Minnesotans should be wary of PolyMet project’s financials

With the issuance by the Army Corps Engineers of the final permit needed by PolyMet to begin mining, shouldn’t Minnesotans be happy that this contentious project has finally been approved? Putting aside environmental concerns, the publicly released economics of this project indicate that should PolyMet actually be built, its skinny economics and poorly structured financial assurance agreement indicate problems for current and future Minnesotans.

Financial Assurance (FA) is the damage deposit required by state law to cover the potential environmental harm caused by mines that otherwise avoid their environmental responsibility via bankruptcy and other means.

In May of 2017, PolyMet proposed financial assurance of $332 million. By the time the DNR issued PolyMet the permit to mine in November of last year, the number was slightly over $1 billion. Credit must be given to the DNR, and their outside consultants, for correctly scoping the magnitude and cost of reclamation and long-term water treatment and increasing the account of financial assurance accordingly. However, it must be kept in mind that the funding of financial assurance is set yearly in negotiation with the commissioner of the DNR and PolyMet. This is not unlike a star NFL player’s long-term contract for a staggering large number that everyone knows is meaningless because it is renegotiated annually to get under salary cap constraints. In PolyMet’s case the constraints would be lack of profits making the projected cash payment to the trust fund difficult.

Investors first, cleanup cash second

The DNR may have gotten the large headline producing the financial assurance number it wanted, but PolyMet won on the terms. The state is allowing PolyMet to pay itself and its investors first before setting aside cash for environmental cleanup. Instead of cash up front to fund the trust fund, PolyMet persuaded the DNR to rely on complex financial instruments such as surety bonds and irrevocable letters of credit to cover environmental liabilities, without determining (or asking) banks or insurance companies if this is possible.

The state’s own independent mining experts, Emmons and Olivier Resources Inc., claim such instruments would be “very difficult” for PolyMet to obtain because it is a “small and new company.” The first nine years of operation are the most profitable and also create the greatest environmental liability, estimated to be $558 million. PolyMet projects the project to produce $1.393 billion in after-tax cash flow during the first nine years. But only $28 million of this is set aside into the financial assurance trust fund to protect the state. The rest of the potential billion-dollar liability, over the life of the mine, is to be covered by said surety bonds and irrevocable letters of credit. The Minnesota taxpayer would be left holding the bag should anything go wrong. A wise NFL player requires guaranteed cash up front, and so should the state.

The issue of profits

PolyMet’s size is not the only impediment to getting the surety bonds and irrevocable letters of credit they have convinced the state they can get. There’s also the issue of profits. Again, the state’s consultants: “Our calculated financial indicators for the PolyMet mine fall below the values expected in most mining projects … the project economics may be viewed as marginally economical by bond companies, lending institutions and other potential sources of capital.”

But not to worry: PolyMet has told Canadian regulators (where it is based) that its plan is to build a mine two to four times larger than the one the DNR just permitted. They have told the Canadian regulators the return on investment for the larger mine is 24 percent, not the 9.6 percent stated in their just granted permit. Problem solved?  No. That is not the mine the DNR just permitted. The larger mine PolyMet told the Canadians it was  building would require more robust environmental safeguards and a new – or supplemental – permit to mine application. So, which mine is PolyMet building?

So is PolyMet telling the truth to Minnesota regulators or Canadian regulators? The answer is: probably the Canadian regulators. In Lee Schafer’s business column in the Star Tribune on March 31, 2018,  he interviewed Jon Cherry, PolyMet CEO, and Jim Kuipers, independent mining consultant, and both made the case for the larger mine based on profitability and Glencore’s desire for big projects. PolyMet is controlled by Swiss-based Glencore, the largest mining company in the world based on revenue.

About Glencore — definitely not Minnesota Nice. Glencore is currently under investigation by the U.S. Department of Justice for bribery and corruption and was recently fined $30 million by the Ontario Securities Commission for misleading investors. The Ontario Securities Commission also cited several high-ranking Glencore executives, including its head of global copper operations, for these same abuses. Compared to dealing with Glencore, Minnesota’s painful history of dealing with Essar Steel may just be child’s play.

Putting aside environmental concerns, the average Minnesotan should not be happy with the PolyMet agreement. We call upon Gov. Tim Walz and DNR Commissioner Sarah Strommen to protect Minnesota taxpayers and take a critical look at the financial aspects of this project.

Ron Sternal, of St. Louis Park, is a retired Wall Street executive. Alan Thometz, of St. Paul, is a certified financial analyst and senior lecturer at the University of Minnesota’s Carlson School of Management. John Gappa, also of St. Paul, is the retired chief financial officer of four Minnesota companies. The opinions expressed here are solely their own.

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