After spending more than half a billion dollars to take the Pebble Project to the cusp of permitting, Anglo American plc has pulled out of The Pebble Limited Partnership, an alliance it forged six years ago with junior Northern Dynasty Minerals Ltd. to gain a 50 percent stake in one of the largest copper-gold-molybdenum deposits on the planet.
According to the most recent published resource estimate, Pebble contains 80.6 billion pounds of copper, 107.4 million ounces of gold and 5.6 billion pounds of molybdenum. That is enough copper to supply the copper needs of every person on Earth for four years, based on 2012 consumption, and as much gold as is held by Germany, which has a gold reserve second only to that of the United States.
“Despite our belief that Pebble is a deposit of rare magnitude and quality, we have taken the decision to withdraw following a thorough assessment of Anglo American’s extensive pipeline of long-dated project options,” explained Anglo American CEO Mark Cutifani.
To earn a 50 percent stake in Pebble, Anglo American agreed to invest US$1.5 billion towards exploring, permitting and developing a mine at the world-class mining deposit. This all-or-nothing agreement means that the early departure effectively results in a more-than zero-dilution US$500 million financing for Northern Dynasty, as the junior regains sole-ownership of Pebble.
Northern Dynasty CEO Ron Thiessen said, “Northern Dynasty will again own 100 percent of one of the world’s most important copper and gold resources and will have the benefit of US$541 million worth of expenditures, which opens the door to a number of exciting possibilities for Northern Dynasty and its shareholders and the Pebble Project and its stakeholders.”
Thiessen said the Pebble partnership will remain intact, providing a vehicle for bringing another partner to the project. The Vancouver B.C.-based junior, meanwhile, is hammering out its plan to take the project the final step into permitting.
Constipated pipelineLike many of the global-scale mining companies, Anglo American recently replaced their top executive and charged the new leader with seeking ways to realize greater value for its shareholders.
Cutifani, which took the helm at Anglo American in April, began looking at ways he could trim a glut of projects in the global mining company’s pipeline.
“In terms of our project pipeline we’re constipated,” the CEO explained in July. “We spend US$950 million from pre-concept through to approval on new project pipelines.”
He said Anglo American is weighing risks versus rewards when determining which of the early stage projects it can actually digest.
“Our focus has been to prioritize capital to projects with the highest value and lowest risks within our portfolio, and reduce the capital required to sustain such projects during the pre-approval phases of development as part of a more effective, value-driven capital allocation model,” Cutifani explained in cutting Pebble loose.
Pebble in recent years has been weighted by an increasingly well-funded and vocal opposition. This group contends that the Bristol Bay Watershed and the world-class salmon fishery it supports is too important a resource to allow a mining project on the scale of Pebble.
It is unclear, though, to what extent this anti-Pebble movement played into Anglo’s decision to lay Pebble by the wayside.
“Anglo American’s choice to withdraw from development of the Pebble mine was a private business decision driven by a variety of economic factors. The company has stated its reasons, and I have no reason to question the decision,” said U.S. Sen. Lisa Murkowski, R-Alaska. “Mining is an important part of our state’s economy, and I continue to believe that Alaska’s resources can be developed responsibly for the benefit of all.”
Rewards unclearWhile the risks of developing a Pebble-scale mine in the Bristol Bay region of Southwest Alaska have been discussed in detail, the potential economic rewards of the project have not been so publicly scrutinized. In fact, an economic analysis – preliminary economic assessment, prefeasibility study or feasibility study – has never been published by either Anglo American or the Pebble partnership.
A PEA commissioned by Northern Dynasty, independent of the Pebble Partnership, forecast positive economics for developing Pebble. This scoping level study, completed by Wardrop Engineering Inc. in 2011, envisions an open-pit mine feeding a 219,000-metric-ton-per-day mill.
Using long-term metal prices of US$2.50 per pound copper, US$1,050 per ounce gold, US$13.50/lb molybdenum, US$15/oz silver, US$3,000 per kilogram rhenium and US$490/oz palladium, a 45-year mining scenario yields a pre-tax internal rate of return of 14.2 percent; a payback period on initial capital investment of 6.2 years; and a pre-tax net present value (seven percent discount) of US$6.1 billion.
Over that 45-year span, the mine would produce 31 billion pounds of copper, 30 million ounces of gold, 1.4 billion pounds of molybdenum, 140 million ounces silver, 1.2 million kilograms (2.6 million pounds) of rhenium and 907,000 ounces of palladium, while mining only 32 percent of the total Pebble mineral resource.
Updating this PEA with a pre-feasibility study is one of the items currently up for discussion as Northern Dynasty determines the best path to advance Pebble as the sole owner.
“That’s another one of the milestones that we need to determine from a timing- and cost-perspective,” Northern Dynasty Vice President of Public Affairs Sean Magee told Mining News.
Although the Pebble Partnership has not published a feasibility study, it has commissioned a report on the potential economic benefits that could ripple out from the mine, if developed.
“The Economic and Employment Contributions of a Conceptual Pebble Mine to the Alaska and United States Economies,” a 69-page report released in May, forecasts a mine at Pebble could contribute US$1.1-US$1.4 billion annually to gross state product during the initial 25 years of operation.
Compiled by IHS Global Insight, which is considered among the leading economic analysis and forecasting firms in the world, the economic report estimates that some US$4 billion in taxes and royalties from mining the ore at Pebble is projected to be deposited into Alaska coffers over the first 25 years of production. The federal government would collect another US$4.4 billion in taxes during the same time-span.
“Pebble is a substantial multibillion-dollar state asset as shown by this report, which provides great insight regarding the long-term positive economic impacts the project could have for the region, state and the Lower 48,” said Pebble Partnership CEO John Shively.
Undo risksSen. David Vitter, R-Louisiana, blames the U.S. Environmental Protection Agency for adding undo risks that could stymie these economic rewards.
In response to Anglo pulling out of the Pebble Partnership, the top Republican on the Senate’s environment committee said, “This is a prime example of why the economy isn’t recovering. EPA and their far-left environmental allies are using unprecedented tactics to shut down potential projects and corresponding jobs before they’ve even begun the permitting.”
The “unprecedented tactics” for which Sen. Vitter is referring include: a multi-million-dollar study of the affects a large-scale mining operation might have on the environment where the Pebble project is located; and a threat to deny the developer the opportunity to have its mine plans vetted under the permitting process.
A coalition of environmental and Alaska Native groups opposed to Pebble petitioned the EPA to test the extent of its power under the federal Clean Water act by denying the Pebble Partnership the option of applying for permits to develop a mine at its world-class copper-gold-molybdenum deposit in the Bristol Bay region of Southwest Alaska.
Responding to the request, the environmental agency initiated the Bristol Bay Assessment to evaluate the salmon and other ecological resources in the region; gain a better understanding of the impacts of large-scale mining on these resources; and determine if this extraordinary stretch of its CWA authority is justified.
While EPA has a handful of times exercised its authority to veto a project during and after permitting, the environmental agency has never denied a project before it has been proposed.
In an opinion piece published in Forbes a week prior to the Anglo American announcement, American Resources Policy Network Daniel McGroarty presaged that wielding such power would add risks that could deter investment.
“Such a move would fundamentally change the way companies assess the risks of even conducting preliminary research on a potential project. Important ideas that can create jobs, drive innovation, and produce value for the economy may never make it off of the drawing board, as EPA’s Sword of Damocles dangles precariously overhead,” penned McGroarty.
This sentiment echoes a prediction made by the world’s largest business federation.
“EPA’s decision to choose a poor-performing hypothetical mine plan to base their study on is problematic and is stacking the deck against the project before it has even been proposed. At a minimum, this exercise by EPA prejudices the fair and unbiased consideration of a mine proposal that would actually provide much needed jobs – thousands of them – for America’s economy,” the U.S. Chamber of Commerce penned in a May comment letter to EPA.
Next stepsWhether it was risk or reward that tipped the scales for Anglo American, the economic blow caused by the pullout of the global mining company is rippling out from the region of Southwest Alaska where the Pebble deposit is located.
Though Northern Dynasty is determined to continue advancing the world-class copper deposit, the Vancouver-based company does not have the deep pockets of its former partner.
Spending is likely to be a fraction of the roughly US$90-million-per-year- outlay averaged since Anglo American came on board.
“The program spending going forward in 2014 is going to be less,” Magee said.
While this reduced budget is partly the natural development of a project that is entering permitting, Northern Dynasty has indicated that it will likely need to cut much of the ancillary programs that Anglo American could afford.
“We are functionally done with all the heavy lifting and what remains, really, for this project is the permitting process,” Thiessen explained.
“Certainly, we don’t need US$1 billion to get this project through permitting, which is roughly what was left in the Anglo expenditure to retain their 50 percent interest,” he added.
To ensure an orderly exit, the detailed aspects of Anglo American’s withdrawal from the Pebble project are being developed and implemented.
“We are beginning what will be a negotiation with Anglo American in the days and weeks ahead. At the end of a 60-day notice period Anglo will withdraw from the partnership,” Thiessen explained.
As Anglo American moves out, Northern Dynasty is readying the Pebble Partnership for the permitting process under its ownership.
While Anglo American was still onboard, the Pebble Partnership had indicated that the project would be ready to enter permitting by the end of the year, a timeline that Northern Dynasty is striving to adhere to.
“At this point we haven’t made any decisions to alter that timeline and certainly all the preparations that have been underway to meet that timeline continue unabated, so we will be in a position to go into permitting by the end of the year,” Magee expounded.
Northern Dynasty, though, is still in the early stages of reviewing its personnel and financial resources in the context of advancing the Pebble Project as a sole owner.
“The project is ready to take that next step – we, as a sole owner, are trying to determine the optimal timing for doing that,” Magee explained.
CEO Shively said the exit of Anglo American does not change the Pebble partnership’s resolve to develop a mine that balances the risks and rewards demanded of developing a world-class copper deposit in Southwest Alaska.
“Development of the mineral resources at Pebble, with our stated commitment to co-exist with the fishery, remains an important project for Alaska,” Shively said. “The project, when developed, will generate almost 1,000 direct Alaskan jobs, nearly US$200 million in annual revenue for the state and local governments, and over one billion dollars in annual economic activity.”
Leaving a half-a-billion-dollar gift on the doorstep, Cutifani waved a cordial farewell to the estranged Pebble Partnership.
“We wish the project well through its forthcoming permitting process and express our thanks to all those who have supported Pebble and who recognize the opportunities and benefits that such an investment may bring to Alaska,” he concluded.