After roughly two years of taxing negotiations, Teck Alaska and Northwest Arctic Borough have found middle ground on a tax structure that offers the municipality added funds to provide services to a sprawling remote borough without risking the viability of Red Dog Mine during the lows of cyclical metals markets.
Teck is the operator of Red Dog and Northwest Arctic Borough is a regional municipality that blankets 40,750 square miles of Northwest Alaska, a minerals rich expanse about the size of Kentucky.
The agreement on the table, which still needs to go before the borough assembly for a final vote, calls for Red Dog to pay around US$25 million a year into the borough. While this is roughly double what the mine has been paying in recent years, Teck believes the compromised payments in lieu of taxes structure strikes a good balance between the borough’s fiscal needs and certainty for world-class zinc mine.
“We are very pleased to have reached this new agreement through discussion and cooperation between Red Dog and the Northwest Arctic Borough,” Red Dog General Manager Henri Letient said in the news release. “This agreement will provide more resources for the people and communities of the region, while also supporting Red Dog’s ability to stay competitive and continue generating jobs and economic activity.”
Too far apartSince Red Dog began production in 1989, the primary source of revenue for the Northwest Arctic Borough has come from payments in lieu of taxes paid by the mine.
These “PILT” payments are the result of agreements negotiated between the Red Dog Mine and Northwest Arctic Borough every five years. The latest negotiated agreement, which averaged roughly US$9.1 million directly to the municipality and another US$2.4 million per year to the school district, expired at the end of 2015.
In the months leading up to the expiration of the 2010 to 2015 PILT agreement, the Northwest Arctic Borough began negotiating for significantly larger payments from Red Dog for the next five years.
The two sides, however, were too far apart to find middle ground before the PILT agreement expired.
In making its case for the higher payments, the borough pointed out that Red Dog is among the world’s largest zinc mines and is well enough established to pay higher taxes to meet the municipality’s needs.
“The Red Dog Mine is now one of the largest zinc mines in the world and Teck enjoys the benefits of low, set tax payments to maximize profitability for its shareholders,” Northwest Arctic Borough penned in a talking points bulletin.
The borough said it would have collected US$287.5 million in taxes from Red Dog from 2010 through 2015, or US$57.5 million per year, if the mine had been taxed under a severance tax adopted by the borough in 2009.
Teck argues that even under the former PILT agreement, Red Dog pays the highest municipal tax rate of any mine in Alaska. The company points out that if the mine was located in one of the other mining municipalities in the state – such as Fairbanks, Juneau or Delta Junction – it would pay between US$3.7 million and US$4.6 million in local taxes.
With the two sides unable to find workable middle ground before the PILT expired, the borough implemented a reworked version of the 2009 severance tax at the onset of 2016.
While this tax has been around for a few years, Teck was exempt as part of the PILT agreement.
The borough increased the severance tax rate from 3 percent under the plan adopted in 2009 to 4.5 percent in 2015. However, Patrick Savok, director of government affairs, Northwest Arctic Borough, told North of 60 Mining News earlier this year that the new tax is actually lower due to its structure.
“Under the revised structure, the tax allows significant deductions in calculating the tax base,” he explained.
Even with the deductions, Teck calculated that Red Dog would be paying US$30 million to US$40 million per year under the severance tax, roughly triple the rate it had been paying.
Red Dog, which is already the biggest taxpayer in the Northwest Arctic Borough, accounting for 70-80 percent of the municipal government’s general funds, is the only business that is currently subject to the severance tax. Teck argues that this targeted tax hike is discriminatory.
The company also contends that the steep tax increase is opportunistic, taking advantage of the fact that Red Dog can’t be moved to a jurisdiction with a more favorable tax structure, which would be anywhere else in Alaska.
In a move aimed at getting Northwest Arctic Borough officials to the negotiating table, Teck filed a complaint over the tax hike in Alaska Superior court early in 2016.
“It is our hope that, rather than continue the legal process, the NAB will agree to come to the table and work cooperatively to achieve a reasonable new agreement,” company officials wrote in a paper laying out their position.
Finding middle groundMore than a year later, the two sides have finally found middle ground, settling on a PILT structure that significantly increases funds going into Northwest Arctic Borough coffers while also providing certainty for the future of the Red Dog Mine.
Importantly, if finalized, this agreement would be effective for ten years, double the time span of previous PILT agreements and the next round of negotiations.
In total, the mine would flow roughly US$20 million to US$26 million into the borough each year under the new agreement.
Roughly US$14 million to US$18 million of these funds would be paid directly to the Northwest Arctic Borough each year, a payment that would be calculated on a percentage of Red Dog’s fixed asset value.
The agreement also includes the establishment of a new village improvement fund. Administered by the borough, with input from the 11 villages it encompasses, this fund would be earmarked for community programs, services and infrastructure.
Red Dog has agreed to put an initial US$11 million in this fund and then pay US$4 million to US$8 million a year into it, payments that will be calculated based on the mine’s gross profit.
The borough assembly has given this PILT agreement initial approval during an April 11 reading of a borough ordinance on the subject.
“I am happy to share that the assembly took its first step towards approval of the PILT agreement by approving introduction of Ordinance 17-03,” said Northwest Arctic Borough Mayor Clement Richards. “This administration has worked hard to negotiate an agreement that meets needs of our borough, which has remained of the utmost importance to us.”
The assembly is slated to consider the agreement further on April 25. A passing of the ordinance and final agreement by Teck would put taxing negotiations behind the two parties for at least another decade.