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Expert cautions state on costs to close PolyMet

A PolyMet Mining official explains in December 2013 how the company will use rod mills, one of which is at right, to crush metal-bearing rock from 1/2-sized pieces to small pieces of gravel as part of the process of extracting copper, nickel and other metals from the planned mine. The mills are part of the old LTV processing plant now owned by PolyMet. (News Tribune file photo)

An expert on the work needed to close old mines and keep them from polluting says the initial proposal for the PolyMet copper mine in Minnesota is underfunded and overly optimistic on financial returns and potential pollution.

Jim Kuipers, a Montana-based mining engineer, says PolyMet's permit to mine application now being reviewed by Minnesota regulators calls for too little money to be set aside as so-called financial assurance.

That's the money guaranteed available to the state in case the company files for bankruptcy and walks away from the project.

In a speech last week at the University of Minnesota's Institute on the Environment in the Twin Cities, Kuipers said he essentially agrees with PolyMet's own estimate that it would cost about $146 million to close the mine and rehabilitate the site.

But Kuipers said PolyMet is drastically underestimating how long the water leaving the site may need to be treated to prevent acidic runoff from polluting nearby waters. PolyMet is figuring on 50 years of treatment costing about $436 million. But Kuipers said the federal Bureau of Land Management, for example, figures on 500 years of treatment, essentially in perpetuity, which would push the ongoing PolyMet treatment cost to nearly $3.7 billion.

Kuipers also criticized PolyMet's estimate that cost overruns will amount to only 5 percent of the total. In real-world mine closures, Kuipers notes, cost overruns ranged from 30 to 80 percent original cost estimates.

That "unrealistic" 5 percent contingency estimate "compromises" PolyMet's entire permit application "tremendously," Kuipers said.

Unrealistic returns?

Kuipers also questions PolyMet's projection that its financial assurance fund will earn a net 6.9 percent annually, figuring an 8 percent return on investment and just 1.1 percent annual inflation. Kuipers said the industry standard is to figure on net returns of less than 4 percent, while the federal Office of Management and Budget uses 1.5 percent.

That return rate is critical because it determines how much money PolyMet must front before any mining can begin, either in trust funds, surety bonds or insurance policies, or a combination of all three.

PolyMet says it can achieve the $842 million financial assurance total needed by the 11th year of operations to close the mine early (the company is planning a 20-year mine life, with peak liability starting at year 11) by setting aside $332 million when the permit is awarded by the state.

Kuipers' estimate is more than three times higher.

Using PolyMet's closing cost estimate but adding in higher cost overruns and lower interest rates, Kuipers said the state should demand at least $514 million and probably much more. Figuring only a 1.5 percent annual return on investment after inflation along with a 30 percent contingency or cost overrun estimate and a 500-year water treatment period, Kuipers says PolyMet should be required to front $934 million before any permit is awarded.

Kuipers was hired by the Minnesota Center for Environmental Advocacy to review the PolyMet permit to mine application. He has a degree in mineral process engineering from the Montana School of Mines. He's worked on mining and environmental projects including engineering design, permitting, operations, reclamation and closure, water treatment and financial assurance for more than 30 years. He currently serves as liaison for First Nations tribes on the Mount Polley expert review panel investigating solutions to the 2014 Mount Polley mine disaster in British Columbia.

Kuipers cited the Zortman-Landusky mine in Montana that operated from 1978 to 1998 when the owner, Pegasus Gold Corp., declared bankruptcy and walked away from its operations in Nevada, Montana, Idaho and Australia. That forced the state of Montana to take over operations at Zortman-Landusky where they unexpectedly found vast areas of acid mine pollution that eventually cost nearly $100 million to clean up, including starting perpetual water treatment at the site.

While the Zortman-Landusky mine produced $300 million in gold over 20 years of operations, it closed leaving Montana taxpayers with a $33 million cleanup bill.

"This is the kind of thing you (Minnesota) want to avoid," Kuipers said.

Minnesota offers a more difficult, water-rich environment than Montana, he noted, where lakes and rivers might be 30 miles away from the mine.

"It takes a great deal more precautions," he said of mining in acid-bearing rock in wet areas such as Northeastern Minnesota. "There's a higher risk that things could go wrong."

 Draft permits by September?

Most of the money PolyMet says it will need when it leaves the project is for water treatment using a reverse osmosis filtration system. It's hoped that the system will keep any acidic water out of local waterways where it might leach heavy metals and other pollutants into the ecosystem.

The rest of the money would be used to close the mine pit and rehabilitate the site, including filling the mine pit, safeguarding stockpiles of acidic waste rock, tearing down the processing center and leaving the site in a more natural state that is less likely to pollute in the future.

"It's interesting that we are probably close to agreeing on how much it's going to cost to physically close the operations, assuming nothing goes wrong," said Aaron Klems, spokesman for the Minnesota Center for Environmental Advocacy. "The real issue is how much do you require PolyMet to put up in real money, on Day One, so that taxpayers aren't put at risk for footing the bill for long-term treatment or cleaning up any mess?"

PolyMet has applied for most of the more than 20 state and federal permits needed to start the mining project, the most important of which is the permit to mine through the Minnesota Department of Natural Resources. That permit includes state requirements for financial assurance.

PolyMet spokesman Bruce Richardson said the initial permit to mine application was a first step in the company's process with the DNR. The company expects robust negotiations with the state to develop the final numbers.

"The financial assurance provisions in our permit to mine application, as with our other permit applications, are under agency review. That review will undoubtedly result in various modifications being made of the proposals, and those changes will appear in the draft permits that the agencies will begin issuing for public review and comment," Richardson told the News Tribune. "That will be the appropriate time to debate the merits of the application. It's premature to do so now."

Barb Naramore, DNR assistant commissioner, told the News Tribune she's "anticipating a draft permit decision and public notice in late summer" but that could be delayed considering the complexity of the permit. Naramore said the state hasn't even started writing details of the permit and that any assessment of where they are in determining financial assurance numbers is premature.

"We are carefully considering all information and recommendations from our consultants, our own staff, and other sources as we work on the financial assurance aspects of the permit to mine application," Naramore said. "We are not yet at the stage of developing draft permit language. If and when we do get to that stage, we will certainly be drawing on the expertise of our consultants."

Naramore said all interested parties will have a chance to comment on permit details when the draft permit goes public later this year. She said that's the proper time for interested parties to weigh-in on specifics.

"However, MCEA has provided us with a copy of Mr. Kuipers' analysis and we will certainly review it," he said.

State consultants raise flags

The DNR's financial consultants hired to help draft the permit for Minnesota's first-ever copper mine submitted their first major recommendations in January. They pored over past examples where mines in other states failed to stop environmental damage, where acidic runoff damaged nearby waters and where the companies declared bankruptcy and walked away, often leaving taxpayers holding the cleanup bag.

They warned that unless PolyMet finds a major partner or is purchased by a larger firm, the small "Canadian junior" company may not be able to obtain the bonds necessary to fund financial assurance up front. (PolyMet is one-third owned by Swiss commodities giant Glencore, but PolyMet officials insist they intend to run the company after opening the mine.)

And the state consultants, like Kuipers, warned against using only PolyMet's cash flow to cover the cost of paying for financial assurance. PolyMet would rather pay as it goes, increasing financial assurance as it makes profits from mining.

After looking at past mine pollution problems, the state's consultants concluded that "many of the bankruptcies involved small or junior mining companies without deep pockets. So when the commodity price slumped or additional financial assurances were demanded, the company could not maintain the cash flow and could not secure outside financial assurance after the fact.

"In most cases, neither party (regulatory agencies nor the mining company) understood the true future environmental damage potential nor the cost to mitigate the problem because the regulators did not insist on geochemical sampling and evaluation. The magnitude of the problem was not recognized by the regulators until after the damage was done, and by then it was too late."

The state consultants then noted that if an accurate, upfront financial assurance had been required, some mining companies likely would have walked away.

"If the actual cost of the reclamation and water treatment were recognized and factored into the mine economics, some of these projects may never have started," the consultants concluded.

Jobs and economic impact

The PolyMet mine is proposed near Babbitt while the company plans to reuse the idled LTV Steel taconite processing plant near Hoyt Lakes to process copper, nickel, gold and other valuable metals.

PolyMet supporters say the all-new kind of mining will employ 300 people and pump $550 million into the regional economy each year, a welcome diversification in an area hard-hit by the cyclical iron ore industry.

But critics say the potential for polluted runoff from the site is too great and that the potential environmental harm isn't worth the risk — especially the risk of acidic runoff when sulfur-bearing rock is exposed to air and water.

PolyMet's Environmental Impact Statement was approved in 2015 by the Minnesota Department of Natural Resources after a nearly 10-year environmental review period that included a do-over after the initial review was deemed inadequate by federal regulators. The Hoyt Lakes mine is the only project that Toronto-based PolyMet has. The company will need to raise more than a half-billion dollars from investors and lenders to actually build out the mine, with financing likely to come after permits are approved.

Construction would start when permits are issued and would take about two years before the mine is operational.

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