Plans to build Minnesota's first copper-nickel mine suffered a major setback Monday when the state Court of Appeals reversed three permits issued to PolyMet Mining Corp. and kicked them back to state regulators for additional review.

Chief Judge Edward Cleary said the Department of Natural Resources (DNR) erred in not holding so-called contested case hearings on the permits to fully vet objections by environmental groups and the Fond du Lac Band of Lake Superior Chippewa. In a decision released Monday, he ordered the DNR to hold such a hearing.

In addition, Cleary said, the DNR should have specified time limits for the mine's entire life cycle in PolyMet's all-important permit to mine. Although PolyMet says it intends to mine for 20 years, the permit isn't clear about the time frame for activities such as mine reclamation and future maintenance of the huge tailings dam for mine waste that will be left behind, according to the court's decision.

The ruling affirmed a fourth action by the DNR, its decision to transfer an existing tailings dam permit to PolyMet.

The ruling is a major victory for the Fond du Lac tribe and environmental groups deeply opposed to PolyMet's $1 billion open-pit copper-nickel mine operation planned for sites near Babbitt and Hoyt Lakes. Hard-rock mines have a long history of pollution violations because the process can generate sulfuric acid and can leach toxic heavy metals such as mercury and arsenic into the groundwater, lakes and rivers.

Monday's ruling does not kill PolyMet's permits, issued in late 2018, but is likely to create significant delays and complicate the company's efforts to raise construction financing. A contested case hearing could last more than a year.

The DNR has 30 days to appeal the decision to the Minnesota Supreme Court.

In a statement Monday, the agency said it is reviewing the decision, "which has implications not only for this project but for the role of contested case hearings in the state's permitting framework more broadly.

Notably, the court's opinion does not draw conclusions about the validity of the scientific analyses underlying the DNR's decisions. We remain confident in the solid foundation of our technical work."

The tribe and multiple environmental groups held celebratory press briefings in Duluth and St. Paul, where they cheered the decision as an "enormous victory."

In Duluth, members of the tribe celebrated the decision alongside local activists.

Both groups pledged to continue fighting a project they claim would pollute the water in their communities, which lie downstream from the mine site on the St. Louis River.

"For now, we can breathe a sigh of relief, and we can celebrate a victory that was long coming," said Gwiiwizens Ricky DeFoe, a member of the Fond du Lac tribe who sits on the board of WaterLegacy, a Minnesota-based environmental advocacy group.

"The protection of our wild rice is of utmost importance to us," he added. "So the people, the water and the wildlife can celebrate today also, in a spiritual fashion."

In St. Paul, Kathryn Hoffman, head of the Minnesota Center for Environmental Advocacy, called the state's environmental regulatory process "broken." She urged the DNR to "go back to the drawing board" on PolyMet's permits so the state can get it right. Supporters held up large banners reading "Protect Water-Stop PolyMet."

Retired miner Bob Tammen, from the Iron Range town of Soudan, told the group that mining accounts for less than 1% of the state's jobs. "We're sacrificing our air and water for something that's doing very little for the state of Minnesota," Tammen said.

PolyMet issued a statement saying it was disappointed by the ruling and said it is exploring options, including petitioning the state Supreme Court.

"The administrative record for the NorthMet Project is built on a comprehensive process of scientific study, analysis and public review and comment established in state law, which we participated in for 15 years," PolyMet said. "We remain firmly committed to putting people to work in northern Minnesota and will continue pushing forward on the project."

Minnesota House Minority Leader Kurt Daudt, R-Crown, called on Gov. Tim Walz to order the DNR to appeal the ruling: "Good-paying jobs are being put on hold thanks to politically motivated lawsuits by environmentalists," Daudt said.

Swiss parent company

Since receiving its state permits, Toronto-based PolyMet has been working to raise the estimated $945 million needed to build the mine, but with four of the permits currently suspended it's not clear how financing could proceed.

The company recently hired an experienced mining executive, Richard Lock, to direct the project. The company said Lock was most recently the construction director for KAZ Minerals Peschanka, a copper mine located in Russia.

PolyMet is now 72% owned by the Swiss mining conglomerate Glencore PLC, which has been cited by government pollution regulators in other countries and is under investigation by the U.S. Department of Justice in a corruption probe.

News of the setback fell hard on mining supporters who have followed PolyMet's permitting marathon.

Nancy Norr, chair of Jobs for Minnesotans, which supports copper mining in Minnesota, said the decision "negates about 15 years of work."

State Sen. David Tomassoni, DFL-Chisholm, called the ruling a "travesty" for Iron Range residents who have been waiting years for the mine to open. "We've had hundreds of public hearings all over the state. It's all been done in the light of day," Tomassoni said. "We've proved for 135 years we can mine and still have the cleanest water and the cleanest air of anywhere in the state."

U.S. Rep. Pete Stauber, R-Duluth, said the ruling would not only delay a needed project but could also set a "dangerous precedent" in which permitting decisions are made by administrative law judges rather than state regulators.

"That really disempowers our state commissioners," Stauber said.

Questions about dam

In Monday's opinion, Chief Judge Cleary found that mine opponents raised several factual issues that should have been vetted in an administrative trial known as a contested case hearing.

One set of issues involves the tailings basin PolyMet has proposed to hold mine processing waste. The proposed dam uses an "upstream" design, he noted, which the DNR's own research indicated is "the least robust" of three possible dam construction methods. Cleary cited a well-known August 2014 catastrophe in which a tailings dam failed at the Mount Polley mine in British Columbia.

Another factual issue concerns the clay PolyMet would use to augment the tailings dam; Cleary noted that one of the DNR's consultants called the bentonite seal a "Hail Mary type of concept."

A third issue, Cleary said, is that PolyMet didn't choose a waste storage technique known as dry stacking, considered "the best available technology" for storing mining waste. Cleary quoted a DNR consultant saying it's a "major leap of faith" to think PolyMet's tailings dam can be permanently maintained so it doesn't fall apart.

Finally, Cleary said there are valid factual questions about whether PolyMet's financial assurances are sufficient to cover future environmental cleanup costs, and whether Glencore's increasing equity interest in PolyMet requires its name to be on the permit.

In addition to the case before the Appeals Court, PolyMet faces a legal challenge on another front — alleged "procedural irregularities" in a permit issued by the Minnesota Pollution Control Agency (MPCA). That permit is the subject of an evidentiary hearing starting Jan. 21 in Ramsey County District Court in St. Paul.

Staff writers Katie Galioto and Greg Stanley contributed to this report.