A $300 million mine fight
Pacific Rim argues that El Salvador’s investment statute should be read in light of international jurisprudence.
By Lise Johnson and Luke Eric Peterson
After arbitrators dismissed Pac Rim Cayman LLC’s CAFTA claims on jurisdictional grounds in June of 2012, the company continues to pursue relief before that same panel of arbitrators based on its remaining domestic law claims. In its recent memorial on the merits, a copy of which has been uploaded to our website, Pac Rim refocuses its arguments and lays out how El Salvador’s conduct runs counter to the protections in a domestic investment law over which the tribunal has jurisdiction.
As earlier reported, the dispute arises out of Pac Rim’s unsuccessful efforts to develop gold mining projects in El Salvador. Pac Rim contends that El Salvador’s failure to issue environmental permits for mineral exploration and exploitation implemented a “de facto ban” on mining and warrants an award of at least $314 million in favor of the company.
The ICSID tribunal hearing the case is composed of Guido Santiago Tawil, Brigitte Stern, and V.V. Veeder (presiding arbitrator).
The merits phase of the arbitration is playing out on a leisurely timetable, with El Salvador not scheduled to file its own counter-memorial on the merits until January of 2014. Merits hearings are slated for September of 2014.
Pac Rim Argues Its Exploration Permit Entitles It to an Exploitation Permit
In the previous jurisdictional phase, the parties and the tribunal focused heavily on identifying the actionable “measure(s)” and when it/they were taken. The answers to those questions were relevant for assessing whether the challenged conduct fell within the temporal coverage of the CAFTA and whether Pac Rim’s treaty claim – which the company pursued after moving corporate activities from a Cayman Islands entity to a US company in 2007 – amounted to an abuse of process.
However, with the tribunal’s rejection of jurisdiction over CAFTA-based claims, Pac Rim’s recent memorial now reflects a more crystallized packaging of the claim. It alleges that the wrongful conduct is the ongoing “de facto” ban on mining, which, according to the claimant, the government expressly ordered in 2008 and implemented by failing to take action on and approve the environmental permits sought by two of Pac Rim’s subsidiaries.
In particular, Pac Rim contends that once its affiliate, PRES, had obtained an exploration permit, it had the right under Salvadoran law to receive the exploitation permit necessary to enable it to proceed to the next phase of lucrative mineral development (as opposed to merely the right to apply for an exploitation permit). Pac Rim also argues that its other subsidiary, DOREX, was entitled to receive environmental permits to enable it to proceed with mineral exploration. The remedy Pac Rim seeks is based on the value of the companies had they been able to proceed with their exploration and exploitation plans.
El Salvador’s Investment Law Internationalizes Investment Protection?
Pac Rim asserts that El Salvador’s failure to issue exploration and exploitation permits breaches three articles of the country’s domestic investment law – Article 5, prohibiting “unjustified or discriminatory measures” that could hinder the establishment, use or disposition of investments; Article 6, prohibiting discrimination due to “nationality, residence, race, sex or religion”; and Article 8, requiring compensation for expropriation.
That statute grants foreign investors access to local courts or international arbitration, and grants domestic investors access to local courts only, but does not specify the law applicable to interpretation of the statute’s obligations.
According to the claimant, the preamble to the statute, as well as the “Statement of Purpose” accompanying the draft bill when it was submitted to the legislature, establish that the statute, which was passed in 1999, was intended to and must be interpreted in light of “best practices” in international investment protection. This, Pac Rim contends, also means that the law incorporates the principles of fair and equitable treatment and protection of legitimate expectations.
Pac Rim further asserts that recourse to international law is appropriate on the issue of damages. The claimant contends that the statute’s silence as to the substantive law applicable to questions of compensation indicates that there is no agreement between the two parties on this question. Given this alleged vacuum, Pac Rim argues that Article 42(1) of the ICSID Convention provides for the application of international law to determine remedies and provide for damages irrespective of whether such remedies would be available under local law.
Damages of $314 million sought using income-based and market-based methods
Pac Rim approaches the issue of damages on the assumption that it had rights to develop its mining project through further exploration and, more importantly, exploitation, and that those rights in the project have been utterly wiped out – rather than subject to a more time-limited moratorium or administrative delay. The company sets forth two methods prepared by valuation experts at FTI Consulting with respect to calculation of losses.
Both methods use as their valuation date, the period immediately before a March 2008 speech wherein Salvadoran President Saca allegedly announced a de-facto ban on mining in the country.
On an income-based model, a discounted cash-flow analysis leads to a value of between 79.7 and 92.8 million (US) for a particular deposit (the Minita Reserves). In addition, other assets of Pac Rim are assessed in light of a market-based approach, with two assessments undertaken: a comparison with other publicly traded companies and gold projects (i.e. the so-called Trading Multiples Approach); and a comparison with other sales (market) transactions that may shed light on the value of various other assets/resources apart from the aforementioned Minita Reserves.*
Summing up, the combination of the income-based and market-based approaches led to a valuation of $314 million (US) including pre-judgment interest that runs from 2008 to present.
“Top Down” vs. Grass Roots Political Influences
In its Memorial on the Merits, Pac Rim also recounts a story of shifting political support for the project. For several years, the company and its predecessors benefited from close and supportive ties with high-level government officials. Through those connections, the memorial explains, the companies were able to secure emergency exceptions from El Salvador’s mining law and to help draft amendments to that legislation, revising it to include provisions more favorable to the mining companies.
Pac Rim’s brief also details the ways in which the companies had previously been able to use government officials to “lean on” the technical officers responsible for environmental review of proposed exploration and exploitation activities in order to try and speed up the permitting process and secure approval of the mining projects.
Yet, according to Pac Rim, its successes in exploiting the “top down” nature of governance in El Salvador eventually came to an end as high-level officials, including two successive Salvadoran presidents, began to oppose the companies’ plans for “political” reasons.
IAReporter readers may recall that the “political” dynamics of the case were framed from another angle in an amicus curiae brief filed earlier in the case by certain Salvadoran citizens groups. As we reported in 2011, that brief had suggested that the ICSID dispute is not a “legal” dispute at all, but rather a “political” dispute that has arisen as a result of (legitimate) opposition to mining that had arisen organically in El Salvador after individuals and communities affected by the mining projects brought their concerns to the national level and made the issue of mineral development a “central issue of Salvadoran politics”.
Pac Rim is represented by Crowell and Moring. El Salvador is represented by Foley Hoag.
* (Damages aficionados may be interested to know that the damages experts assigned a weighting of 10% to the price ratio derived under the Trading Multiples Approach, and the remaining 90% to the Price Ratio of the Comparable Transactions Approach.)