The announcement late last Wednesday that Glencore had agreed to loan PolyMet another $11 million to pay for an update to its definitive feasibility study, was greeted by some as a piece of good news— that suggests the giant Swiss-based commodities broker still sees potential in the company’s NorthMet copper-nickel mine despite the recent collapse in metals prices.
Yet the terms of the loan, and the likely results of the feasibility update, point to a project that’s teetering on life support. While PolyMet saw a bump in its stock price in November with the release of the Final Environmental Impact Statement, investors have grown increasingly pessimistic ever since. As of this week, the company’s stock price had recovered slightly, to 89 cents, but is still down 20-percent since its post-FEIS peak. Savvy investors can’t be unaware that major copper mines around the world are being shuttered by companies like Glencore, Rio Tinto, and others, in a desperate attempt to stem the financial bleeding and the production oversupply that has cut copper prices in half from their peaks in the late 2000s.
The nickel market has been even more brutal, as prices for the metal have fallen by nearly 75 percent from the levels that PolyMet had assumed in its 2008 update of its feasibility study.
The whopping 16-percent interest rate that Glencore is charging PolyMet for its $11 million lifeline further points to a market that has little confidence in the project. You don’t pay loan shark interest rates in the current low interest rate environment unless every other option for funding is off-the-table. PolyMet is, at this point, completely dependent on Glencore to survive, and that rarely works out well for any company in the long run. Just ask Duluth Metals.
What’s worse, the updated feasibility study that $11 million is supposed to generate is unlikely to inspire any newfound optimism in the project. I’ve been tracking the effect of metal prices on PolyMet’s economic outlook for months and the picture is bleak, at least at current metal prices.
While PolyMet could once claim a robust 30-percent return on investment, it’s not clear there’s any appreciable return at current metal prices.
Even if an updated financial assessment shows a modest profit, it’s difficult to imagine the scenario under which the massively debt-laden Glencore opts to sink another $650 million into copper-nickel production it needs like a hole in the head.
The most realisitic scenario right now is that the company keeps PolyMet alive through the completion of the permitting process, then sits on the project for years until metal prices recover. Glencore, after all, operates mines of its own. Locking up the NorthMet reserves, as a long term investment that keeps other companies from developing the site and adding to global oversupply, makes sense. Investing in an operating mine at the site, at least any time soon, seems highly unlikely.
For a region clamoring for a new mine to replace lost jobs in the taconite industry, such realities are hardly encouraging. But one of the downsides of basing your economic future on the boom and bust cycles of the global commodities market, and the whims of overseas corporate boardrooms, is that the hopes and dreams of local residents, politicians, and newspaper editors, count for exactly nothing.
In the end, it’s always about the bottom line.
There is no doubt that metal prices may well rebound sometime in the future, but most financial analysts with far more expertise than I, don’t see a significant long-term recovery any time soon. It appears that the historically high metal prices that sparked so much interest in PolyMet several years ago were the result of what many economists refer to as a “super-cycle,” in this case created by the extraordinary economic boom in China that affected global commodities through the first decade and a half of the 21st century. Super cycles, as they inflate, tend to push commodity prices much higher and they invariably prompt companies to invest in new production capacity to meet the rising demand. Companies can generate fortunes during the peak of such cycles, as prices are high, but when they come to an end, the economic pain and dislocation can be enormous as the vastly expanded production capacity built up during the super cycle suddenly swamps slowing demand, sending prices plummeting. This is exactly what we’ve seen across the commodities sector for the past two years. While the normal cycle of boom and bust can flip every year or two, super cycles, both the upside and the down, tend to last much longer— as in decades. That’s why many economists don’t see any substantial recovery in most basic commodities for at least the next ten years.
In commodities, timing is everything. And in the case of PolyMet, it increasingly appears that the timing is off— badly.
And this economic-based assessment, remember, assumes that the project isn’t derailed by other factors, such as successful litigation that could send state and federal regulators back to the drawing board on the FEIS. The document released by the DNR in November has a number of major flaws that could still come back to bite. And it remains unclear whether the federal Environmental Protection Agency will be able to issue a water discharge permit as things currently stand.
Yet even if PolyMet had its permits in hand, there’s little reason to believe a copper-nickel mine will be operating in our region any time soon. If more mining is your answer to the region’s economic woes, it’s time to start asking the right questions.