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.
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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