Pebble Mine Economy: Garbage In, Garbage Out
The Canadian owner of the besieged Bristol Bay mining project is promising a preliminary economic analysis within 45 days to demonstrate the financial feasibility of the mine, which is set to lose billions.
Stop the presses! Canadian exploration company Northern Dynasty Minerals – 100 percent owner of the widely doomed Pebble Mine – issued another press release.
The news? Within 45 days, the company intends to issue a Preliminary Economic Assessment (“PEA”) backing its claim that the pebble mine will generate a profit. Rather than wait until the press release is released when the PEA is actually released for review, Northern Dynasty has apparently decided that its promise of a PEA is sufficient.
Whatever his thinking, based on the company’s press release and subject to seeing the PEA itself, here is some important questions on (1) the timing of the apparently premature release and (2) the content of the analysis based on what Northern Dynasty represented:
Time of release
- Was the timing of Northern Dynasty’s press release a mere coincidence or a deliberate distraction from other bad news for the project?
Northern Dynasty issued its press release early on September 9e – the same day the EPA and other parties (including the state of Alaska) filed a joint proposal for the next steps in a recently reinstated federal litigation. Filed in 2019, the lawsuit challenges the Trump administration’s withdrawal of section 404 (c) protections of the Clean Water Act for parts of the Bristol Bay watershed – the headwaters of the greater wild salmon fishery in the world and the region itself threatened with contamination by the Pebble Mine.
September 9e Joint proposal The EPA announced its decision not to defend the withdrawal of the Trump administration and to relaunch the 404 (c) process – undoubtedly bad news for the Pebble project, its Canadian owner and their shareholders.
Content of the version
For years, and throughout the Army Corps of Engineers (“Army Corps”) licensing process, Pebble refused to prepare and publish an economic feasibility analysis for his 20-year project, claiming variously that ‘he didn’t have the time, the money, or the legal flexibility to do so. Former Rio Tinto environmental permitting manager Richard Borden conducted his own analysis of the project in 2019 and estimated a “net present value” (“NPV”) of $ 3 billion for the 20-year Pebble Mine plan. that Northern Dynasty attempted to authorize.. Neither Pebble nor the Army Corps chose to consider the matter except to dismiss it, including, for example, this congressional response from Former Pebble Partnership CEO Tom Collier: “If it is not financially viable, it will not be built. And if it’s not going to be built, what are we doing here today. . . . It will bring in money in the future. (I underline.)
Based on the information in Northern Dynasty’s press release, here are some important questions about the promised PEA:
- What is a preliminary economic analysis?
A preliminary economic analysis is not a full-fledged feasibility study or even a pre-feasibility study. It is, by definition, “preliminary” and, as such, much less precise than the feasibility and pre-feasibility studies. In general, pre-feasibility studies have an accuracy of 20-30%, feasibility studies have an accuracy of 10-20%, and under Canadian securities legislation PEAs can only be used to demonstrate the potential, not real, the viability of a mining project. As the press release warns, PEA “includes inferred mineral resources that are considered too geologically speculative for economic considerations to apply to them. which would allow them to be classified as mineral reserves. (I underline.)
- Is the PEA prepared by an independent consulting firm?
No. Contrary to common practice in the industry, Northern Dynasty’s next PEA is not prepared by a team of fully independent consultants. According to the press release, four of the participants – those responsible for the fundamental disciplines of financial sustainability (for example., resource estimate and sampling, geology and exploration, and general project information) – are “non-independent” (including three from Pebble’s parent company, Hunter Dickinson). The remaining four participants provided information mainly on technical issues (for example., metallurgy, tailings and water management, surface mining and processes).
- How are the costs of the project estimated?
The PEA appears to be basing its capital cost estimates on a 2011 preliminary assessment of the Pebble Project (referred to as the Wardrop Report) – the last publicly available independent economic assessment – without realistically accounting for the impact of inflation. costs from 2011 to 2021. If we do not take into account the general net increase in inflation of 22% since 2011, the PEA estimates only a 7% increase in investment costs over the 25-year mining scenario in the Drop report, probably leading to a significant underestimation of the capital required for the construction of the project.
- How is the potential income estimated?
According to the press release, although it may significantly underestimate inflation and investment costs, PEA aggressively inflates the estimated long-term average annual price of copper and gold. Although copper prices have only increased by 5% since 2011, the PEA assumes a 40% increase in the value of this product; for gold, which has only increased by 15% since 2011, the PEA assumes an increase of 50%. PEA’s estimates of the average annual price of these raw materials over the 20-year life of the project – $ 3.50 per pound of copper and $ 1,600 per ounce of gold – consistently exceed the average annual price. of the two raw materials in the past 20 years.
- How are maintenance investment costs estimated?
The EEP estimates the maintenance investment costs to be 40% less than the assumed value in 2011. While they will save some costs due to the reduction in waste rock stripping from that planned in 2011, these savings are expected to be more than offset by ten years of inflation and other costly design changes mentioned above. below.
- How will the infrastructure be financed?
The PEA apparently assumes that $ 1.7 billion in infrastructure costs for the power plant and access road will be both sufficient and funded by someone else. Consequently, and even if this funder (if there is one) is not identified, these significant costs for an essential element of the project were apparently deducted from the estimate of the infrastructure costs of the PEA.
- How are operating costs estimated?
Despite inflation and the possibility of unspecified costs associated with leasing infrastructure, the PEA reduced operating costs of Wardrop 2011 report (reduced from $ 11.16 / tonne in 2011 to $ 10.98 / tonne in 2021). It seems more reasonable to assume that operating costs will increase compared to 2011, as lower waste rock stripping costs are offset by significant increases related to costly tailings facility design changes, wastewater treatment and other aspects of project design and maintenance.
- What is the estimate of the PEA as the net present value of the project?
The PEA focuses primarily on the 20-year mine plan proposed by Pebble for clearance by the Army Corps of Engineers. This mining plan estimates only half of the projected metal production for the 25-year mining plan analyzed in the Wardrop 2011 report – and, furthermore, this estimate assumes a 19% lower grade deposit. However, even with these significant reductions in the main sources of potential income, the PEA forecasts a slightly lower NPV than the 25-year scenario of the Wardrop report – or $ 2.3 billion (2021) against $ 2.5 billion (2011). These two figures contrast sharply with former Rio Tinto expert Richard Borden’s 2019 estimate of $ 3 billion for the 20-year mining plan.
- Why is PEA discussing mine expansion scenarios?
Although Northern Dynasty again claims that it has no plans to expand beyond the 20-year mining plan on which its permit application was based, this claim has been sadly denied by the authorities. famous Pebble Tapes released just over a year ago. In these recordings, through the videotaped words of Northern Dynasty CEO Ronald Thiessen and former Pebble Partnership CEO Tom Collier, Pebble made it clear that his expansion plans for the Pebble Mine – a mine 180-200 years or older, ten times the size of their draft permit application – were “unstoppable”, repeatedly confirming that “this is the plan”. The company’s continued denials of such an intention are once again undermined by the emphasis in the yet unpublished PEA on mining plans of a scale and significantly increased value.
These are just a few of the questions for Northern Dynasty when its promised PEA is completed and released for public review. There will no doubt be more questions to come. But if the claims in its premature press release are corroborated by the final product, Northern Dynasty will likely have done nothing but further proof of the hackneyed “garbage in, garbage out” axiom.
Not only is the analysis not the product of the independent review that a credible economic analysis typically requires (in order to reduce the risk of bias based on a candidate’s financial interest), but its financial conclusions will fundamentally be compromised by (1) aggressive inflation of commodity estimates; (2) the omission of a realistic inflation adjustment in the projection of construction, maintenance and operating capital costs; and (3) the unexplained “outsourcing” and deduction of $ 1.7 billion in critical infrastructure costs.
When Northern Dynasty talks about his Pebble project, it has always “made sense to be skeptical”. Here we go again . . . .