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What’s next for PolyMet?

With permits in hand, company offers no clear timeline

Marshall Helmberger
Posted 4/2/19

REGIONAL— For more than a decade, PolyMet Mining issued a seemingly never-ending series of optimistic timelines for the start of construction and operation of the state’s first copper-nickel …

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What’s next for PolyMet?

With permits in hand, company offers no clear timeline

Posted

REGIONAL— For more than a decade, PolyMet Mining issued a seemingly never-ending series of optimistic timelines for the start of construction and operation of the state’s first copper-nickel mine. Each, in turn, fell by the wayside as the environmental review process dragged on for more than a decade.

Now, with the environmental review completed, and all of its major permits finally in hand, the company is offering no clear sense of when, or even if, the now-permitted project will proceed—at least as proposed.

While the company’s completion of a marathon environmental review and state and federal permitting process was a significant achievement, it came at considerable cost— more than a quarter of a billion dollars in debt. A total of $243 million of that is owed to PolyMet’s principal financial backer, Switzerland-based Glencore Xstrata.

Company officials note that retiring those loans remains at the top of their to-do list for now. Glencore agreed last month to give PolyMet a three-month extension for repayment of that debt, which had been set to mature on March 31. Some of that debt is convertible to ownership of the project, but PolyMet officials declined to say whether they expect Glencore to accept a greater ownership stake in lieu of cash repayment. Glencore currently owns just under one-third of the company and has representation on the PolyMet board of directors.

PolyMet is planning to offer current owners of its common shares the chance to purchase additional stock in the company in hopes of raising the capital it will need to retire its debt with Glencore by the new maturity date of June 30. How much interest they’ll find in the offering is the $243 million question upon which the future of the project could rest. Despite the company’s newly-issued permits, investor interest in PolyMet stock remains lackluster. As of this week, the stock was trading at just 65¢ a share, close to an all-time low for the company.

PolyMet’s 2018 annual report listed strengthening its balance sheet, either through restructuring or repayment of outstanding debt, as among its top five goals for 2019. Other goals include completing a “project optimization plan,” as well as securing the roughly $1 billion in financing for construction. At the same time, the company is hoping to complete an “implementation plan” and maintain social, political, and regulatory support for the project.

As other mining operations have demonstrated in recent years, obtaining permits for a mining project, while a critical milestone, is no guarantee of a project’s success, at least in the short term. Regulators in Nevada issued permits for a proposed copper and gold mine there, known as Pumpkin Hollow, in 2015. Four years later, the project is finally under construction, albeit at a significantly smaller scale than originally proposed and at an upfront price tag of $197 million, barely one-fifth the capital that PolyMet will need to advance its proposed NorthMet mine plan. The company behind that project, known as Nevada Copper, struggled for three years before putting together a financing package for its stripped-down project, despite a higher grade of ore than PolyMet is proposing to mine and an expected internal return on investment before taxes of 21 percent.

In the case of PolyMet, there probably isn’t an option for a smaller-scale project, with a less imposing upfront investment. If anything, the company’s most recent financial projections suggest that a much larger project than the proposed 32,000 tons-per-day operation might be the only way to boost financial returns to a level likely to pique investor interest. A March 2018 financial update projected an internal rate of return of just 10 percent on PolyMet’s current mine plan, well below the usual standards of the inherently risky mining sector. And PolyMet’s lackluster financial estimates assume a copper price of $3.29 per pound and nickel at $7.95 per pound, both well above current prices for these critical metals.

The future of the NorthMet project likely ultimately depends on a commitment by a major mining company to take on the venture in a partnership with PolyMet. The financial consulting firm, EOR, which the Department of Natural Resources hired to assess the project, has raised doubts about PolyMet’s ability to develop the project through traditional commercial debt.

“PolyMet alone would probably not be able to obtain the necessary financing and required financial assurance instruments without the backing of Glencore or another large company,” note the consultants in a report issued late last year. “Therefore, we concluded that it is unlikely that the project would proceed without this financial backing. So long as Glencore or another large company invests in the project, there would be little risk of the project failing.”

Will Glencore or another major mining company agree to invest upwards of another billion dollars to finance construction and start-up for a project with marginal profitability? That’s an unknown, although it would be consistent with Glencore’s long-term view that prices for metals like copper, nickel, and cobalt are likely to rise over time with the greater adoption of electric vehicles. According to the company’s 2017 annual report, Glencore is projecting that electric vehicles will comprise more than a third of the total vehicle fleet globally by 2030, just 11 years from now. If so, the company predicts that global demand for copper will increase by 18 percent over 2017 production levels, while nickel demand will jump by 59 percent over 2017 production levels.

It’s that expectation that is currently fueling the interest in bringing new copper, nickel, and cobalt production online. In addition to copper and nickel, the PolyMet mine is expected to produce small amounts of cobalt, which is typically a byproduct of nickel production.

According to EOR’s financial assessment for the DNR, Glencore is “focusing on controlling and adding to its reserves of copper, nickel and cobalt, which explains its involvement in PolyMet.”

As EOR noted, Glencore is a major company with 2017 revenues of $205 billion and a profit of $5 billion. “The NorthMet project would be a minor part in Glencore’s overall portfolio. In this regard, there would be no economic reason for this project not to be successful so long as Glencore guarantees the financing and the financial assurances, especially when there are unexpected dips in the cash flow.”

While Glencore’s size would seem to be an advantage for the NorthMet project, the project’s marginal economics could put the project lower on the priority list for a company with vast global holdings in the sector. While a small start-up like PolyMet might be eager to get mining underway, since it has no other source of revenue, a large multinational corporation like Glencore could afford to sit on a deposit like NorthMet, possibly for years, until an increase in the price of metals makes the project more economical.

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