lost profits to a foreign mining company? Or will mining continue, leaving Salvadorans like Escobar in fear of the uncalculated hazards of further mining contamination?

For Salvadorans the case poses a potential lose-lose scenario: If the tribunal sides with the foreign investors, either their country goes half broke in a loss or settlement, or industrial mining continues against the popular will of a government and its citizenry. 

Polluted water, and accusations of an unspoken ban on mining

Drive the windy roads north to Victoria, a tiny pueblo repopulated by ex-guerillas from the Salvadoran Civil War, and you’ll find a quiet community with deep divisions over the mining debate. At least three murders of anti-mining activists have been attributed to the violent escalation of that debate, which pits some locals who support the mine for jobs and economic development against those who oppose it for environmental reasons.

“They have to defend the little water they have left,” said Manuel Pérez Rocha, an Associate Fellow at the Institute for Policy Studies in Washington, DC. “Their country’s hydric stress, that’s water stress, they’re very conscious that mining is very pernicious to water stability because of cyanide. The mines in Cabañas would pollute the only clean source of water the Salvadorans have.”

Although it is the smallest nation in Central America, El Salvador is rich in minerals like gold and silver. For decades, the government granted numerous permits to foreign companies to explore for buried precious metals. But beginning in 2006, under the conservative administration of President Tony Saca, the rate of granting exploitation permits suddenly dropped.

The result of fears of contamination from mining activity and years of political activism and pushback by residents is that today, El Salvador has a de facto moratorium on mining.

“There is currently no industrial gold-mining occurring in El Salvador. None,” wrote Robin Broad, a professor of International Development at American University who studies development and environmental concerns. “This is phenomenal, given the country’s relative economic poverty and the high price of gold.”

Newly elected President Salvador Sánchez Cerén has pledged to keep it that way. Preventing mining is a popular decision, but one that creates a conflict: How can a government that invited myriad mining companies to spend millions of dollars exploring for minerals now implicitly tell those companies they will never be allowed to open a mine?

Pacific Rim, the mining company suing El Salvador and recently bought by OceanaGold mining, claims that El Salvador’s denial of mining rights after granting exploratory privileges breaks the country’s commitments through the Central American Free Trade Agreement (CAFTA) and Salvadoran investment law. The mining firm is suing the Republic of El Salvador in the International Centre for Settlement of Investment Disputes (ICSID), a court loosely affiliated with the World Bank.

El Salvador argues that such a dispute should be settled in Salvadoran courts, not outside of the country.

“If it loses, the case will set a precedent allowing companies outside of DR-CAFTA to claim investor rights,” wrote James Fredrick in World Policy Review.

Those familiar with the situation whisper that the permit denial by El Salvador may have been part of a blanket and arbitrary rejection of mining permits by the Salvadoran government referred to in the industry as La Ley de la Gabeta, “The Drawer Law” — an alleged, unwritten government directive to redirect all mining proposals into the proverbial drawer where they could sit indefinitely, never to be approved. If the tribunal were to find clear evidence such a practice existed, Pacific Rim could have a strong case – such a tactic would violate basic investor rights.

El Salvador’s defense, led by Luis Parada of Foley Hoag law firm, may argue that Pacific Rim did not conduct sufficient environmental research prior to applying to dig, an accusation backed up by geologist Robert Moran, whose review of the company’s Environmental Impact Assessment, found that, “the EIA would not be acceptable in countries such as Canada or the United States.”

The three-person tribunal at the World Bank can decide: to award up to $315 million in investment losses claimed or hand over permission to mine; or rule in favor of El Salvador, leaving the international miners empty handed. This assumes the two sides do not settle before a ruling, as OceanaGold has said it would prefer.

Even if El Salvador wins the case, the country is still out the $6 million already spent on its legal defense. El Salvador can’t sue for repayment of those legal costs — Pacific Rim, the original plaintiff, was bought out by OceanaGold. 

Mining Goes Underground

While industrial mines haven’t operated here recently, the San Sebastian mine in the east has been worked continuously. Rather than multinational companies, locals dig deep, dark tunnels to excavate mineral-rich soil. They sift through the dirt to isolate small pieces of gold, which they sell through a locally organized market.

Dubbed güiriseros, these illegal miners admit to operating some 50 tunnel mines in the area of San Sebastian alone. One motley team of miners consisted of 36 men who alternate mining in two groups every other day. Although they don’t use a chemical cocktail of cyanide to get to their gold like industrial mines do, they do use mercury, which has been found in the San Sebastian river. The government looks the other way.

These güiriseros argue that they are not the biggest polluters in town. They point to the barrels of cyanide left at the top of the hill from the mining company that abandoned San Sebastian.

But some who witness this small-scale mining can envision a future in which industrial scale mining could create formal, gainful employment here in a country where a third of the population lives below the poverty line, and the GDP is $24 billion, smaller than the GDP of Vermont.

But in that respect, El Salvador’s past is rife with disappointments. Between 1904 and 1954, international mining interests dug up 32 tons of gold from the San Sebastian mine alone. Not much wealth stayed in the developing Salvadoran economy, and most of the easily accessible minerals were extracted.

The dusty tunnel miners in rural El Salvador seem far removed from the ICSID lawsuit underway in Washington. The case before the World Bank tribunal by definition focuses primarily on trade agreements and international investment, trumping local concerns or environmental factors.

The very existence of the dispute raises questions of state sovereignty in a world of free trade agreements: if a democratically elected government decides to change course on investment law after signing a free trade agreement, should they have to pay a penalty in international court?

"The threat of metal extraction is a threat to life,” Sánchez Cerén said to La Prensa Gráfica at the outset of his new term as president of El Salvador. “Everyone says that El Salvador has wealth underground, has golden valleys, basins of silver; but what does it mean if we allow it to be removed? It will destroy our lives.”

While mining and the taxes and royalties that come from it are on virtual hold in El Salvador, Cabezas estimates there are over 70 proposed mining projects just across the border.

“During the same time they’ve prevented mining in El Salvador, it’s proliferated in Guatemala and Honduras,” he said.

Sam Pazuki, communications representative for OceanaGold, declined to comment on the arbitration of the case, but said in an email that, “the company’s strong preference is to engage in a constructive dialogue with the government of El Salvador to seek a negotiated outcome to the permitting impasse.”

He added that, “It is important to note that the El Dorado Project already has very strong local community support.”

The ICSID tribunal at the World Bank will finish hearing arguments on Sept. 15, El Salvador’s Independence Day.

“On that very day,” said Pérez Rocha, “El Salvador will be defending itself at the world tribunal, defending its very rights.”

Last week in Washington, Pacheco made a plea to the United States: “I would call on the American people and the organizations in charge of this initiative to take into consideration the worries of the Salvadoran people, the farmers, the ranchers, (to understand) that they can be affected by a project like this.”

Jacob Kushner contributed to this article.