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Digging in or digging out?

Despite new exploration, mining's future is in a deep hole

July 1, 2002


Jane Brissett Contributing Writer
Digging in or digging out?

Working for a half-century in the mining business has made Ernest Lehmann a patient man. Since 1985, he has been exploring on and off for platinum and palladium near the northeastern Minnesota town of Babbitt.

Two years ago his Lehmann Exploration Management partnered with South Africa-based Impala Platinum Ltd., the world's second largest platinum producer, to help analyze whether mining the ore body there is economically feasible. Lehmann's patience might pay off in a big way—or it might never pay off.

"You begin to wonder whether you'll live long enough to see these things happen," he said.

Lehmann and a small group of other explorers are looking for nonferrous (or noniron) metals. The deposits are there; it's a matter of trying to extract them economically. That little fact has raised eyebrows, as some see nonferrous mining as a logical replacement for a sagging taconite mining industry in Minnesota.

But it will be at least five years before Lehmann and Impala's underground mine could be operating. And that's just one of the factors that begins to take the bloom off the rose. The effects of finite resources, globalization and low metal prices also challenge development of a permanent new mining sector in Minnesota. And if other states are any barometer, nonferrous mining in the Ninth District appears to be on the same downward track as the taconite industry in northeast Minnesota and Michigan's Upper Peninsula.

Better efficiency but fewer jobs

The U.S. mining industry (which includes coal, petroleum, natural gas, iron and nonferrous metal) has made huge strides in efficiency over the years. The value of mining output increased from $205 billion in 1990 to $212 billion in 2000 (in chained 1992 dollars), and is expected to continue increasing to $230 billion in 2010.

Metal Mining Employment

(In Thousands)

Year Minnesota Montana North
Source: Bureau of Labor Statistics

Mining's Economic Impact

1999 (In Millions)

  Minnesota1 Montana2 North
State & Local Government
1 Primarily iron mining.
2 73 percent metallic minerals as well as coal, gemstones and industrial and construction minerals.
3 Primarily coal.
4 Primarily gold, stone, sand and gravel. In 2002 only one mine is producing gold, compared with five in 1998.
5 Primarily crushed stone, sand and gravel.
Source: National Mining Association

That's not exactly fast-track growth—indeed, the projected output growth of about 0.8 percent per year in mining is substantially less than the 3.3 percent annual growth rate seen for all industries combined.

But mining employment decreased 24 percent to 543,000 jobs from 1990 to 2000, and more job cuts are expected. By 2010, the industry's total employment is projected to fall by another 55,000 jobs, according to the Bureau of Labor Statistics. Mining is expected to have the largest annual employment decline for any major industry until at least 2010.

Many of the job cuts in the district have been at taconite mines. Minnesota's mining employment fell by 62 percent from 1980 to 2001—from 15,600 workers to 6,000 workers, according to the Iron Mining Association of Minnesota. During that time, three of eight iron mines closed and one—Northshore Mining, formerly called Reserve Mining—reopened.

Environmental requirements, low-priced imports, high-cost production and bankruptcies have plagued American steelmakers and affected the demand for taconite, the low-grade ore mined and processed in northeast Minnesota and the U.P. As in other mining sectors, technological improvements have allowed taconite mining operations to run with fewer workers.

The most recent closure was LTV Steel Mining Co., the state's second-largest mine, which was shuttered last year due to the bankruptcy of its parent company, LTV Corp. Two owners of other mines, Bethlehem Steel Corp. and National Steel Corp., have filed for bankruptcy, but their Minnesota mines continue producing.

Empire Mine, one of two iron ore mines in the UP, was out of production for several months in late 2001 and early 2002, while an owner of the Tilden Mine—which ultimately sold its share—struggled with insolvency.

Many are holding out hope for a turnaround in the taconite industry, particularly in value-added iron products. Northshore Mining in Silver Bay is working with Kobe Steel, a Japanese firm, to make nuggets that are almost pure iron. Minnesota Iron and Steel has been working for more than six years on a plan to mine iron ore and build a steel mill near Nashwauk, but financing is not complete.

Looking for paydirt

In the meantime, however, there is hope that a new metal mining industry—still at an embryonic stage—can pick up some of the mining slack on the Iron Range. About seven companies are exploring or testing samples of gold, platinum, palladium, copper, nickel, cobalt and other metals, which are known to be present in a geologic formation called the Duluth Complex.

In Minnesota, a state metallic minerals lease sale last July doubled the number of exploration leases on public land in the Arrowhead region of Minnesota. Ten mining companies submitted bids for 126 leases on 28,000 acres of land.

That is exciting news in Minnesota, where there's been little exploration for 20 years, said Don Gentry, president of Golden, Colo.-based PolyMet, but it's not intense interest from an industry point of view. PolyMet is one of the companies looking at the possibility of developing a mining operation.

PolyMet and Teck Cominco, a multinational mining company based in Canada that also owns Minnesota exploration leases, have each developed what they say are inexpensive, environmentally friendly ways to separate the metals from each other and from waste. Metals such as copper, nickel, silver and gold often are found chemically bound in the ground.

Both companies would use some of the underutilized Iron Range taconite facilities to at least partly process the nonferrous ore near the mining site. If Teck Cominco can extract the ore cost-efficiently, it would use LTV's crushing and grinding equipment near Hoyt Lakes. It would also build its own plant to further refine the ore. All told, its capital investment would be about $550 million. The entire operation would employ about 1,000, said John Key, the company's Minnesota project manager.

PolyMet envisions a $600 million investment, using some of LTV's facilities and employing 450 to 500 workers. Both PolyMet and Teck Cominco are primarily interested in extracting copper and nickel, and would build open pit mines.

Lehmann is more interested in platinum and palladium, which would be mined underground, partly processed in Minnesota and sent to South Africa for final refining.

One chance in 1,000

McVicar Minerals Ltd. of Toronto, which is conducting its first mineral exploration in the state, has partnered with the deep pockets of Australian conglomerate BHP Billiton to look for nonferrous metals, said Mike Rosatelli, a senior geologist with McVicar. He noted that although his company has computer models showing the land it's leasing from the state is geologically similar to an area in Russia that contains high-grade ore deposits, chances of the property becoming a mine are about one in 1,000.

The decision will be made after investing perhaps $1 million during an estimated five years of exploration. "You hope that if you find something, that in five years the price is going to go up," Rosatelli said. If the price of copper and nickel rises substantially, he predicted even more interest in exploration in northern Minnesota.

In addition to technological advances, the availability of resources and idle infrastructure, Minnesota is creating an increasingly favorable environment with a relatively new permit system for nonferrous mining. Furthermore, many politicians are interested in developing the industry. "You have a favorable business and government climate in Minnesota at this time," Lehmann said.

Indeed, the Iron Range Resources and Rehabilitation Agency, an arm of state government, will match up to 40 percent of direct drilling costs. It is also offering $15 million in agency trust fund money for loans, grants or equity investments to help build new nonferrous facilities. Another $80 million in agency and state money is available to develop a nonferrous mineral mine or processing plant or a value-added iron products plant.

Hard (rock) times

Whether nonferrous mining is a good investment of public resources might be questionable because hard-rock mining in other district states has also been through rough times. For example, the UP was once called "copper country," but today the only copper mine left—the Caledonia Mine in Ontonagon County—produces small quantities of mineral specimens for museums.

As recently as 1998, South Dakota had five active gold and silver mines. Today it has one, Wharf Resources, located in Lead, which is also home to the mammoth, recently closed Homestake gold mine. Some of the closures are partly attributable to depletion of the resource, but low gold prices and high production costs have affected all the mines, according to Mike Cepak, natural resources engineering director at the South Dakota Department of Environment and Natural Resources.

Likewise in Montana, where gold, silver, copper, nickel, platinum and other metals are mined, the industry "is not exactly booming along," said Warren McCullough, chief of the state's Environmental Management Bureau. Pegasus Gold Corp., owner of the now-defunct Zortman and Landusky gold mines in north-central Montana, filed for bankruptcy three years ago. The state's one remaining high-grade gold mine, Golden Sunlight Mine near Butte, has about a year of life left. Continental Pit, a copper-molybdenum mine also near Butte and owned by Montana Resources Inc., suspended operations nearly two years ago because of high electricity and low commodity prices, and "some people wonder whether it will ever reopen," McCullough said. Altogether, just four metal mines are operating in Montana today vs. nine in the mid-1990s.

Exploration for new deposits in Montana and South Dakota is almost nil. In northeast Wisconsin, a zinc-copper underground mine project proposal called the Nicolet Mine near Crandon has been dealing with state regulatory processes for about seven years and still appears to be years away from becoming reality.

Metal commodity prices, except platinum and palladium, have been low for years. Even gold, which in the late 1970s was $800 per ounce, sold last spring for less than half that price. Palladium, which is used in automobile catalytic converters, is in some demand. It reached a peak of about $1,000 per ounce during the past two years, but was about $370 per ounce in the spring of 2002.

Because some companies have been expanding abroad in a big way, there's too much ore on the world market, which keeps prices low. With poor worldwide economic conditions and slim profits, it's a difficult time to finance exploration, which is an expensive gamble even in the best of times. Gentry said that until the new technologies PolyMet and others hope to use are proven, investors have little interest in bankrolling them.

Long start-up timelines, comparatively expensive labor and tight regulations in the United States have pushed mining giants to invest elsewhere—they're especially interested in South America—leaving little capital for domestic exploration.

IRRRA Deputy Commissioner Brian Hiti acknowledged that there are a lot of "ifs" involved with nonferrous mining in Minnesota, but his agency is encouraging its development—as well as that of value-added iron production. If successful, the new sectors will benefit the area in the long term, he said.

The 1,000 jobs that Teck Cominco could create would have great impact, he said, since it could replace most of the lost LTV jobs, and the life of the operation is estimated at 60 years. Lehmann estimates his project would operate for 20 years, while PolyMet estimates 24 years or more.

Length of operation is not a major concern for the agency. "By their very nature, mining projects have a life. ... Other economic development projects do, too, but we don't know what it is because it depends on changing business conditions," Hiti said.

Ride over toward the sunset

Still, a look westward shows what could happen down the line. Mining is an important part of Montana's economy. The state is the nation's sixth biggest coal producer and has the nation's only platinum-palladium mine. The industry contributed $360 million in direct economic gain (including nonferrous minerals, gems, industrial minerals, talc and bentonite) to the state's economy in 1999, according to the National Mining Association.

For those fortunate enough to have mining jobs, the average income per worker is more than $45,000—good pay in a state where the median household income is estimated at less than $30,000 per year. The industry paid $79.6 million to state and local governments.

But political sentiment appears to be less favorable than it once was, especially in terms of environmental issues. Companies have closed mines, and the industry has shrunk. Employment fell from 8,800 to about 5,000 from 1980 to 2000.

Exploration has also fallen off. In 1989, mining companies spent an estimated $23.6 million on 90 exploration projects in Montana, said Robin McCulloch, staff mining engineer for the Montana Bureau of Mines and Geology. A decade later, exploration investment was less than $100,000 in 10 projects, and no mines are in the permitting circuit.

McCulloch, who compiles the Montana Mining Directory, said obstacles such as lawsuits, retroactive liability for old pollution problems and changing environmental requirements are keeping mining companies away.

In an annual survey, the Fraser Institute, a think tank in Vancouver, British Columbia, ranked Montana, Minnesota, South Dakota and Wisconsin in the bottom half for mining policy, mineral potential and investment attractiveness. Nevada scored near the top in each category. Chile, Brazil and Australia, as well as Ontario and Quebec, were at or near the top of the lists.

Lehmann, for one, disagreed with Montana's ranking, but the perception that Montana is a difficult place to start new mining operations seems strongly held inside and outside the state. But some believe Montana's mining canary is still alive. McCulloch, for one, believes that mining companies will return someday. He compared the state to an apple tree with 2 percent of its ripe fruit picked.

"When they have plucked all the mega-open pit ore [abroad], they'll have to come back here to mine," he said.

See related stories in the November 2002 fedgazette:

What lies beneath
The bills come due for hardrock mining's toxic past
The prices—right
The toughest problem in metal mining's future will be making prices reflect all the costs.
How much for a grizzly?
Estimating environmental values is difficult but essential.
Pay dirt or fool's gold
Do small towns strike it rich with metal mining or do they simply get the shaft?