A new round of endangered species review delivers potentially crippling blow to Augusta Resource’s Rosemont copper project

The discovery last month of one male ocelot near the proposed Rosemont copper mine site and new information on the impacts to other endangered species has triggered a new round of formal endangered species act consultations between federal regulatory agencies.

The endangered species review, combined with other recent regulatory developments concerning impacts to water resources, may deliver the fatal blow to Augusta Resource Corporation’s effort to develop the open-pit mine in the Santa Rita Mountains southeast of Tucson.

The U.S. Fish & Wildlife Service (FWS) formally notified the U.S. Forest Service on May 15 that additional discussions over the Rosemont mine’s potential biological impact on the ocelot and seven other endangered species is required. It is unclear how long it will take for these consultations to be completed.

The reopening of endangered species consultation raises questions of whether regulatory hurdles are now too significant even for Toronto-based Hudbay Minerals Inc., which is in the midst of a hostile take over bid for Augusta. Hudbay, which already owns 16 percent of Augusta’s 145 million shares of common stock and has far more financial strength than Augusta, has an all-cash offer for Augusta that expires May 27.

Augusta appears to be running out of financial options and now may be forced to accept Hudbay’s buyout offer that Augusta has strongly resisted since February, unless Hudbay decides to withdraw its offer.

The FWS had issued a final biological opinion on the Rosemont copper project last Oct. 31, but must reinitiate consultation if new information is discovered, such as this case with the Rosemont project. New information was discovered last month when a University of Arizona remote camera photographed the endangered ocelot near the mine site.

Additionally, new information about the proposed mine’s potential depletion of water resources on the federally-owned Las Cienegas National Conservation Area suggests much more serious impacts on endangered species dependent on riparian habitat as well as two other species that are about to be listed.

The renewed endangered species act deliberations, along with recent information about Rosemont’s inadequate Clean Water Act mitigation plan,  make it virtually impossible for Vancouver, B.C.-based Augusta to receive final approvals and permits for the mine by June 30, leaving the cash-strapped company in an extremely precarious financial position.

Augusta has repeatedly stated in regulatory filings that it will receive the Final Record of Decision (ROD) approving the mine from the Forest Service and the required Section 404 Clean Water Act permit from the U.S. Army Corps of Engineers by June 30.

It is extremely unlikely the Forest Service will issue a Final ROD approving the mine while endangered species act consultations are under way with the FWS. Coronado National Forest Supervisor Jim Upchurch recently was quoted in the Arizona Daily Star as saying, “[w]e haven’t decided on any course of action at this point until we finish discussions with our other federal partners.”

The Forest Service also missed an April 30 deadline to respond to objections to its Final Environmental Impact Statement and stated that it would provide an update on when it would complete the required review by the end of May.

Last week, the U.S. Army Corps of Engineers notified Augusta that its mitigation plan needed to obtain the Section 404 permit failed to meet minimum federal regulations and that the agency was moving forward with preparing its permit decision. The announcement raises the possibility that the Army Corps is prepared to deny the 404 permit.

Without the 404 permit and the Final ROD, Augusta has no readily apparent access to additional capital that it needs to operate beyond June 30.

“The Company must obtain additional funding in the second quarter of 2014 in order to continue development and construction of the Rosemont Project,” Augusta stated in its 1^st Quarter Financial Statement released last week.

Augusta reported only $6 million cash on hand at the end of the 1^st Quarter on March 31 and has been spending about $2 million a month on the Rosemont copper project and other expenses including interest.

Augusta must have the 404 permit and Final ROD to access the remaining $12.5 million in funds from a $109 million loan from RK Mine Finance, an arm of the London-based metals hedge fund Red Kite, Augusta states in its 1st Quarter Management Discussion & Analysis report.

Further clouding the company’s prospects is that it must repay the Red Kite loan by July 21, with the possibility of a 90-day extension. Augusta has put up all the assets of its Rosemont Copper Company subsidiary as collateral on the loan, leaving the door open for Red Kite to seize control of the copper project if Augusta can’t repay the loan. Red Kite has expanded the loan two previous times and could possibly extend more credit to Augusta.

Augusta reported that its financial condition as of March 31 “raises substantial doubt about the Company’s ability to continue as a going concern and is dependent on the Company receiving the permits necessary for the construction of the Rosemont Project and raising additional debt or equity financing.”

While the Hudbay buyout appears to be Augusta’s only option, Hudbay stated in a May 16 press release that it was already reviewing the “potential implications” of the Army Corps’ announcement that Augusta’s mitigation plan failed to meet regulatory standards. The FWS decision to reopen endangered species consultations adds another regulatory hurdle that Hudbay could conclude makes the Rosemont project impossible to pursue.

On the other hand, Hudbay already has a substantial investment in Augusta and has far more cash that could be used to possibly address the Army Corps and FWS regulatory concerns. Hudbay also doesn’t need the Rosemont project to come on line immediately as it is in the middle of construction of a massive open pit mine in Peru.

No ocelots had been recently documented to be in the Santa Rita Mountains when the FWS prepared the Biological Opinion last fall. Last month’s discovery, however, requires the FWS to consider what impact the Rosemont mine could have on the species, which is exceedingly rare in the United States but more abundant in Mexico and Central America.

The FWS also stated that new information concerning the mine’s potential impact on aquatic resources was included in the Forest Service’s Final Environmental Impact Statement released last December that was not considered when the Biological Opinion was prepared.

The FEIS included technical reports that indicate the mine could have negative impacts on Empire Gulch and Cienega Creek “that may affect the Huachuca water umbel, Gila topminnow, Gila chub, Chiricahua leopard frog and southwestern willow flycatcher” in a manner not considered in the Biological Opinion.

The FWS also stated that two additional species may be listed as threatened or endangered in the near future and that “conferencing” on the impact of the Rosemont mine on the northern Mexican gartersnake and yellow-billed cuckoo is recommended.

During this reinitiated consultation between the two agencies, the FWS will also review the previous conclusion that the proposed Rosemont Mine will not adversely modify the habitat for endangered jaguar. A male jaguar has been repeatedly photographed near the Rosemont mine site. The FWS designated critical habitat for the jaguar last fall that includes the Rosemont mine site.