Statewide View: Listen to state's hired sharks on PolyMet draft permit
Since 2014, we've told state officials working on the PolyMet copper-nickel mining proposal that they should hire their own "sharks" to scrutinize the financial aspects of the project. To their credit, they did so, employing highly qualified financial experts and mining engineers.
However, the PolyMet draft permit stops short of implementing all of the steps the experts and engineers recommended to protect Minnesota taxpayers. Unless this is fixed, the PolyMet permit would make Minnesotans unwitting and unwilling speculators who could be on the hook for more than $1 billion in cleanup costs if the mine fails.
The Minnesota Department of Natural Resources deserves credit for listening to their independent experts about the financial risk posed by PolyMet. Compared to rosy estimates provided by the company, the draft PolyMet permit shows a project with eye-popping numbers for financial risk. Just one year after mining commences, the DNR estimates a cleanup bill of $588 million. Halfway through the proposed life of the mine, that figure balloons to more than $1 billion. For context, this is the same size as the largest bonding bill in Minnesota history, which paid for two years of construction and capital investments across the state. It's also about four years of the total operating budget for the city of Duluth.
We have a great deal to lose if we get this wrong.
In all financial matters, cash is king. This situation is no different. The best protection for taxpayers is significant up-front cash. The PolyMet draft permit does not require this. After a $10 million initial payment, PolyMet is only required to contribute $2 million into a cleanup trust fund each of the first nine years the mine is open. That means that after nine years of operation, the state of Minnesota would have just $26 million in cash set aside to pay for a potential billion-dollar cleanup.
With so little money up front, Minnesota taxpayers would be dependent on the cash flow of the mine to fund cleanup costs. Again, the state's own experts raise red flags. PolyMet has not substantively updated its financial feasibility study since 2008, when metal prices were higher. The DNR's sharks warn that an updated financial study "is critical to determine the risk of PolyMet not meeting their financial assurance funding obligations." The PolyMet draft permit fails to require this.
So while the state listened to its sharks about the scale of PolyMet's financial risk, state leaders didn't listen to concerns about PolyMet's ability to pay for it. Instead of cash up front, the PolyMet draft permit depends heavily on financial instruments called "surety bonds" and "letters of credit." These are promises from bigger, more creditworthy banks or insurance companies to pay if PolyMet can't meet its obligations.
But the DNR's independent experts are skeptical PolyMet can acquire the bonds required to meet its obligation, stating it would be "very difficult" for PolyMet (or even a major mining company) to do so. Despite this warning, the PolyMet draft permit relies heavily on surety bonds and letters of credit despite the state's own experts stating it likely won't work.
Unfortunately, the draft permit seems to simply hope PolyMet will be profitable and be able to find banks and other underwriters to meet its billion-dollar commitment. That's an intolerable risk to impose on Minnesotans.
There are a number of actions the Minnesota DNR should take to improve the permit and reduce the risk to taxpayers.
First, the DNR should listen to the sharks and implement their recommendations to maximize the amount of cash, minimize the amount of bonds, and require an updated financial analysis. If PolyMet is permitted, outside experts should continue to be used to annually review PolyMet's financial assurance. This annual review process should be open and transparent so the public knows the risk we are taking on and what is being done to minimize it.
Second, the DNR has the ability to shut down the mine if PolyMet fails to meet its financial-assurance obligations. But this is a "nuclear option" that would be politically difficult to impose. The DNR should have additional options to prevent shareholders and executives from personally profiting while Minnesota taxpayers are placed at risk. If PolyMet is in default on its financial-assurance obligations, the DNR should have the option to prohibit any dividends to mine shareholders and prohibit any payment of bonuses and stock options to executives. The state of Minnesota also should have the ability to require full cash funding of all financial-assurance obligations if the mine is sold.
To adapt the old saying, "in God we trust," PolyMet needs to bring cash. We now know that permitting PolyMet is a billion-dollar gamble for the people of Minnesota. When the Minnesota DNR has listened to the sharks it hired, it has done good work. Unfortunately, the draft PolyMet permit ignores some of the sharks' key recommendations, and the resulting risk to Minnesota taxpayers is unacceptable.
Alan Thometz is founder of KACET LLC, a business advisory group in St. Paul. Ron Sternal of St. Louis Park, Minn., is a retired financial executive. And John Gappa of St. Paul is a former chief financial officer for a Minnesota corporation. All three are members of the board of the Minnesota Center for Environmental Advocacy.