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CASILLAS, Guatemala, Dec 24 (Reuters) - A bitter drama playing out over a Guatemalan silver project forced to close by the courts has shocked miners throughout Latin America, sounding a warning to firms to approach indigenous issues more cautiously or pay the consequences.
Work at the Escobal mine, where U.S.-based Tahoe Resources has invested more than $500 million, was abruptly suspended last year by judges pending consultation of nearby indigenous Xinca communities, a decision upheld by Guatemala's top court in September.
Leaders of the Xinca, a mainly farming community which claims a 400,000-strong population, oppose the mine due to worries it will harm their ancestral land and water resources.
The court ordered the mining ministry to "immediately" begin consultations, although the process is already bogged down in litigation over which specific Xinca towns should take part.
The slow-burning squabble illustrates the pitfalls firms can face from determined and increasingly sophisticated opponents, often a combination of environmental activists and local communities, according to company executives and sector analysts.
"It's a reminder that a secure mining investment requires obtaining a social license first," said Luis Rivera, a Lima-based executive with South African miner Gold Fields.
The Santiago-based Observatory of Mining Conflicts in Latin America estimates there are 256 active disputes spread across 20 countries, with the highest number in Mexico, Chile and Peru.
"Everywhere in the world, indigenous people have a lot of influence on politicians and when you go up against some of these groups... you almost can't win," said an executive at a Canada-based miner with projects across the Americas, speaking on condition of anonymity due to the sensitivity of the matter.
The executive has decades of experience negotiating over indigenous consultations required by the United Nations International Labor Organization's Convention 169 (ILO 169), which was invoked in the Guatemalan court decision.
ILO 169 requires that companies enter into a dialog with affected indigenous communities in the early phases of projects, something that did not happen before construction of Escobal, home to the world's second largest silver deposit.
In neighboring Mexico, around 10 mining and energy projects suffered major delays this year alone due to problems with indigenous consultations, said Gabino Fraga, a consultant who has helped firms including miner Penoles and state oil company Pemex navigate consultations.
Fraga says more clashes are likely across the region if governments and companies do not spend more time and resources on consultations.
Escobal secured its extraction license in 2013 - producing some 20 million ounces of silver through 2017 - but the court's decision to side with its environmentalist and Xinca foes was the first time Guatemalan judges had halted an operational mine over indigenous consultations.
Tahoe Resources' shares have fallen by more than half since last year, with losses deepening since the September ruling.
In a new twist, Canadian miner Pan American Silver Corp offered to buy Tahoe last month, including a conditional payment hinging on the restart of shipping silver concentrate from Escobal.
That could prove a risky bet if the Xinca dig in their heels on the consultation.
Gabriela Roca, an executive and lawyer with Tahoe Resource's local unit Minera San Rafael, suggested the court-ordered consultations could take as little as a few months if all parties act in "good faith." If not, they could drag on for up to five years.
"The consultation isn't a vote, it isn't a veto or a plebiscite, it's a dialog," she said.
An Inter-American Development Bank report published last year on conflicts in 200 projects in Latin America and the Caribbean - nearly half from extractive industries - said a lack of adequate consultations caused them in 74 percent of cases.
The report further concluded that in nearly 9 out of 10 cases conflicts involving indigenous communities worsened when potentially affected groups were not consulted.
Far from easing tensions, the court ruling appears to have galvanized Escobal's opponents.
Next to the mine's mothballed property in the town of Casillas, approaching trucks are inspected by locals seeking to enforce the suspension at what they dub a "resistance camp."
A few dozen young men sat watching, several of whom carried machetes, while a couple of others held what appeared to be pipes at the ready that could be used to fire crude projectiles.
Minera San Rafael and its workers have also been accused of heavy-handedness by critics, including allegations of kidnapping and violent intimidation. The company rejects the accusations.
As Guatemala's mining ministry prepares for consultations to kick off some time next year, the Xinca leadership is adamant it will not participate in any future dialog over the mine, the president of their parliament, Aleisar Arana, said in a recent interview.
Hailing the court ruling as a new "independence," Arana hopes it will inspire other indigenous groups to join the fight against projects like the Escobal mine.
"It's something we view as a threat and an invasion," he said. (Additional reporting by Sofia Menchu in Guatemala City and Mitra Taj in Lima; editing by Richard Pullin)