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Don’t burden Minnesota taxpayers with PolyMet cleanup costs

As I review the PolyMet plan from a CFO perspective, I struggle to figure out how the numbers can work with a model that has 20 years of benefits and hundreds of years of costs.

Too frequently, the debate about PolyMet’s proposal to build a copper-nickel, or sulfide mine, in northern Minnesota is portrayed as a debate between conservationists and business, between jobs and the environment. On tax day, April 15, I want to bring a different perspective from my 20 years of experience as a chief financial officer. If Minnesotans are not careful, we could end up footing a future tax bill enlarged by publicly funded cleanup costs.

John Grappa

As a CFO, I have reviewed hundreds of millions of dollars of investments creating over 1,000 jobs. My role in these investments was to develop the business case, project costs and revenues over a 20-year period, and evaluate the returns and associated risks. 

While most of these investments were successful, some were not. Over the years, I learned the hard way that failed projects all have two problems: overestimated benefits and underestimated costs and risks.

20 years of benefits, hundreds of years of costs

As I review the PolyMet plan from a CFO perspective, I struggle to figure out how the numbers can work with a model that has 20 years of benefits and hundreds of years of costs. My conclusion is the only way PolyMet’s financial model works is to inflate the benefits, underestimate the costs and shift the risks to someone else. Unfortunately, Minnesota taxpayers might well be the ones stuck with the cost of cleanup.

Given the significant length of time that remediation will be required, estimating the upfront investment needed to fund the remediation is highly uncertain and very small differences in assumptions have a dramatic impact on the total funding required. This means that these assumptions need to be scrutinized, and Minnesota needs to be conservative in these assumptions. Failing to do so could transfer risks from the company to the taxpayers. 

Another key concern is to ensure that the remediation is fully funded, regardless of when PolyMet stops mining – whether after 5, 10 or 20 years. To quote one of the many risk factors that PolyMet included for its investors in a filing with the Securities and Exchange Commission: “Because the price of metals fluctuate, if the prices of metals in our ore body decrease below a specified level, it may no longer be profitable to develop our NorthMet Project for those metals and we will cease operations.” The State of Minnesota would be wise to heed this risk factor as well.

A key difference between PolyMet and most companies making these sorts of investment decisions is that PolyMet exists solely to develop this specific project. But PolyMet’s largest investor is one of the largest commodities trading firms in the world, Glencore. Glencore owns the first five years of minerals produced if PolyMet is permitted, but it is not the owner of the project. There is no requirement that Glencore be on any permit issued for PolyMet, which would make them responsible for the costs of remediation and cleanup. That means that Glencore stands to reap the profits from the minerals that PolyMet would produce, while shielding itself from the liability if and when things go wrong.

Risk transferred to taxpayers

The management of PolyMet and Glencore has skillfully set up an investment vehicle that leverages their investment by transferring risk to the taxpayers of Minnesota. Their losses are limited to what they put in up front, potentially creating a significant unfunded liability for the taxpayers of Minnesota.

In many ways, the PolyMet/Glencore model is reminiscent of the many creative financial structures that Wall Street brought us — where complex instruments such as credit default swaps were created to transfer toxic liabilities to someone else.

My request to our elected officials is to be wary of overestimated benefits and underestimated costs and risks. Once PolyMet exposes the sulfide laden ore to the elements, Minnesota does not want to be facing our own “too big to fail” scenario, at tremendous cost to our taxpayers and to our environment.

John Gappa serves as the chief financial officer for a Minnesota-based company and has 30 years of experience as a financial executive. In 2011, Gappa was named CFO of the year by the Minneapolis / St. Paul Business Journal.

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Comments (10)

  1. Submitted by Rachel Kahler on 04/15/2015 - 09:15 am.

    Reality

    I’m glad that someone is publicly pointing out that the cost risks to the public are huge. The jobs benefit to the state are limited and unpredictable. Even if the site can be cleaned up to a point where we haven’t lost natural resources (including clean water, soil, and living species) forever, the monetary cost could be billions or more in direct and indirect (e.g., public and environmental health) costs. The PolyMet project smells like a giveaway designed to shove the final costs onto the public.

  2. Submitted by Dave Eischens on 04/15/2015 - 10:41 am.

    Definition of concise

    Thanks John, your post spells out very clearly the fiscal argument against permitting Polymet. As a corporate “person” they could cease to exist precisely when the balance sheet turns red or disaster happens. Now if the investors, board and executives want to put up all their personal assets as collateral, I’d be inclined to think they’re operating in good faith.

  3. Submitted by Jeffrey Swainhart on 04/15/2015 - 01:02 pm.

    PolyMet is a bad deal for Minnesota

    The only way for PolyMet to work financially is for the investors to be down the road while we are left to clean up the mess. It is ever the corporate way: privatize the profits while socializing the risks. I think that Mr. Eischens has the right idea: have “the investors, board and executives want to put up all their personal assets as collateral” then see how fast the investors run the other way.

  4. Submitted by Michael Hess on 04/15/2015 - 02:34 pm.

    i cant imagine

    How you project cleanup and site protection costs for hundreds of years. we can’t even do this accurately at the decades scale.

  5. Submitted by Bill Willy on 04/15/2015 - 06:06 pm.

    Finally: A Truly Conservative Perspective

    These days there are millions of people who think of themselves as conservatives and are anything but shy about expressing their views. I don’t doubt many of those people’s sincerity, but I would say anyone who believes they understand what “being conservative” means (“fiscally conservative” in particular) should read this article.

    And even though I don’t like to tell anyone what to do, I can’t help but say anyone concerned about this issue ought to bookmark this page before it disappears, just in case they’d like to have an excellent reference handy, should they know any taxpayers, politicians, lawmakers, agency or department heads, Chamber of Commerce people, corporate CEOs, board members, small business owners, or everyday people that are “on the fence,” or wondering what all the fuss is about.

    Thanks for sharing your experience and thoughts on this (huge) aspect of the issue, Mr. Gappa. I hope you’ll continue to communicate your perspective on this and other issues. It’s refreshing to hear from someone who, in my opinion, anyway, actually understands what the word “conservative” means, what its “practical application” looks like, and what can happen when that’s “done right.”

  6. Submitted by Barb Heideman on 04/15/2015 - 09:12 pm.

    Another reality check…

    The sad truth is that it’s cheaper and easier to mine for precious metals than it is to recycle the metals we’ve already converted into smartphones and IPads. Mining will grind up huge parcels of the earth and turn it, literally, into dust. The loss of habitat for trees, plants, birds, and other critters is staggering–and no amount of money, WHEREVER it comes from, can restore what will be lost. Let’s spend that money to figure out how to better manufacture new stuff and to safely reclaim precious metals from the electronic waste we already generate.

  7. Submitted by C.A. Arneson on 04/16/2015 - 03:53 pm.

    Environmental costs are economic costs

    PolyMet’s disclaimers make for interesting reading, particularly since it is the company currently touting reverse osmosis. As I commented on, “McCullum seeks ban on new mines in much of northeastern Minnesota,” reverse osmosis will not protect our waters.

    Recently, I received an email from a mining remediation expert who said the following: “Reverse osmosis isn’t ‘treatment.’ It is only SEPARATION. RO sends contaminated water through a semi-permeable membrane at immense pressures, yielding ‘permeate’ (more or less clean) and ‘concentrate,’ the concentrated glop consisting of the entire catalog of contaminants. THE CONCENTRATE EQUALS ABOUT 1/4 TO 1/3 OF THE ORIGINAL VOLUME OF WHAT’S FED INTO THE SYSTEM! If you don’t have a place to put the concentrated contaminants, then you shouldn’t do RO! At all.”

    Minnesotans need to understand that our waters will be polluted. There is no safe way to contain the immense volume of concentrated contaminants (in reality hazardous waste) for perpetuity in our water-intensive state; which is probably why the issue was not appropriately addressed in PolyMet’s SDEIS. In fact, there was no guarantee that reverse osmosis would even be used, let alone that any actual plan existed to deal with the concentrated contaminants.

    In other words, economically we are not only looking at clean-up costs for perpetuity (remember there is no end date), we are dealing with the high probability that clean up would be an impossibility.

    Read what PolyMet’s disclaimers tell us about reverse osmosis (at the end of its press release, linked below), about the existence of its mineral resources, and other aspects of its project (legal notice link). The only thing we know for sure is that PolyMet will pollute. Twin Metals would be no different; it is already using the same terminology, such as the meaningless, “We will meet all existing environmental standards.” What if there is no standard, or a standard in not written in a permit? What happens when our agencies give variances (licenses to pollute)? Environmental costs are economic costs.
    http://www.polymetmining.com/news/news-releases/polymet-reports-successful-water-treatment-pilot-plant/
    http://www.polymetmining.com/legal-notice/

  8. Submitted by Alan Muller on 04/20/2015 - 12:23 pm.

    Who would want mining if the true costs were properly monetized?

    It is sad to see so many Range politicians banging the drums for something so harmful to the communities they represent.

    On the other hand, the breadth and depth of opposition is very impressive.

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