Despite lower copper prices, PolyMet's mine still has financial appeal

Opponents of copper and nickel mining in northeastern Minnesota have turned hopeful that declining prices for those metals mean PolyMet Mining's project no longer makes financial sense, even if it gets its permits to mine.

They are going to be disappointed.

In the 11 years and counting of the permitting process so far, the prices of copper and other metals have surged and slumped, but they have never declined to the point investors have lost interest in PolyMet's project.

A recent announcement from the company about financing is just a 155-word news release, but it said a lot about the about the financial viability of PolyMet's project.

That's because this new money came from PolyMet's financial partner in the deal, a global giant in the mining business called Glencore. That company is under so much pressure to pare down its debt that everything it owns is thought to be for sale at the right price. And it still went ahead and put an additional $6 million into PolyMet.

"I actually met with Glencore in the last week," said PolyMet CEO Jon Cherry, in a conversation this week in his St. Paul office. "They expressed their full support for the company. They still like the project, and they still want it to go forward."

PolyMet recruited Glencore into this project because that's more or less the way projects come together for so-called junior mining companies like PolyMet Mining, today still more of a prospector than a miner.

The typical business plan of juniors is to drill into rocks to find ore and do a lot of the early work to get the site ready to mine if they find it, including seeking permits from regulators. There's a lot of risk in this work, but it also takes a fraction of the capital it does to actually build a mine and processing plant.

Generally when the juniors are successful in moving along high-potential projects, they can count on financial support or even being acquired by bigger mining companies.

PolyMet struck up its relationship with Glencore in 2008. Glencore has since put more than $160 million into PolyMet, both debt and equity, which could give Glencore about one-third of the company on a fully diluted basis.

Switzerland-based Glencore turns out to be a fascinating company, even among the global mining giants. It started as the commodities trading business of the controversial financier Marc Rich, and only more recently got very big in traditional mining operations.

Having a trading operation was supposed to have insulated Glencore investors from the earnings volatility caused by big swings in commodity prices, but as the stomach-churning ride in the past few months has shown, that's anything but the case.

At a recent price of about $2.40 per pound, the price of copper has declined by nearly half since early 2011, and the price of nickel has declined sharply since then, too. It's meant that Glencore's adjusted operating income for the first half of 2015 declined 61 percent from the same period of 2014, putting pressure on a balance sheet that had swollen during Glencore's debt-financed acquisition spree.

As summer turned to fall Glencore promised to cut capital expenditures, suspended its dividend, raised equity and has pursued asset sales, including news just this week that two small copper mines would be sold.

At PolyMet's St. Paul executive offices they certainly read this news, but it doesn't have much to do with PolyMet's plans. Cherry said he hopes Glencore remains a partner for the long term, but if Glencore has further problems of its own making, they are not going to derail his project.

Glencore is only a minority shareholder in publicly held PolyMet, with its executives holding two of the eight seats on PolyMet's board of directors. And, Cherry added, "there are other people just as interested in us as Glencore is."

Cherry also pointed out that 2015 metals prices aren't nearly as important as what prices will be in 2017 or 2018. There are bullish cases by analysts now in the market along with bearish ones, but it is interesting to note that International Copper Study Group just put out its new forecast, this time looking for a copper production deficit next year.

"Right now is actually a great time to permit and build a mine," Cherry said.

PolyMet's own price expectations for metals are stuck in a kind of time warp. The PolyMet mine plan is years old by now and hasn't changed, as amending it would mean the permitting process starts over.

PolyMet plans to produce much more copper than any other metal, and the copper price estimate in PolyMet's plan is $2.90 per pound. That price for copper helps make the mine project as solidly profitable in its plan, with earnings before interest, taxes, depreciation and amortization, or EBITDA, of more than $217 million per year.

Financial analysts who have looked at PolyMet don't have to just stick with the company's plan, of course. Chris Krueger of Minneapolis-based Lake Street Capital Markets assumes far lower metals prices in his financial model, but it still shows a consistently profitable operation with annual EBITDA of about $176 million.

That's the kind of financial picture that will be shown to investors if regulators permit PolyMet to mine, as the company tries to raise the hundreds of millions of dollars required to finish the project.

It has a great head start compared with the other companies seeking to mine copper and nickel in Minnesota. It acquired an old taconite mill and other mining infrastructure about a decade ago for a fraction of its replacement cost, adjacent to the mine site near the town of Hoyt Lakes.

The real asset value here, though, is what lies below the ground. At $3 per pound, just the 3.6 billion pounds of copper to be mined under its existing plan is worth nearly $11 billion. The total ore body is thought to be more than 15 billion pounds of copper, plus nickel and other metals.

Raising the remaining capital required to get all of that value out of the ground seems like it should be one of the easier challenges PolyMet has had to face.

lee.schafer@startribune.com • 612-673-4302