REGIONAL— With the final environmental review on PolyMet’s proposed NorthMet mine set for release by Nov. 15, Gov. Mark Dayton said he’ll ask for a financial review of the company before deciding whether his administration will issue the company a permit to mine.

“I’ve made it clear to the company that their financial capability to build this and then to operate it was going to be a critical component of my decision of whether the project will go forward or not,” Dayton told the Associated Press in late October.

Dayton said he wants proof PolyMet and its backers have the financial capacity to build and operate their proposed copper-nickel mine, with a start-up cost in excess of $600 million. Dayton’s review would go beyond the financial assurances that the state would require PolyMet to provide to cover cleanup costs down the road. The Final Environmental Impact Statement is expected to show that water treatment will be required at both the NorthMet Mine site and the company’s tailings basin for hundreds of years and any financial assurance package will need to cover those costs.

The governor’s proposal is unusual, but it’s not unreasonable under the circumstances, said Rep. Tom Anzelc, DFL-Balsam Township, who said he’s inclined to support the governor’s request. “It’s part of the governor’s due diligence,” he said. “If the governor wants to make sure the financial assurances are legitimate, it’s definitely in his purview.”

Anzelc said he wouldn’t see such a review as appropriate for most businesses, but he recognizes that PolyMet’s proposal, and copper-nickel mining in general, is a different case. “But this review is connected to financial assurances” making it an exception, he said.

Senate Majority Leader Tom Bakk, DFL-Cook, and Sen. David Tomassoni, DFL-Chisholm, had also been contacted by phone but had not returned calls by the Timberjay’s deadline.

Bad timing

The inquiry into PolyMet’s financial condition, if approved by legislative leaders, comes at a tough time for the company, given the dramatic fall in metal prices, as well as the financial woes of Glencore Xstrata, the Swiss-based commodities broker that has been PolyMet’s chief backer for several years. Under a 2008 agreement between the two companies, Glencore would purchase 100 percent of the mine’s products, which would include copper, nickel, cobalt, platinum, palladium, and gold, if the mine goes into production. Yet Glencore has recently shuttered copper mines around the world to compensate for falling demand and oversupply.

While PolyMet’s original definitive feasibility study, published in 2006, with updated financials in 2008, pointed to impressive returns on investment, a recent op-ed by in the Minneapolis Star Tribune, noted that the company hasn’t updated its financial projections since then, and the effects of inflation and falling commodities prices have eaten into the company’s financial assumptions to a degree that it may no longer be financially feasible. That commentary, authored by Ron Sternal, a retired Wall Street executive who lives in St. Louis Park, Alan Thometz, a St. Paul-based certified financial analyst and the former director of advisory services for Grant Thornton LLP, and John Gappa, also of St. Paul, who serves as chief financial officer for Post Consumer Brands, suggests that PolyMet’s formerly robust projected returns, once fully updated, could well turn negative.

“Using publicly available data for PolyMet’s return calculation and standard investment analysis methodology, we were able to update PolyMet’s financial model with today’s costs, metal prices and financial assurance requirements. The results show the project’s return is now negative at minus3.3 percent. Pretax cash earnings have fallen from $217 million to $58 million annually. Moreover, the “pay as you go” plan of phased construction and environmental remediation puts the project in a negative cash flow position for at least the first five years. Even Wall Street in its go-go years would not finance a project with these returns,” wrote the three authors.

PolyMet spokesperson Bruce Richardson sees it differently. “If NorthMet were in production today, it would be highly profitable,” he said. “The project continues to attract very strong interest from experienced investors in and lenders to the global mining industry.”

According to Richardson, PolyMet will soon be issuing an updated Technical Report, including an economic analysis, around the time the company submits permit applications.

Metal prices

flagging

Once adjusted for inflation, current prices for copper, nickel, cobalt, and platinum are all, in fact, running well below PolyMet’s price assumptions for its mid-range financial projection, which suggested a 30- percent return on investment. That projection, produced in 2008, assumed a copper price of $2.90 per pound in 2008 dollars. Today, copper is selling for about $2.35 per pound, but that equals just $2.13 per pound in 2008 dollars, according to the Bureau of Labor Statistic’s inflation calculator.

And nickel prices have fallen far more sharply, to levels well below any of the projections made by PolyMet. The company’s same 2008 financial projection pegged nickel at $12.20 per pound. Yet today’s nickel price of $4.59 per pound equals just $4.15 per pound in 2008 equivalent dollars. That’s a significant deterioration for a metal that was projected to account for over one-third of the total metal value from the PolyMet mine. Platinum and cobalt, which combined account for another 10 percent of projected revenues are also currently running below PolyMet’s assumptions, once adjusted for inflation.

And many analysts see weakness in most basic commodities, including copper, continuing through 2020. The World Bank forecasts only a five-percent increase in inflation-adjusted copper prices through 2025. The International Monetary Fund projects virtually no improvement at least through 2020. At the same time, Goldman Sachs slashed its price estimates for copper in July, and expects further declines in copper prices as far out as 2018.

At the same time, the cost of construction has increased, a fact that PolyMet acknowledged in late 2012, when it adjusted its estimated construction cost to $602 million, a 36-percent increase over its original cost projections. But assuming construction were to get underway in late 2016, the effects of inflation would add at least another $30 million to the most recent construction estimates.

Financial

assurance

One of the biggest wild cards for PolyMet isthe up-front financial assurance that the state will require the company to post in order to receive a permit. That financial assurance is a tool that states and countries routinely use with mining companies as a means of protecting taxpayers from paying the high cost of clean-up and site remediation when mine operators declare bankruptcy.

The authors of the recent Star Tribune commentary suggested the state might need to seek as much as $350 million to cover the cost of hundreds of years of water treatment at both the mine site and tailings basin. If so, the commentators suggest that start-up costs for PolyMet could easily exceed $1 billion.

At the same time, PolyMet will assume additional environmental liabilities if it is issued a permit to mine. Those include the cost for clean-up at the former LTV site. Under an agreement with Cliffs Natural Resources, Cliffs will retain those liabilities if the state declines to issue a permit to mine to PolyMet. In 2012, PolyMet estimated those liabilities at approximately $25 million.