Serving Northern St. Louis County, Minnesota

Sluggish market could slow PolyMet project

Recent history suggests financing may be a challenge for mine project

Marshall Helmberger
Posted 11/21/16

REGIONAL—PolyMet Mining’s recent submission of its permit to mine application to the Department of Natural Resources has furthered hopes that this long-awaited project could soon be underway.

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Sluggish market could slow PolyMet project

Recent history suggests financing may be a challenge for mine project


REGIONAL—PolyMet Mining’s recent submission of its permit to mine application to the Department of Natural Resources has furthered hopes that this long-awaited project could soon be underway.

But the recent history of other mining projects in the U.S., combined with the continued sluggish copper market globally, suggest that development of the NorthMet deposit, near Hoyt Lake, may not come as quickly as many project boosters might hope.

Take the proposed Copperwood Mine in Michigan’s Upper Peninsula. A junior mining company, Orvana Minerals Corp., which had pursued development of the copper-silver deposit located there, completed the permitting process for opening of the mine in 2013. The following year, Orvana sold the project to Canadian-based Highland Copper Company, which has given little indication it plans to advance the project to operational status any time soon. The company is exploring a change in the mine plan, that could reduce some of the initial start-up costs by eliminating the need for a new tailings basin, but has given no indication when the new mine might actually be built.

It’s a similar story at the Pumpkin Hollow proposal in Nevada, which received its permits in August of last year. The mine proposal calls for nearly double the daily production proposed at PolyMet, and total employment of about 850. But local residents haven’t seen those jobs materialize yet, and officials of Nevada Copper, the junior mining company advancing the project, say the project is entirely dependent on raising the estimated $1.04 billion the company will need to get the mine operational.

PolyMet does have some advantages over those two projects, including the fact that the company already owns major facilities and infrastructure, once owned by the now-defunct LTV Steel, that PolyMet acquired more than a decade ago. Those previous acquisitions have helped reduce the financial requirement of a PolyMet startup, to around $650 million.

While some copper projects have struggled to find financing, PolyMet’s circumstances may make it more attractive to investors. “There is significant interest in our project,” said PolyMet spokesperson Bruce Richardson. According to Richardson, the geopolitical stability of the region, the size of the deposit, and a forecast deficit of global copper production by 2019 or 2020, are all factors contributing to investor interest in the project. Richardson said PolyMet officials have met with Glencore and a number of top tier banks in the U.S., Canada, and Europe regarding construction financing for the project. “The recent financing that we just completed started as a $10 million private placement and closed at $30 million, because of the interest in our project.  This is a good indication of what to expect going forward.”

Supporters of the project, like Hoyt Lakes Mayor Mark Skelton, remain focused on the permitting phase for now and are optimistic the project will proceed once permits are in hand. “All I can tell you is they’re [PolyMet] working on all facets of the project, but permitting is in the forefront right now,” said Skelton. “That’s the most important thing.” And Skelton remains confident in the team that PolyMet has assembled. “My experience with them has been a very positive one,” said Skelton. “They’re smart people.”

Critics of the mine, however, note that PolyMet, as a junior mining company, has no financial wherewithal on its own to build an operating mine, even if regulatory agencies ultimately grant the nearly two dozen permits the project will require.

“They’re thinly capitalized, raising money quarter-to-quarter, mostly from Glencore,” said John Gappa, a chief financial officer for a number of sizable Minnesota corporations. He has consulted with a number of environmental organizations on the PolyMet proposal.

Glencore is a giant Swiss-based international commodities broker with mining assets around the world.

While Glencore undoubtedly has the financial resources to advance the PolyMet project, Ron Sternal, a retired financial services professional who sits on the board of the Minnesota Center for Environmental Advocacy, said he’s convinced they won’t do so any time in the next two to three years. “Financially, we just don’t see it happening, just because of the glut of copper in the world,” Sternal said.

Sternal said during the 2015 collapse in copper prices, due to overproduction and slowing demand from China, Glencore shuttered a significant amount of copper mining capacity in order to cut costs and trim oversupply. “They took 400,000 tons of daily production off line,” he said. “Theoretically, that will have to come back before the 32,000 tons per day expected at PolyMet will ever come on line.”

The drop in the prices of both copper and nickel have made the PolyMet project much more tenuous financially, said Gappa. “We know that in the current metals market, the project is not viable. In 2008, their feasibility study predicted $200 million in EBITDA [Earning Before Interest, Taxes, Depreciation and Amortization].

“But if you plug in with today’s metal prices, it’s underwater.”

Richardson disputes that suggestion. “The project is economically viable at current copper prices,” he said. Given the forecast of a possible copper supply shortage within three to four years, Richardson said PolyMet’s timing appears to be good. “Recognizing that it takes time to permit and construct a mine, this is actually the best time to permit and construct a mine so that it will begin production around the same time as the copper deficit develops.”

Commodities forecasting four years out is a risky bet, yet the longer-term horizon cited by PolyMet is consistent with the view of most forecasters, in that a price recovery in the shorter term is widely seen as unlikely. The International Copper Study Group sees a growing surplus of copper production in 2017, with uncertain demand from China, which now consumes roughly 45 percent of all copper produced in the world. Investment house Goldman Sachs recently warned investors of a “supply storm” in the copper market, and forecasted a roughly ten percent reduction in copper prices over the next year. That would put the price of a pound of copper under $2. Copper prices topped $4 per pound as recently as 2011, but have slid substantially since then, dropping below $2 per pound late last year. The price has since rebounded modestly, sitting at $2.46 per pound as of midweek.

Current prices for both copper and nickel, however, remain 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’s copper price, adjusted for inflation, equals just $2.19 per pound in 2008 dollars, according to the Bureau of Labor Statistics’ 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 $5.19 per pound equals just $4.64 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 resource value from the PolyMet mine.

“That’s the cruel irony for the people of northeastern Minnesota,” said Gappa. “Clearly the people of the region deserve access to good-paying jobs, but this is just not going to do it, at least not any time soon.”

Skelton said he can’t worry about global markets. “That’s up to the businesses involved,” he said. “As for the length of time it takes, it is what it is. We’re looking forward for it to be done right, and we’re looking for some positive news.”


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Steve Jacobson

Common Marshall! You're better than this! Two of your sources to discuss the financial side of the story happen to be environmentalists! It's like having Abertson get quotes from Sean Hannity and Rush Limbaugh!

Tuesday, November 22, 2016
Marshall Helmberger

Steve: I question whether you understand journalism. I clearly identified the two individuals as representatives of environmental groups, therefore readers are allowed to judge their credibility for themselves. If you're suggesting that because they have an environmental leaning, that somehow that means their substantial financial experience or opinion is invalid or should not be committed to print, that's just wrong. I'm also quoting Bruce Richardson, from PolyMet, whose bias is at least as strong as any environmentalist. Is it okay, by your definition of proper journalism, to only report the opinions of people biased towards your view? As you can see, I operate by presenting the arguments of various sides in this debate. That's called "fair journalism." I know some people around here don't like fair. Are you one of them?

Tuesday, November 22, 2016
Steve Jacobson

Marshall: Yes, I would expect a very pro bias from Mark Skelton and Bruce Richardson. In fact, you would most likely get a pro bias from anyone who is working in the mining business. I just thought that you could acquire pricing on metals from the American Metals Market and just report or state current or historical pricing base on that. The numbers would not have a biased opinion one way or the other just pure facts. But, by having them quoted by environmentalists tainted the story. Myself being involved in the mining business and very involved with the environmental side of it believe the story was less about the economics of Polymet and more about the hope that the project never succeeds. I guess after all my babbling I could have said that you didn't need neither sides opinion and just stuck with the facts. I believe I can pretty much guess how each was going to respond.

Wednesday, November 23, 2016