Amid silver’s steady rise, sides fight over mine lease

Nine months after the Sunshine Mine’s operators filed for bankruptcy, a court battle is heating up over control of the historic silver mine.

Sterling Mining Co. reopened the Sunshine Mine in Idaho’s Silver Valley in late 2007, paying out $10,000 in monthly lease fees to the mine’s owner, Sunshine Precious Metals.

But less than a year later, Sterling was broke. The company laid off all but a handful of its 200 workers. Amid mounting debts, the company relinquished the mine’s lease to Sunshine Precious Metals in late February. Within days, Sterling filed for bankruptcy.

The Sunshine Mine is part of Idaho’s storied history. Over the past 125 years, the mine produced more than 360 million ounces of silver, making it one of the nation’s richest silver strikes. It’s also the site of one of the country’s deadliest hard-rock mine disasters. Ninety-one miners perished during the 1972 Sunshine Mine fire.

Silver prices have risen rapidly this year, making the Sunshine Mine an attractive mining prospect again. On Monday, the metal was trading at $17 an ounce. So perhaps it’s no surprise that a court battle is brewing over the mine’s lease.

Shortly after relinquishing the lease, Sterling’s attorneys told the bankruptcy court that company officials never intended a permanent turnover. They noted that Sterling didn’t give the required 60-day notice to terminate the lease.

Over Sunshine Precious Metal’s objections, U.S. Bankruptcy Judge Terry Myers ruled in Sterling’s favor. Sterling took back control of the Sunshine Mine in August. But Myers also said that Sterling needs to pay off more than $1 million in pressing debts to keep the lease.

The debts include $382,000 in royalties from past silver production payable to the U.S. Environmental Protection Agency and the Coeur d’Alene Tribe for Superfund cleanup in the Silver Valley. Sterling also owes $60,000 in lease fees; $70,000 in back taxes; $50,000 in federal fines for discharging metals-contaminated water into Big Creek; $319,000 in utility payments; and $281,500 to settle government liens.

Sterling’s ultimate goal, according to bankruptcy documents, is to market its interest in the Sunshine Mine to the highest bidder, earning the money to pay off $15 million owed to creditors.

Sunshine Precious Metals, meanwhile, says it found another operator for the mine. Earlier this month, the company appealed Myers’ decision to award Sterling the lease in Idaho’s 1st District Court.

Andrew Grundman was on Sterling’s board of directors when the decision was made to vacate the lease.

“I was there at the board meeting. At no point did we discuss that it was a temporary measure,” said Grundman, an attorney who worked for Sunshine Precious Metals before his stint as a Sterling director and now is a Sunshine consultant.

“Sterling didn’t have the money to take care of the mine,” Grundman said. “A quick turnover was considered beneficial.”

Grundman said the board was concerned about the mine falling into disrepair and neglect of environmental oversight, including daily water quality monitoring. An outside engineer said the Sunshine needed $1.5 million worth of repairs to address health, safety and environmental problems.

Sterling’s abrupt decision to reclaim the lease came as “a complete surprise to Sunshine Precious Metals,” Grundman said.

Robert Higdem, Sterling’s general manager, said his company has rehired a crew of 13 to work on maintenance issues at the Sunshine Mine. Sterling is also working on a reorganization plan to submit to the court by early December. Higdem said he didn’t know if Sunshine Precious Metals’ appeal will affect Sterling’s plans to emerge from bankruptcy.

Meanwhile, Sterling’s largest creditor, Minco Silver Corp., has stepped forward, pledging $1 million in loans to help pay off debts related to the Sunshine Mine’s lease, and another $2 million for additional work at the Sunshine Mine, including pumping water out of the lower levels. The lease is Sterling’s major asset, and the main security for $5 million that Minco lent to Sterling before the bankruptcy, said Ken Chai, Minco’s chairman and CEO.

According to court documents, Vancouver, B.C.-based Minco has $400,000 in escrow for Sterling’s financing. Minco also planned to raise at least $10 million this month through a private placement. A Chinese-based growth fund is one of the committed investors, according to a company press release. Minco also owns a silver property in China.

But Minco’s role in financing Sterling is also controversial. In court documents, Sunshine Precious Metals’ attorneys called Minco’s involvement an effort to reassign the Sunshine Mine’s lease without their approval.