Tuesday, March 19, 2013

Wetlands vs. Copper-Nickel Mine

Management from Polymet Mining (PLM:  NYSE) was recently making the rounds among traders and analysts with an update on the copper, nickel and precious metals mine the company proposes in northern Minnesota’s famed Mesabi Iron Range.  Polymet plans to move into a complex originally built by LTV Steel Mining Co. near Hoyt Lakes.  With some improvements and additions, Polymet expects to process up to 32,000 tons of ore per day, producing each year 72 million pounds of copper, 15 million pounds of nickel and 106,000 ounces of other precious metals such as cobalt, palladium, platinum and gold.

Mineral reserve estimates suggest Polymet can operate at that rate for twenty years.  There is likely to be more than enough demand for its ores, all of which are in high demand for computers, cellphones, wind turbines and other new technologies.

Called the NorthMet Project, it has an appeal for investors and politicians.  Taking advantage of the existing facilities means savings on initial capital costs.  Polymet has also secured an off-take agreement with commodities trading company Glencore AG (GLEN: London) for 100% of its output.  At least 350 jobs are expected to be created through the ore extracting and processing steps.  Hundreds of other support and ancillary jobs are likely to open up in communities surrounding the mine.

Polymet has $11.1 million in cash on its balance sheet, enough to cover its annual cash usage near $3.5 million per year for at least three years.  Glencore has invested $118 million in the project, providing a strong endorsement for the economics of the NorthMet project.

With economics like this you would expect all parties would be rushing PLM.  One group has been decidedly cool  -  friends of the environmental.  Polymet proposes to set up shop next door to a protected wilderness area and a watershed flowing in the opposite direction. The project is about six miles from Hoyt Lakes and upstream from Colby Lake, a community water supply.  Mining is notorious for leaching mercury and other heavy metals into soil and water.  The wetlands next door could be at risk if Polymet fails to properly dispose of tailings and waste water. 
In 2006, Polymet submitted environmental data to state and federal regulatory authorities.  The resulting draft Environmental Impact Study (EIS) received over 3,700 public comments, of which an estimated 75% were negative.  The collective view at the time was that Polymet had fallen far short of the rigorous analysis expected of a major mining operation.  The company has been at the drawing board ever since, reworking models, simulations and projections.  A supplemental EIS is expected to be available mid-2013, accompanied by a second round of public comments.

Environmentalists immediately impugned the initial EIS and the battle is not over.  Various groups claim the multi-ore extraction and processing operation would lead to the loss of at least 1,000 acres of wetlands in Minnesota.  This would be the single largest loss of wetlands in Minnesota history.  So this is how it stacks up for the public  -  350-plus jobs and tax revenue against 1,000 acres of wetlands.

My research did not turn up a value for Minnesota wetlands, but a study by the Michigan Department of Environmental Quality put a price tag of $6.0 million per acre on that state’s wetlands.  Marshy lands help reduce flooding, preserving shoreline and the homes and business located there.  Watersheds are nature’s filter, improving water quality.  They are also a prolific incubator for wildlife, supporting hunting, fishing and recreation businesses and serving as a last stand for biodiversity.  Michigan claims at least $26 billion of wetlands have been lost already in that state mostly from land use changes. 

If Minnesota’s geography is comparable, then Polymet’s mining project runs the risk of wiping out $6.0 billion worth of irreplaceable watershed.   Polymet’s business model is compelling, but cannot deliver comparable value even in the most favorable light.  That is why Polymet has been asked to sharpen up its plans for environmental protection.    

Polymet’s common stock is trading at just under the 52-week high of $1.25 per share, making it an affordable stock.  Indeed, the stock is priced more like an option on management’s ability to clear that final environmental hurdle than as equity in the mineral reserves.   For what it is woth the company's current CEO has a background in environmental engineering. 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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