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Old memos shed new light on Twin Metals leases

Suggest Trump administration ignored record in reversing Obama-era cancellation of mineral leases

Marshall Helmberger
Posted 12/5/18

REGIONAL— A treasure trove of historical federal documents, obtained by the Timberjay, is shedding new light on whether the Trump Interior Department improperly reinstated two federal mineral …

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Old memos shed new light on Twin Metals leases

Suggest Trump administration ignored record in reversing Obama-era cancellation of mineral leases

Posted

REGIONAL— A treasure trove of historical federal documents, obtained by the Timberjay, is shedding new light on whether the Trump Interior Department improperly reinstated two federal mineral leases on the Superior National Forest that are now the subject of ongoing litigation.

The documents, including more than a dozen detailed memos dating back to the mid-1960s, provide extraordinary insight into the negotiations between representatives and supporters of mining interests and federal officials in the Johnson administration over a proposal by the International Nickel Company, or INCO, to begin copper-nickel mining about ten miles southeast of Ely.

They bolster the legal arguments of the Obama administration, which concluded that the federal government had no legal obligation to grant a renewal of the leases to INCO’s successor, Twin Metals, when it applied for reauthorization in 2013. Twin Metals is wholly owned by the Chilean copper giant Antofagasta.

The Obama administration opted against renewal of the leases in December of 2016, citing the environmental risks that a sulfide-based copper-nickel mine posed to water quality in the 1.1 million-acre Boundary Waters Canoe Area Wilderness located directly downstream from the proposed mine site. The decision all but ended work on the Twin Metals project, since the federal leases were integral to its success.

This past May, however, the Trump Interior Department ordered that the leases be reinstated and justified that unprecedented action by claiming that the prior administration had committed “legal error” when it determined that the government had discretion over whether to renew the leases.

Daniel Jorjani, a former legal counsel for the conservative Charles Koch Foundation now working for the Trump Interior Department, had issued the new opinion late last year, arguing that the terms of the original lease guaranteed that Twin Metals had the right to one more ten-year renewal. Jorjani argued that the federal government had no choice but to renew the claims given the language in the original leases, known as MNES 1352 and MNES 1353, which were first issued to INCO in 1966.

A number of Minnesota businesses and environmental groups filed suit against the decision in June, and the case is now before a federal judge appointed by President Trump.

Documents clarify negotiations

The collection of federal records was released by the government to plaintiffs as part of discovery in the ongoing lawsuit and they have since been obtained by the Timberjay. The documents are comprised mostly of memoranda written by federal officials with the Department of the Interior in 1965 and 1966 documenting their discussions with Congressman John Blatnick and representatives of INCO as they negotiated the terms of the mineral leases.

The discussions and agreements described in the memoranda suggest that the Trump administration may have a difficult time defending the validity of the legal opinion under which Interior officials made their decision.

The memoranda describe sometimes tough negotiations, with INCO representatives arguing for enactment of two 50-year leases that would provide them greater opportunity to recoup the estimated $2 million investment the company anticipated in order to finalize its exploration and develop a mine plan.

The company and the federal Bureau of Land Management had tentatively agreed on a 50-year term back in the mid-1950s, but the BLM never approved the leases after press coverage at the time suggested they amounted to a sweetheart deal. Talks between the company and the agency related to mineral leases subsequently ceased for nearly a decade, although INCO did maintain short-term prospecting permits in the affected area.

Interest in the project was rekindled in 1965 as word leaked out that U.S. Steel planned to permanently close the Pioneer Mine, Ely’s last iron mine, within a year or two. Rep. John Blatnik, who represented the Eighth District at the time, hoped that a copper-nickel mine could provide jobs for at least some of the miners who would be laid off with the shuttering of the Pioneer. That concern was echoed by then-Ely Mayor Joseph Pucel, who led a local delegation to Washington to push for progress on the copper-nickel front. Purcel attended at least one of the meetings in Blatnik’s Washington office to discuss prospects for the INCO project with federal officials and company representatives.

While the Johnson Interior Department was amenable to the mining proposal, memoranda from that time show that the federal officials, by then, had no interest in providing a 50-year lease to INCO. Charles Stoddard, the BLM director at the time, noted at a July 7, 1965 meeting in Blatnik’s office that the agency could not justify a 50-year lease given that the agency traditionally offered nothing longer than 20 years. Companies typically had a preferential right to renew their leases, which meant they, in effect, had a right of first refusal on subsequent lease renewals, if the federal government decided that renewal was in the public interest.

INCO held out for a better deal. In that same July meeting, INCO Chairman Henry Wingate told federal officials “that if the leases were for 20 years, or less, that the Department could forget about INCO.”

BLM representatives, including Stoddard, told those at the meeting that the agency supported the project and would offer lease renewals if production was underway. But they objected to a 50-year lease since it would only require actual mineral production in the 49th year of the lease. “Mr. Stoddard stated that the BLM was subject to more political pressure than any other agency, and it was necessary for them to do something to demonstrate that they are performing in the best public interest,” noted a July 12 memorandum produced by J.D. Turner, the Chief of the BLM’s Branch of Mining. Turner quotes Stoddard telling the group that BLM customarily required lessees to begin production “prior to the 5th, 10th, or 15th lease years.”

By August, it appeared that INCO had agreed to drop its demand for a 50-year lease. An Aug. 18, 1965, memo from R. E. Spratt, the BLM’s Assistant Chief of Conservation, describes a follow-up meeting in Blatnik’s office. Quoting one of the participants, Spratt states that, “the meeting was on a friendly, cooperative basis, and that INCO has agreed to accept the standard lease form, to drop the 50-year [lease term], and is now wanting to negotiate royalty terms.”

INCO, in exchange for agreeing to drop its demand for a 50-year lease, then wanted the government to lower the royalty amount from the rates that the company and the government had agreed to in the 1950s. Negotiations over royalties consumed the next several months.

By October, the lease was close to complete, except for an agreement on royalty terms. In an Oct. 5, 1965, memo titled “Proposed Preference Right Lease to International Nickel Co.”, Director Stoddard described efforts at “re-negotiation” of the proposed 1954 lease “into conformity with the regulations and policies of the department and to gain the best possible assurance that the company would begin productive operations during the primary term.”

Blatnick continued to pressure the agency to move quickly, particularly on royalty rates, which by October was the last sticking point to an agreement. Some officials within the Interior Department were unconvinced of the justification for a reduction in royalties, which delayed any final decision. On Oct. 14, a handwritten note by Harold Duncan, then Chief of the Conservation Division, described a phone call from Blatnik’s office urging him to support the company’s proposed royalties. “I said nothing warranted me to okay a change over the royalty rates agreed to in 1956,” Duncan wrote.

Duncan reiterated that opinion in a lengthy Oct. 29, 1965, memorandum, citing the history of the 1950s-era negotiations that led to the original royalty terms.

W.T. Pecora, then director of the Geological Survey, concurred with Duncan in a Jan. 10, 1966 ,memo stating his opinion that the company had provided no justification for adjustment of the royalty rates.

But by the end of January, it appeared that political pressure had won over the department. A Jan. 30, 1966, document outlines the differences between the unexecuted 1950s-era lease and the new one that the company was seeking. In addition to the change in royalty rates, the document notes that the term of the lease was changed from 50 years to 20 years, with rights to renew at three ten-year intervals with no change in terms “unless not in production [in] the 1st 20-yr. term on either one lease or the other.” The lease did allow the secretary to grant a ten-year extension under certain circumstances, but that the mine would have to get underway during the extended period.

By early summer of 1966, the lease was finalized and the Department of the Interior issued a press release announcing the leases on June 14.

Then Secretary of the Interior Stewart Udall praised the leases, which he said offer “promise of new economic life for an area beset with increasing job layoffs.”

The press release notes that the leases “grant mining rights to the company for 20 years, renewable for 30 years at 10-year intervals if the property is brought into production within the initial 20-year term.” (emphasis added).

Nearly 53 years later, no copper-nickel has been produced from the leases, although the BLM and U.S. Forest Service did allow INCO and its successors to renew the leases in 1989 and 2004 despite the lack of production. Related legal opinions, produced by both the Reagan and Obama Interior Departments, concluded that renewal of the leases was discretionary on the part of the government, due in part to the company’s failure to begin production within the initial 20-year term.

Jorjani opinion questioned

In his legal opinion issued Dec. 22, 2017, Daniel Jorjani argues that INCO’s renewal rights were never contingent on the start of mineral production. Instead, Jorjani claims that the requirement to begin production within 20 years related only to the federal government’s right to adjust royalties.

“Rather than conditioning the right of renewal upon production, [the lease] sets forth the degree to which the BLM may readjust the terms, conditions, and royalty rates during lease renewals, and creates an incentive for early production by limiting BLM’s discretion during the first three lease renewals if production has begun,” states Jorjani in his legal opinion.

Nothing in any of the memoranda produced by the government supports Jorjani’s novel claim. Instead, Jorjani’s argument runs directly counter to the discussions detailed in government memoranda as well as the 1966 government press release which clearly linked the company’s rights to future lease renewals to the beginning of production within the initial 20-year term.

In addition, it runs counter to the Jan. 30, 1966, lease comparison which describes the lease terms, the rights to renewal, and royalty rates as separate provisions. At no point in any of the documents is it suggested that the production requirement stipulated in the lease refers only to the government’s right to adjust royalties.

Jorjani’s legal argument, if believed, suggests that INCO representatives were remarkably shrewd in their negotiations with the government. In effect, Jorjani claims that the company— apparently without the government’s knowledge— negotiated a guaranteed 50-year mineral lease with escape clauses (options for renewal) for the company at 20 years, 30 years, and 40 years, but with no similar right for the government.

And that in compensation for obtaining even more favorable terms than the 1950s-era lease, the government also granted INCO a substantial reduction in royalty rates.

The negotiations outlined in the government memoranda point to exactly the opposite conclusion as they indicate that INCO wanted lower royalty rates in compensation for agreeing to an initial 20-year term with a production requirement.

An Oct. 5, 1965, memo produced by Interior’s Duncan notes detailed discussions on the question and indicated that INCO expected to get something for agreeing to a shorter lease term.

He said company representatives made it clear that “if INCO relinquished its right to a 50-year lease for a 20-year lease, that they expected a cut in the proposed royalty… by at least 50 percent.” Had the company and federal officials believed that the government was granting INCO an automatic right to a total of 50 years of mineral leasing, without a production requirement, the company’s rationale for lower royalties would have vanished.

Other claims in Jorjani’s legal opinion are equally suspect. In it, he states that Twin Metals has consistently maintained its right to automatic renewal of the two federal mineral leases.

In fact, the company has stated the opposite. Its 2014 43-101 technical report contains the following in an assessment of potential risks to the project: “Subject to applicable laws and regulations, BLM has discretion as to whether to issue or renew any prospecting permit and any preference right lease, as well as discretion with respect to the terms and conditions to be included in any such prospecting permits and preference right leases. Issuance and renewal of prospecting permits and preference right leases also are subject to review by the United Sates Forest Service under applicable federal law.”

Legal proceedings

The memoranda obtained by plaintiffs are almost certain to serve as key exhibits as the lawsuit before District Court Judge Trevor N. McFadden, filed by affected businesses and environmental groups ,proceeds. As currently scheduled, plaintiffs will present briefs arguing for summary judgment by Jan. 16, 2019, with responses from the government and rebuttal by plaintiffs anticipated in February and March. If the schedule proceeds as currently ordered, a decision could be expected by early summer.

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