PolyMet's Iron Range project has been Glencore's all along

There was a typically long and tedious list of risk factors in the recent stock deal prospectus of PolyMet Mining Corp., but the company helpfully put the one risk worth noting in bold text.

"The failure to complete the Rights Offering and to receive the anticipated $265 million in Gross Proceeds … will have a material adverse effect on the Corporation as it does not currently have sufficient cash or alternate sources of financing available to otherwise repay the Glencore Debt."

That seems pretty clear. PolyMet owed Glencore, usually described as Anglo-Swiss and a global mining giant, a ton of money it had no way to repay. Worst case, to satisfy the debt Glencore takes everything, a proposed mine near Babbitt along with copper and nickel deposits in northeastern Minnesota.

Of course, the stock deal went ahead, although it was Glencore that apparently bought most of the newly issued shares, in effect investing money to pay back itself. It's ending up with about 72% of the company's ownership. So it didn't get everything, just almost everything.

It appeared from the reaction of environmental activists and others last week that having a controlling ownership position shift to Glencore marked some sort of watershed moment in our state's development of copper and nickel mining.

If so, it's a realization that's come about 11 years late. There were lots of agreements, amendments to agreements and financing between Glencore and PolyMet over the years, but if you had to pick one day where it became clear this project was really up to Glencore to complete, the best choice looks like Oct. 31, 2008.

That's when the company said its first Glencore financing deal closed.

The difference between development stage PolyMet and its controlling partner is hard to overstate. Glencore produced about $12 billion in cash flow last year from nearly $130 billion in assets. In looking into Glencore's disclosures about the stability of its tailings basin dams, which have failed spectacularly in the industry, it was surprising to read Glencore had 55 of them just in South America.

Somewhere in a company this big there are people who care a lot about a potential operation in northeastern Minnesota, but it's hard to imagine the board of directors does.

It's also the kind of company that seems to routinely make the newspaper for problems that the board of directors should care a lot about.

This spring, for instance, it came out that the U.S. Commodity Futures Trading Commission (CFTC) had begun investigating whether Glencore and its affiliates had violated regulations through "corrupt practices." The company pointed out that the job of responding to this inquiry got assigned to its Investigations Committee, which had been set up to handle another investigation launched last year by the U.S. Department of Justice.

It seems inevitable that Minnesota would end up with a big company like Glencore if nonferrous mining went into production, because that's the way this industry often works. Companies like PolyMet are known as juniors, not a very helpful term. People in the industry are more likely to divide it between prospectors on the one hand and miners on the other.

The mission of prospectors, the juniors, is to find and confirm ore deposits that make financial sense to mine. If that goes well, big mining companies that know how to finance, build and operate big mines will happily come in and take it from there.

The same kind of pattern exists in other industries, like how a young company with a promising new medical device gets it through the regulatory process until maybe Medtronic acquires the business.

PolyMet is basically a U.S. company with its roots still in Canada, as that's where there are investors, analysts and bankers who understand this business. The stocks of more than 200 mining companies are traded on the Toronto Stock Exchange, one place PolyMet shares trade, and nearly a thousand more trade on the TSX Venture Exchange.

The company has been at this a long time, funding itself largely with equity offerings, but in the fall of 2008 it announced its partnership with Glencore.

The big company would buy what PolyMet's mine produced for at least its first five years of production. Glencore also agreed to invest up to $50 million in PolyMet debt securities, to finance the company through the remaining permit stage. The debt would come due in 2011.

It's always interesting to see debt issued by a development stage company, because obviously there's no cash flow to pay back any debt. Lenders like Glencore understand the risk, too, but what they are looking for by taking debt is to jump in line ahead of the shareholders. If the project goes sideways, they are in control.

PolyMet didn't even get close to production by 2011. But the question since 2008 wasn't if investors thought the PolyMet project was still viable enough to fund. It was whether Glencore did.

Through various additional deals and the renegotiation of past ones, what PolyMet owed Glencore finally got to $251 million. The stock price of PolyMet drifted lower as more and more of the economic value slid away from the shareholders to Glencore.

The prospectus outlined a complex negotiation between the company, Glencore and a special committee of PolyMet's independent directors to figure out a path forward given that this Glencore debt was again coming due.

This is a Canadian-registered company and the references to securities laws in filings aren't familiar ones, but it's clear that Glencore, as a related party to a company with a lot of small shareholders, couldn't just ruthlessly squeeze them all out.

Yet it was also clear Glencore wanted the deal it got, a rights offering to shareholders that it would "backstop," meaning it would buy all the new shares if other shareholders passed.

It would be the formal completion to a transition in control that had happened a long time ago.

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