Counterpoint: PolyMet's Minnesota copper-nickel project is risky business

As finance professionals who have spent considerable time studying the PolyMet project, we come to the exact opposite conclusion from Lee Schafer ("Low prices won't dissuade PolyMet," Oct. 15). When we crunch the numbers, it's clear PolyMet's proposed mine doesn't make financial sense.

PolyMet and the Minnesota Department of Natural Resources (DNR) are rushing to complete an environmental-impact statement on the proposed copper-nickel mine near Hoyt Lakes. In their haste to finish, they are not telling Minnesotans a critical fact: current metal prices mean the project is not economically feasible.

PolyMet's proponents routinely cite the need for job creation in northern Minnesota. A cruel irony is that the jobs PolyMet promises to people on the Iron Range are not coming anytime soon, whatever the result of the DNR's environmental review process.

We've long been puzzled by the financials of this proposal, and the recent plunge in commodity prices has only reinforced our skepticism. When we started looking, we were surprised to find that PolyMet's last public financial return analysis was completed in 2008. At that time, PolyMet claimed that the proposal showed a healthy 30.6 percent after-tax return. But a lot has changed since 2008: a crash in the metals market, with copper down over 30 percent; a rise in wages and equipment costs, and the discovery that PolyMet would need to treat pollution for hundreds of years after the mine closed.

Using publicly available data for PolyMet's return calculation and standard investment analysis methodology, we were able to update PolyMet's financial model with today's costs, metal prices and financial assurance requirements. The results show the project's return is now negative at -3.3 percent. Pretax cash earnings have fallen from $217 million to $58 million annually. Moreover, the "pay as you go" plan of phased construction and environmental remediation puts the project in a negative cash flow position for at least the first five years. Even Wall Street in its go-go years would not finance a project with these returns.

In order for this financially risky proposal to secure financing, it would need a much higher return to be attractive. This leads us to believe that PolyMet will be unable to secure financing for the project anytime soon. PolyMet's financial partner, Glencore, is struggling to pay down $10 billion in debt to avoid a crippling downgrade in its credit rating to junk status. Thus, it is unlikely to provide the upward of $1 billion necessary to develop the mine and fill the trust fund required under Minnesota law.

The sources Schafer relied on for his rosy assessment of PolyMet's financial position all have a financial stake in the outcome of PolyMet's permit decision. It's unsurprising that Jon Cherry, CEO of PolyMet, would tout his company's position. But his recent actions tell a different story. On Oct. 1, Cherry chose to cash in 169,000 shares of stock options in the company instead of taking the stock. This happened on the same day that PolyMet hit its lowest share price in almost 10 years. This is not the mark of someone confident that a permit and financing for his mine is imminent. Schafer's other source, Lake Street Capital Markets, receives compensation from PolyMet for investment banking services.

PolyMet is competing for financing in a global context that is not pretty. Global copper producers have mothballed 1.5 million tons of production already this year (compared with PolyMet's projected 36,000 tons of production.) Glencore alone has mothballed 400,000 tons of production. According to a recent Goldman Sachs report, new mine development is on hold until existing mines are brought back on line, which is expected to be at least the year 2020.

Our modeling also shows that PolyMet will struggle to provide an upfront financial trust fund sufficient to protect Minnesota taxpayers. Just using the remediation cost estimates provided by the company, PolyMet will need to establish an upfront trust fund of at least $350 million. This estimate provides only the funds necessary to remediate and maintain the site as estimated by PolyMet. It does nothing to insure us against a tailings dam collapse or other disaster, such as occurred last year at the Mount Polley mine in Canada. Even if PolyMet never turns a shovel at its proposed mine site, the shuttered plant it bought from Cliffs has $72 million in unfunded cleanup costs that PolyMet would be responsible for the moment it receives a permit.

Despite years of work on the environmental-impact statement, critical issues remain. Gov. Mark Dayton's plan to conduct an independent financial review of PolyMet before making a decision on permitting the proposal is a wise one. Giving a permit to operate a risky mine to a financially shaky company would put Minnesota's water and taxpayers in jeopardy.

Ron Sternal, of St. Louis Park, is a retired Wall Street executive. Alan Thometz, of St. Paul, is a certified financial analyst and the former director of advisory services for Grant Thornton LLP. John Gappa, also of St. Paul, serves as chief financial officer for Post Consumer Brands. The opinions expressed here are solely their own.