* To proceed with development of Aqqaluk Deposit
* Viable plan exists to resolve permit appeal issue
* Shutdown would have stripped 5 pct of zinc from market
(Adds comment from company, analyst, updates shares)
By Cameron French
TORONTO, May 20 (Reuters) - Teck Resources TCKb.TO said on Thursday it will proceed with an expansion of its Red Dog zinc mine in Alaska, avoiding a potential closure that would have stripped out more than 5 percent of global zinc production for over a year.
The decision to develop Red Dog's Aqqaluk deposit -- which will double the life of the world's largest zinc mine and ensure production after the current pit runs dry -- comes despite uncertainty remaining over water discharge permits that were appealed by environmental groups earlier this year.
Following the appeals, the Environmental Protection Agency approved construction of Aqqaluk and removed the discharge limits under appeal. The EPA still has to issue new discharge limits.
However, Teck said it is confident it will be able to resolve outstanding issues.
"We feel at the end of the day that doesn't affect our ability to mine the deposit, so we're proceeding with mining," said Jim Kulas, Alaska spokesman for the Vancouver-based mining company.
Vancouver-based Teck said in February it would consider suspending operations later this year if the permit dispute dragged beyond May, when the spring thaw would have made starting construction on Aqqaluk difficult.
Without ore from Aqqaluk, Red Dog would run dry next year.
Shutting down the operation would have removed annual production of nearly 600,000 tonnes of zinc concentrate and 130,000 tonnes of lead from the market.
The price of zinc, primarily used to galvanize steel, has languished on oversupply concerns, caused by a wave of production restarts in the second half of 2009. [ID:nLDE64B1L2]
Three-month zinc CMZN3 on the London Metal Exchange was up 0.7 percent at $1,871 a tonne at 1245 GMT on Thursday, while shares of Teck ended the session down 72 Canadian cents, or 2.2 percent, at C$31.96 on the Toronto Stock Exchange, suggesting few in the market were too concerned about a shutdown.
"Everybody knew it was going to get sorted out and they weren't going to shut the mine down," said Kerry Smith, an analyst at Haywood Securities.
While Teck has been permitted to begin Aqqaluk development since March, it said it wanted clarity on the water discharge limits before starting construction.
Several environmental groups appealed the EPA's permit, saying the water effluent limits on dissolved solids (TDS), as well as toxic substances such as ammonia and cyanide, were more liberal than those outlined in the previous 1998 permit.
Teck has said limits in the older permit, particularly regarding TDS, were impossible to meet. The company has been mining for the past 12 years under special dispensations from regulators, and expects the same conditions will apply until new looser limits are in place.
"With our discussions with the EPA, it's our understanding that they will not enforce," said Kulas.
The new EPA limits could take several months to nail down, as the agency must first wait for Alaska to finalize a new water standards policy that may not be completed until September, EPA regional mining coordinator Patty McGrath told Reuters this week.
$1=$1.06 Canadian Reporting by Cameron French, Additional reporting by Euan Rocha, Editing by Rene Pastor