“Greens” fighting Pebble mine are helping Rio Tinto, Anglo-American and BHP Billiton

I came across an interesting saga yesterday. My introduction came from a May 14, 2015 opinion piece in the Wall Street Journal titled The Greens’ Back Door at the EPA. (Hint: If you don’t have a WSJ subscription, copy and paste the article title into the Google search engine. That should provide you a link to the article via the Journal’s “free pass” program.)

On February 28, 2014 the Environmental Protection Agency (EPA) issued a preemptive veto of the Pebble project, citing its authority under Section 404(c) of the Clean Water Act. That action was initiated even though the developers had not yet filed a permit request; it was ostensibly done in response to a petition filed by native American tribes in the region near the deposit.

It has recently been revealed that EPA staff members, with the assistance of well-funded “conservation” groups, helped the tribes and their legal representatives to draft their petition, internally creating the public pressure to act.

The tale that Kimberly Strassel tells about the EPA’s decision to stop the Pebble mine development was similar in many ways to the story of how the EPA developed the specifics of its state-by-state CO2 emissions rule. It even includes some of the same influencing actors, including the NRDC. The gist is that EPA conducted both a traditional publicly accessible interaction program with certain stakeholders while at the same time accepting far more influential advice and strategy development from selected “green” stakeholders.

While taking action to respond to the government’s decision to prevent it from extracting the minerals from its properly constituted claims, the Pebble Partnership discovered indications of close, non-public cooperation between EPA staff members and activists/lawyers who were fighting the mine development project. It’s worth noting that the Pebble Partnership is led by Tom Collier, who served as Chief of Staff/Chief Operating Officer for the Interior Department from 1993-1995 (under President Clinton).

As indicated by the headline of Strassel’s piece, she believes that the collaboration happened because the EPA staff members share a “green” ideology with the activists that are fighting the mine. Here is her concluding paragraph.

And not soon enough. If the EPA’s Pebble action becomes a model for the agency, it would become the effective zoner of every piece of land in the country—federal, state, private. It’s a terrifying thought, and why we have rules guaranteeing every petitioner a fair and open hearing. Pebble was bulldozed in a secret, ideologically driven collusion between greens and government. That is a scandal worthy of resignations.

As is often the case, my interpretation of the motivating factors behind the stated actions differs from the one offered by the conservative commentator.

I don’t believe ideology is a significant motivating factor in government decisions and I’m pretty cynical about the motives that drive the decision makers at large, well-funded, pressure groups like the NRDC. Thirst for money and the power that it gives those who control it is a more common motive, even if it often takes a little more digging to identify it.

People and organizations loudly proclaim their ideals, but they act on their interests. This particular story does not have much to do with atomic energy, but it is an enlightening analog that would fit into the smoking gun series. It involves actions to limit the supply of valuable commodities by established suppliers of those commodities.

Coordinated private actions that stop competitors from entering a market are illegal under US antitrust laws, but they can provide incredible money-making opportunities. There are big risks associated with taking actions that violate antitrust laws, including the possibility of being forced to pay treble damages. That is what makes green activism so useful to market manipulators; if “environmentalists” place massive resource deposits off limits, few people think about invoking antitrust statutes.

Like Ms. Stassel, they credit ideology, listen to what people say and see the battle as being one of industry versus the greens. They overlook — or purposely obfuscate — the possibility that the real battle is between established suppliers and an enterprising interloper. They fail to see that the new supplier might be working to improve the human condition — and make some money — by developing increased supplies of a useful material.

Pebble prospect history

It’s quite possible that you’ve never heard of the Pebble prospect. (I only learned about it yesterday.)

The Pebble deposit is a copper – gold – molybdenum mineral resource located in a remote area of southwest Alaska, about 200 miles from Anchorage, 65 miles from the nearest tidal water, and 20 miles from the nearest community. It’s on state-owned land that has been specifically reserved for natural resource extraction enterprises.

The Pebble deposit was discovered in 1987. During the subsequent 28 years, an increasingly intensive exploration program has identified the impressive parameters of the prospect. Here is a slide from a recent company presentation that indicates the scope of the deposit in terms of the quantity of its contained resources. The background photo for the slid also provides some indication of the local terrain above the deposit.

The deposit is owned by Northern Dynasty Minerals Ltd., a Canadian publicly traded company (NYSE: NAK, TSX: NDM). This is not an investment advice article, but the 3-year NAK stock price chart is relevant to the story. It’s also worth noting that Northern Dynasty Materials Ltd. has 105 million shares outstanding, which tells you that the market capitalization has dropped by close to half a billion dollars in the past three years, even as the exploration efforts have identified more and more copper, gold, molybdenum and silver.

Perfidious Partners

In September 2013, Anglo American gave up its 50% ownership in the property, even though it had invested $573 million and six years of work in the exploration and development planning program. Anglo American spokesman denied that the pricing trends for gold, one of the more valuable components of the Pebble deposit, had anything to do with its decision.

It’s probably just a coincidence that the price of gold dropped by 25% in the 9 months before Anglo announced its decision. That price collapse occurred after a nearly 10-year period of steadily increasing gold prices — going from $300 to $1800 per ounce. Not only would the product of the Pebble deposit be worth less than expected under the new price trend, but the amount of gold produced by the mine could easily be enough to push the market price down even further.

As an established market leader with existing supplies, Anglo American lost interest in adding to what appears to be a near-term oversupply situation.

At the time of Anglo American’s withdrawal from the project, a spokesman from Northern Dynasty Minerals Ltd. put on a brave face and told reporters that his company believed it had sufficient resources to get the mine permitted, and still had a strong, experienced mining company as a major investor. At that time Rio Tinto, one of the world’s largest mining corporations, still owned 19% of the company’s shares.

In April 2014, soon after the EPA issued its preemptive veto, however, Rio Tinto announced that it was also withdrawing from the project and giving its shares to two Alaskan non-profit organizations. As a huge company with many existing interests in Alaska and a desire to continue maintaining good relationships in the state, that action can be seen as a sensible effort by a good corporate citizen. It can also be seen as recognizing that it’s not worth “fighting city hall” or the federal government.

Rio Tinto, though also a gold producer, is better known for its world wide interest in copper, which is also one of the major sources of value found in the Pebble deposit.

Like gold, copper prices have dropped substantially in the past couple of years.

Analysts provide differing explanations, but a falling price in any commodity can generally be attributed to a shift in the balance between supply and demand to a point where there is more supply chasing an insufficiently growing demand.

In early December 2014, Rio Tinto held an investor’s day. The Economic Times of India carried a Reuters report about that event titled Rio Tinto sees copper market oversupplied in medium term that included the following quote.

Rio Tinto’s head of copper said on Thursday he expects the copper market to remain oversupplied in the medium term and this could put pressure on prices.

“As we move into 2015 the copper industry will continue be oversupplied in the medium term which will drive continued volatility in price,” Jean-Sebastien Jacques, chief executive of the copper division, said during Rio Tinto’s investor day.

A few weeks later, on December 15, 2014, the Financial Post published a story titled BHP Billiton, Rio Tinto move to dominate in copper. Here are the first few paragraphs from that article.

Rio Tinto and BHP Billiton are amassing vast copper holdings in a push to capture a greater chunk of the US$140 billion world market, apparently aiming to squeeze out high-cost producers just as they did in the global iron ore business.

Separately and in joint ventures, Rio and BHP intend to mine millions of additional tonnes of copper, despite seeing an oversupplied market for the next few years.

“For both companies, this is about wielding the greatest influence possible over the global marketplace,” said Gavin Wendt, senior resources analyst for Sydney-based consultants MineLife.

As of April 2014, Rio Tinto no longer had any desire to be a minor partner in a project that would substantially increase the supply of copper and contribute to additional price declines. By December 2014, it was clearly explaining to investors that it would benefit from less copper being put into the market by other players.

Here’s the smoking gun part of this story. One of the non-profit groups that was the beneficiary of Rio Tinto’s munificent decision to give away 19% of the stock in Northern Dynasty Minerals Ltd. was the Bristol Bay Native Corporation Education Foundation. That organization was already a publicly active opponent to the mine’s development; its leader is one of the “Greens” who has been working with the EPA to encourage it to stop the project. Here is a quote from an April 7, 2014 Washington Post article.

Jason Metrokin, chief executive of the Bristol Bay Native Corporation, is a fierce opponent of the mine who has spent more then three years urging the EPA to prohibit the project on the grounds that it could harm the environment and local fishery.

Within months after Rio Tinto gave it almost 10% of the ownership in the project it was fighting, Bristol Bay Native Corporation Education Foundation sold its shares for $6.5 million.

Though the Bristol Bay Native Corporation stated that it would use that money to further its educational programs, money is fungible. Giving a non-profit group $6.5 million for its usual activities frees up the same amount of money that can be directed at saying “no” to development. That kind of “charitable contribution” can be a high rate of return investment for a company with a documented desire to restrict commodity supplies.

Six and a half million dollars can pay a lot of lawyer fees and lobbying expenses. It can buy a huge amount of refreshments for hungry, emotional, sign-carrying activists.

There is one more aspect to this story worth mentioning because it relates to a previous story about the EPA’s odd methods of calculating cost versus benefits. According to the EPA’s Section 404(c) letter of February 2014, the total sales of the fishing industry its veto is designed to protect was $300 million in 2009. A portion of that total sales figure provided income to 11,000 full and part time employees. Even if there were no other expenses involved in fishing other than paying workers, that means that the average take for the workers was about $27,000 for the year in question.

In contrast, a national economic impact study produced by IHS Global Insights in 2013 concluded that developing the Pebble mine would contribute $2.3-$2.7 billion annually to the US GDP and might support as many as 15,000 full time positions. That development phase would last for 25 years with a subsequent additional period of 20 years with increased employment and revenues.

Using logical methods of computing cost and benefits, the possibility of giving up a portion of $300 million for $2.3-$2.7 billion would be a “no brainer.” (It is exceedingly unlikely that developing a mine more than 120 miles upstream of Bristol Bay would lead to a complete collapse of the entire fishery.) Unfortunately, the politicized EPA doesn’t operate logically; it operates to protect politically powerful interests.

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PS – Sorry for my recent lengthy silence here.

Among other excuses, I have been working on a much more complicated tale of a particular effort by a group of commodity suppliers, with the help of interested governments, to control a new supplier in order to inflate profits and market prices. This post is part of my practice in learning to tell complex stories without boring people or causing them to issue a dismissive “conspiracy theorist” condemnation.