When the Chilean copper mining company Antofagasta bought out Duluth Metals on Jan. 20, they paid 45 cents for every share of the foundering company’s stock.

That’s better than the 7 cents per share that Duluth Metals was trading for on the Toronto Stock Exchange when the deal originally was announced last fall.

Still, the buying price was way down from the $3 per share Duluth Metals flirted with in 2011 and 2012. And many stockholders who purchased Duluth Metals in recent years took a big hit - including a more than $500,000 combined loss for the Iron Range Resources and Rehabilitation Board and the Minnesota Department of Employment and Economic Development.

In unusual moves for both state agencies - and maybe for any public agency - economic development officials had purchased outright stock in the fledgling Canadian mining company.

The IRRRB and DEED each lost about $284,000 when Antofagasta took control of the Ely project, now called Twin Metals.

The loss came after both agencies bought into a Duluth Metals predecessor, Franconia Minerals, in a complicated economic development deal that started in 2006.

Both agencies could have decided not to buy that stock. Or they could have sold their stock immediately after acquiring it and made roughly a $180,000 profit each. Instead, they held it until Duluth Metals ceased to exist.

Newly appointed IRRRB Commissioner Mark Phillips (who is a former DEED commissioner) said the risk was calculated at a potentially lucrative reward if Duluth Metals had struck it rich.

Phillips conceded that it is rare for government agencies to buy stock in private companies (outside the state investment board and pension funds.) State statutes allow the economic development wings of government to do so, but it isn’t often done.

Phillips was unaware of any other Minnesota company that DEED owned stock in. But the IRRRB has done it before, with Mesabi Nugget, and more than doubled its money.The IRRRB loaned Mesabi Nugget $500,000 in 2001. Instead of being repaid in cash, the agency opted for 1.2 million “membership units’’ in the startup iron nugget plant. In March 2009, Kobe Steel purchased the units from the IRRRB for $1.2 million.

“There are very few agencies smart enough to get stock warrants. I think it’s a great idea,” Phillips said. “There is a lot of risk out there with many of these economic development loans, and (stock warrants) is a little way to offer an upside if things go really well. It’s not going to happen very often, but it offers the agency a way to get in on the upside with the 1 in 10 or 1 in 100 of these companies that gets into the money.”

There also is a sense of ownership in the company, Phillips said. The IRRRB and DEED could have walked away from Duluth Metals when they got their Franconia loan money back, but both decided to re-invest in the company that they hoped would create jobs and economic growth on the Iron Range.

“Even getting paid back what we loan out is far from guaranteed when we do a lot of these loans. We deal with a lot of startups. We’re taking chances,’’ said state Sen. David Tomassoni, DFL-Chisholm, chairman of the IRRRB board of directors. “Having stock warrants is like having a little extra collateral. If things turn out well, we get a little extra out of the deal. If they don’t, we still get repaid. I think it’s worth any risk we have buying the stock.”

In a similar deal, the IRRRB currently owns stock options for PolyMet, the fledgling firm trying to start an open-pit copper mine near Hoyt Lakes. In 2011, the IRRRB loaned PolyMet $4 million so the company could conduct an expensive land trade with the U.S. Forest Service and several private landholders. PolyMet needs the deal to gain access to the mine site.

PolyMet - if and when it mines and sells any copper - will have to pay back the $4 million with 5 percent interest, like any conventional loan. But as an added incentive to make the loan, PolyMet also gave the IRRRB warrants, or options, to buy up to 400,000 shares of PolyMet stock at $2.50 per share at any time. (As collateral, the IRRRB would take control of the private land purchased in the deal should PolyMet not be able to repay the loan.)

That would be a bad idea for the IRRRB now, considering PolyMet stock is trading at just more than $1 per share. But if PolyMet receives state and federal approval to mine, that stock price is expected to soar. The IRRRB could make a handsome profit by buying and then selling those stock options at that point. And Phillips says that profit would be plowed back into other Iron Range economic development investments.

“The goal is to generate more resources to help diversify the economy,’’ Phillips said.

But state Rep. Tom Anzelc, DFL-Balsam Township, also an IRRRB board member, said he “gets heartburn” whenever the board is asked to approve an outright stock purchase.

Anzelc, who voted for the Duluth metals stock purchase, said it’s difficult for Iron Range lawmakers to say no when asked to invest in natural resource companies that could create more jobs.

Public agencies buying stock “is tricky. It’s risky. I don’t necessarily like it,” Anzelc said. “But when you represent a depressed area with a natural-resource based economy, and you are asked to invest in that economy, it’s almost expected of us to dive in.”

 Anzelc said the state’s half-million-dollar loss on Duluth Metals stock should be cause for concern, but that he’ll take each opportunity as it arises.

“I’m not against it outright, but we have to look very, very carefully at each request,” Anzelc said. “We’re hoping these (stock purchases) pay off and we have more money to spend on economic development, but we also need to remember that the money we spend is taconite production tax, local property tax, and we need to spend it wisely.”

Complicated deal

Here’s how the IRRRB and DEED came to own Duluth Metals stock:

In June 2006, the IRRRB and DEED loaned Franconia Minerals $2.5 million to help push the development of Franconia’s proposed Birch Lake copper project. As part of the deal, Franconia gave the IRRRB and DEED each one stock option for each dollar loaned at a substantial discount from the market rate.

The deal eventually was restructured, with $500,000 of the DEED loan becoming an outright grant.

In March 2011, Franconia announced it was being acquired by Duluth Metals to become part of the larger Twin Metals project.

The $2 million loan was repaid by Duluth Metals immediately when it acquired Franconia, with interest.

With many economic development efforts, that might have been the end of the issue. But the IRRRB and DEED still held the stock options, and in February 2011, the IRRRB’s board unanimously voted to spend $937,500 to turn the options into stock. DEED officials did the same with their options.

When Franconia became part of Duluth Metals stock, the IRRRB cashed out half its stock for $580,300 and received 198,728 shares of Duluth Metals Corporation common stock.

The Duluth Metals stock the agencies bought was trading at about $2.70 per share

“… Both agencies gained when they were able to exercise the warrants and purchase Franconia stock in advance of Duluth Metals’ acquisition of Franconia,” IRRRB heralded in a 2011 press release. “Most of the return on this investment will go back into the agency budget to provide future loans and grants for economic rehabilitation projects within the IRRRB’s” service area.

But that return never happened, at least not directly, as the IRRRB and DEED witnessed firsthand that stock prices can go down as well as up.

During nearly the past four years, as the world price of copper began to decline and as the Ely project ran into more opposition, Duluth Metals’ stock fell substantially, with investors guessing the company would not be able to develop the Minnesota mine on its own after all.

Unable to find a financial partner and unable to raise more cash to continue with the Ely project, Duluth Metals decided to accept Antofagasta’s offer as the best deal available.

Had the IRRRB and DEED each sold at the $2.70 price, they would have each made $534,000 on their 198,000 shares. That would have given each about $184,000 over their original purchase price.

Instead, the combined loss for the two state agencies was just more than a half-million dollars.

But the Iron Range still is on track to see the Ely copper project move ahead - the reason the state agencies got involved in the first place.

“The reason why (IRRRB and DEED) invested in Franconia in the first place was to help get a world-class copper mining operation started on the Iron Range. With Antofagasta coming in now, that’s a lot more likely to happen. So the result is still good,” Phillips said. “The investment helped make this happen. Should the (IRRRB) have maybe sold earlier? Maybe. But I’d do it again in a heartbeat. … Having the option out there to see the upside of these projects is very smart economic development.”

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