Opponents of the project filed a legal complaint in 2020 and the case was heard last year.
In a decision issued late last week, the judge granted the plaintiffs' motion for a summary judgement stating that the Montana Department of Environmental Quality (MT DEQ) violated the Montana Metal Mines Reclamation Act and Montana Environmental Policy Act in its analysis of the project.
Each party now has 45 days to propose remedial measures to the judge, after which she will hand down her remedial actions.
Sandfire said it would then have a clearer picture of the impact, if any, on the project development timeline.
Black Butte, owned by Sandfire's 87%-owned subsidiary Sandfire Resources America, was the first mining project permitted in Montana in over two decades.
"Sandfire has gone to extraordinary lengths to ensure the Black Butte copper project goes well beyond industry standards to meet Montana's rigorous permitting requirements," Sandfire managing director and CEO Karl Simich said.
"The Montana DEQ has performed comprehensive and diligent environmental and technical work over many years to ensure this project will be developed in a way that sets new standards for mine developments globally.
"The project utilises cutting-edge technology and modern underground mining techniques that will minimise environmental impact, protect all water resources and address Montana's non-degradation water standards.
"We look forward to the results of the legal review and we remain confident the project can move forward, creating significant opportunities and benefits for the state of Montana and local communities."
An October 2020 feasibility study for Black Butte outlined capital costs of US$274.7 million for an eight-year, 1.2 million tonne per annum operation.
Average annual copper production will be about 23,000 tonnes at a C1 cost of $1.51 per pound.
Average annual post-tax cashflow is expected to be $77.8 million per annum for the first five years of operations.
The project is forecast to generate revenue of $1.3 billion and pre-tax net cashflow of $518 million in, based on a copper price of $3.20/lb.
However, copper prices have since risen to $4.68/lb.
The study also did not include the 200,000t Lowry deposit, where a 14,000m resource definition drilling program is being conducted.
Sandfire is working on an enhanced feasibility study.