REGIONAL—With the prospect that the Department of Natural Resources could grant provisional approval of a permit-to-mine for the proposed PolyMet copper-nickel mine near Babbitt and Hoyt Lakes …
REGIONAL—With the prospect that the Department of Natural Resources could grant provisional approval of a permit-to-mine for the proposed PolyMet copper-nickel mine near Babbitt and Hoyt Lakes later this fall, many residents of those communities are anticipating potential new employment opportunities.
Yet a number of challenges and potential pitfalls for the project remain, and serve as a reminder that large-scale development, like mining, is often a hit or miss proposition and that timelines can frequently extend for years, or even decades.
It’s been nearly two and a half years since the DNR approved the final Environmental Impact Statement on the project and hopes were high back then that the project would soon be up and running. The DNR issued a draft permit-to-mine in January of this year, but the agency remains uncertain about its timeline for approval of a final permit. Meanwhile, a number of significant roadblocks and hurdles remain in the path of the project. Here are just some of the major issues yet to be addressed:
Even as the DNR works to respond to thousands of comments on its draft permit-to-mine, it faces requests for additional environmental review as well as a “pre-decisional” contested case hearing that would present factual disputes between the agency and project critics before an administrative law judge.
According to Assistant DNR Commissioner Barb Naramore, the DNR had hoped to issue a decision on whether to issue a permit-to-mine this fall, but that decision would be delayed, possibly significantly, if the agency agrees to hold a contested case hearing. A decision on that question is also expected this fall.
Meanwhile, Naramore said she expects the agency to issue a decision within days about whether to reopen the environmental review of the project, given the prospect that PolyMet will seek to substantially increase the scale and pace of mining in order to improve the project’s financial viability. Attorney Paula Maccabee has submitted a petition to the DNR, as well as the U.S. Forest Service and the Army Corps, seeking a Supplemental EIS to address the new mine proposals outlined in PolyMet’s updated definitive feasibility study, released in April. Those alternative proposals suggested nearly doubling or even quadrupling the rate of mining at PolyMet’s NorthMet deposit to boost return on investment.
Maccabee argues that federal law requires a supplemental EIS when a project proposer introduces a substantial change in the plan.
The permit that the DNR is expected to issue would only apply to a 32,000-ton per day mining operation, which PolyMet’s latest financial report suggests is only marginally profitable.
Land exchange uncertainty
While the U.S. Forest Service and PolyMet officially transferred title on approximately 6,600 acres of land necessary for the project in late June, that transfer could still be unwound pending the outcome of ongoing lawsuits challenging the exchange on multiple fronts. Legislation that would have enacted the exchange into law and effectively wiped away the ongoing lawsuits, has been unsuccessful to date.
The lawsuits have been stayed for more than a year in anticipation of congressional action, but they would presumably be reactivated when the current Congress ends four-and-a-half months from now.
Both Water Legacy and the Minnesota Center for Environmental Advocacy are challenging the exchange under provisions of the Federal Management and Lands Policy Act, which requires equal valuation in federal land exchanges. While the exchange entails a roughly acre-for-acre swap, the groups contend that the value of the mineland surface rights provided by the U.S. Forest Service to PolyMet, are substantially higher than the timberland surface rights that the Forest Service is receiving.
The project requires a land exchange to resolve a conflict between the federal law governing the federal lands in question, known as the Weeks Act, and PolyMet’s plan for an open pit mine.
Perhaps the biggest remaining hurdle for the NorthMet is the diminished financial viability of the project. The cost to build the mine has escalated sharply from a 2012 estimate of about $650 million, to $945 million today according to the financial assessment issued in April 2018 as part of the company’s updated feasibility study, known as a 43-101 Technical Report. And that figure does not include the cost of building a hydrometallurgical processing facility, which would add another $259 million to the cost of construction, pushing the final price tag to just over $1.2 billion.
Meanwhile, lower metal prices, particularly for nickel, have cut anticipated financial returns from the mine almost in half. And those estimates are based on copper and nickel price assumptions that are higher than current prices. In the past, the company has taken a more conservative approach to metal price assumptions.
The latest report pegs copper prices at $3.22 per pound, up from the current price of $2.79 per pound. Copper prices have averaged just under $3 per pound over the past year. The report also assumes an average nickel price of $7.95 per pound, well above the current nickel price of $6.22 per pound. Copper and nickel would provide more than three-quarters of the revenue from the proposed mine.
Company officials contend that metal prices are likely to rise during the lifespan of the mine, fueled by the anticipated boom in electric vehicles. Those vehicles require large amounts of copper, nickel and cobalt, according to company officials.
The lower revenues and higher projected costs put the mine’s internal rate of return at 9.6 percent, well below the 30.6 percent return projected in its 2008 financial report, although the return could improve to an estimated 10.3 percent if PolyMet opts to build its own hydrometallurgical processing facility.
PolyMet officials maintain that the project remains viable at its current proposed mining rate of 32,000 tons per day. Most financial analysts, however, consider a return on investment of ten percent to be well below the level that investors expect to see in a high-risk venture, like a mine. In 2014, a pre-feasibility study produced by Duluth Metals for the Twin Metals project suggested a rate of return of 13.6 percent on an investment of $2.8 billion, which most investors saw as lacking viability. Within weeks, the stock price of Duluth Metals had collapsed, and the venture was assumed for pennies on the dollar by Antofagasta.
PolyMet’s disappointing financial outlook could affect more than just investors. Should the state of Minnesota issue a permit-to-mine for the project, it will include financial assurance requirements totaling more than $500 million by the second year of operation and up to a billion dollars by year ten of the project.
The DNR is allowing PolyMet to post most of those funds in the form of letters of credit or surety bonds, but financial consultants retained by the DNR have previously expressed doubt about the company’s ability to obtain such financial instruments on its own. “Due to numerous mine bond forfeitures that caused considerable losses to the surety industry, it has now become more difficult for mining companies to obtain surety bonds,” noted the consultants in a report issued in late 2016. “For a small or new mining company like PolyMet it would be very difficult to obtain a reclamation bond if there is any risk of bankruptcy, which would be indicated if the financing or economics are not solid. It would be even more difficult to find a surety willing to guarantee a long-term financial assurance liability unless the project’s economics are very strong.”
The consultants drafted their conclusions prior to PolyMet’s release of its updated plan, which showed much weaker returns than earlier projections.
DNR officials acknowledge the issue. “Our understanding is that a junior mining company, such as PolyMet, might have difficulty obtaining the necessary surety bonds at a cost it can afford and that pricing would likely be more affordable for a larger, better capitalized company,” said Naramore.
Glencore, PolyMet’s chief financial backer and largest shareholder, could potentially be in a position to put up its own assets as part of a financial assurance package. But that could well be complicated by yet another potential hurdle for the PolyMet project— Glencore itself.
Glencore faces investigation
As the Timberjay reported last month, Glencore is being investigated by the U.S. Justice Department for violations of the Foreign Corrupt Practices Act and U.S. laws prohibiting money laundering stemming from its acquisitions of mining properties in Nigeria, the Democratic Republic of the Congo (DRC), and Venezuela.
While Glencore has yet to be charged with any crime in the case, Tuesday’s announcement certainly raises the possibility. Glencore was founded by fugitive financier and hedge fund magnate Marc Rich. According to the New York Times, the company has long shown a “higher tolerance for politically murky situations, which translates into a willingness to venture into countries where rivals will not. That has enabled it to set up shop in Congo and Venezuela, securing valuable footholds in mineral-rich countries.”
PolyMet officials have not commented publicly on the Glencore investigation, even though their project is inextricably tied to the company.
Depending on the results of the investigation, the company could face fines or sanctions on its activities in the U.S., which could put the PolyMet project at risk. As the project’s chief financial backer, Glencore has loaned over $225 million to PolyMet and currently owns about one-third of PolyMet’s stock.
The company has representation on the board of directors and has an off-take agreement giving the company rights to 100 percent of the production of the mine.