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Providing coverage of Alaska and northern Canada's oil and gas industry
July 2006

Vol. 11, No. 27 Week of July 02, 2006

Rio Tinto gives Pebble project thumbs up

UK-based major to invest C$87.4M in Northern Dynasty, with a particular interest in the project’s underground mining potential

Sarah Hurst

For Petroleum News

A relatively modest investment by mining major Rio Tinto amounts to a huge boost for Vancouver-based junior Northern Dynasty, which is exclusively focused on developing the Pebble project in southwest Alaska. Rio Tinto’s subsidiary Kennecott Canada Exploration has signed an agreement to spend C$87.4 million purchasing 8.7 million Northern Dynasty shares at C$10 each, according to a release June 27. The investment will give Kennecott a 9.9 percent interest in Northern Dynasty’s issued share capital and does not involve any direct property rights.

Kennecott has also obtained the right of first refusal to participate in further share placements by Northern Dynasty, and the right to second up to three technical advisors to complement Northern Dynasty’s project management team. An affiliate of Kennecott Canada Exploration, Kennecott Minerals, operates Greens Creek mine near Juneau.

Until recently, Northern Dynasty expected that the copper-gold-molybdenum deposit would be developed as an open pit mine, but exciting drill results from the Pebble East section of the property indicated that there might be a possibility to use underground mining methods too. Rio Tinto’s main area of expertise is underground mining and Pebble East is what attracted the company to the project, according to London-based spokesman Nick Cobban. “It looks like a very good prospect,” Cobban told Mining News. “Rio Tinto is very aware of environmental issues; these are always of the absolute highest priority.”

Underground, environmental experts from Kennecott

Northern Dynasty’s chief operating officer, Bruce Jenkins, thinks that at least one of Kennecott’s technical advisors will almost certainly be an expert in underground block caving, the method currently being considered for Pebble East. Another advisor will probably be an environmental permitting expert, Jenkins told Mining News. The Pebble deposit is located in the Bristol Bay region, which one of the state’s prime salmon fisheries and is home to Native subsistence hunters as well as wealthy lodge owners.

Negotiations between Northern Dynasty and Rio Tinto have been going on for about a year, according to Jenkins, with an “intensive effort” over the last four to six months. The former owner of the Pebble property, Vancouver-based Teck Cominco, gave up its remaining interest in the project in February 2005. Teck Cominco may have decided it has already invested enough in Alaska, Jenkins said. The company operates two mines in the state, Red Dog and Pogo.

The 9.9 percent investment allows Rio Tinto to avoid the onerous reporting requirements and other responsibilities that investors have if they own 10 percent of a company or more, Jenkins said. “It allows them to learn to walk with us before we run together,” he added. Northern Dynasty hopes to build a consortium of mining companies to take Pebble through the permitting process and eventually into production. Rio Tinto’s involvement is “a real strong vote of confidence and endorsement to the Pebble project,” Jenkins said. “It’s a major milestone.”

The Alaska Miners Association’s executive director, Steve Borell, agrees that the news is great for Pebble and for Alaska as a mining jurisdiction. “I’m sure the detractors will find a way to spin it, but it gives credence to the economics and the potential of the project,” he told Mining News. “I wouldn’t be surprised if they’ve seen every letter to the editor and all of the hogwash that’s gone on around this. Companies like this don’t make an $87 million decision without looking at the political stability, the tax and regulatory stability in Alaska.”

Rio Tinto exec from UAF

Rio Tinto’s decision may also have been influenced by Tom Albanese, the company’s chief executive for copper and exploration, who will take on an even more senior role from July 1. Albanese obtained his master’s degree in mining engineering from the University of Alaska Fairbanks and spent a total of 14 years in the state, including two years as general manager of Greens Creek mine.

“By being part of the U.S. on the North American continent, Alaska is completely excluded from the geopolitical tensions and other risks that a global miner such as ourselves has to contend with in a number of other places where we explore and operate,” Albanese said at the AMA convention in Anchorage in November 2004. “The industry generally enjoys good relations with Native people. ... Kennecott has worked successfully with several of the Native corporations,” he added. The government of Alaska is supportive of the mining industry, Albanese said, but there are still challenges in the state such as the lack of infrastructure and high cost of labor and materials.

Opponents of Pebble are waging a high-profile campaign, and U.S. Sen. Ted Stevens has spoken out against the project. Bob Gillam, the owner of a lodge in the Bristol Bay area, has provided significant funding for the campaign and is one of many people who criticized Pebble at the Alaska Legislature earlier this year. Gillam is president of Anchorage-based McKinley Capital Management, an institutional investor that counts mining companies BHP Billiton, Teck Cominco — and Rio Tinto — among its largest holdings.

McKinley Capital Management is entirely separate from Gillam’s personal activities related to Pebble, company spokesman Todd Bulot told Mining News. Investments are chosen solely on the basis of a computer program that uses a statistical methodology developed by Gillam in 1990. The program only looks at earnings, unless clients ask for additional considerations to be taken into account: for example, some clients do not want to invest in alcohol or tobacco companies, Bulot said. Gillam himself was unavailable for comment.






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