Independent Review Rejects Pebble Mine Economic Analysis

It is well established that inaccurate inputs will produce inaccurate outputs every time, no matter how powerful the computer or personally motivated the project applicant.  Garbage in produces garbage out—period.  And Pebble Mine owner Northern Dynasty Minerals’ long awaited Preliminary Economic Assessment (“PEA”) for its massive open pit project, proposed at the headwaters of the Bristol Bay watershed in southwest Alaska, is no exception.

On October 25, 2021, hoping to persuade potential investors, Northern Dynasty released its September 9, 2021 PEA with enormous optimism about the project’s “strong economics,” calling it an economic “game-changer” that promises billions in revenue for southwest Alaska.    

Last week, on December 1, 2021, former Rio Tinto Head of Environment (Copper, Copper & Diamonds and Copper & Coal Product Groups) Richard Borden completed an independent technical review of that PEA and reached a very different conclusion:

The Pebble Mine Project PEA fails to meet even industry standard practice for financial evaluations and its conclusions are commonly based upon poorly supported and overly optimistic assumptions.

Citing a litany of the PEA’s flawed assumptions—and comparing them with other recent mining industry PEA’s—Borden characterizes the proposed Pebble project as “an exceedingly risky investment.” Far from generating billions of dollars in profit as Northern Dynasty contends, he concludes that “it is likely that the actual project NPV is negative” and further that

if short and consensus long-term metals prices returned to the values from 2019, [the project] would almost certainly have a negative NPV measured in the many hundreds of millions to multiple billions of dollars.

Mr. Borden has impeccable mining industry credentials and deep experience in assessing the environmental challenges posed by the responsible permitting, development, operation, and closure of large copper mines.  In 23 years with Rio Tinto, Borden performed environmental, permitting and closure work at over fifty mines, projects and operations, was involved in the strategic environmental design of several new mines, and participated in numerous economic evaluations of ore bodies and mines as part of due diligence activities.  Now, as an independent consultant, he continues to serve a range of industry and NGO clients.

The flaws identified by Borden in his review of the PEA are wide-ranging and pervasive:

(1) lack of independence of the PEA team from the mine owner;

(2) low level of a PEA’s predictive accuracy;

(3) underestimation of costs, including owners, indirect, and contingency costs;

(4) exclusion of $2.8 billion in infrastructure costs based on the unjustified assumption that they will be funded by someone else yet to be identified;

(5) overly optimistic assumptions about long-term commodity prices;

(6) overly optimistic underestimation of long-term operating costs;

(7) over-estimation of NPV by hundreds of millions and potentially billions of dollars; and

(8) in discussing future expansion scenarios, a failure to acknowledge that the larger mines would carry an exponential increase in environmental risk (including risk to the Bristol Bay fisheries) associated with an estimated 22 billion tons of largely-chemically reactive mining waste requiring containment and treatment forever.

The flaws, in short, are irreconcilable with Northern Dynasty’s claim of Pebble’s “strong economics”—the antithesis of a “game-changer” for its widely condemned project.

Without attempting to reproduce here Borden’s full review, the following excerpts from his principal findings provide a sense of the fundamental flaws in Northern Dynasty’s self-interested analysis:

(1) The PEA is not an independent study.  Four of the eight qualified persons responsible for completing the study are or were recently employed by Northern Dynasty and/or its parent company Hunter Dickenson (PEA pages 56 and 57).  As such they have a direct financial interest in successful development of the Pebble ore body. 

(2) The PEA has an acknowledged low degree of accuracy.  The PEA cost estimates have only been completed to a “preliminary level” (PEA page 51), and the stated accuracy of the cost estimates is only plus or minus 50% (PEA page 289).  PEA estimates typically have an accuracy range of ±25 to ±50%, so the Pebble PEA falls at the lowest end of this range. 

(3) The PEA almost certainly understates indirect, owners and contingency costs.  The last truly independent economic analysis of the Pebble project was completed by Wardrop in 2011 (Preliminary Assessment of the Pebble Project; Wardrop – A TetraTech Company; February 2011). 

• The Pebble PEA actually assumes lower indirect and owners costs than most other recent PEAs completed in the Alaska region. 
• The Wardrop analysis assumed that indirect and owners costs would be 40% of the capital costs, substantially higher than the 2021 PEA assumption of only 28.2%.  Similarly, the 2011 Donlin Creek Feasibility Study assumed indirect costs of 42%.
• The independent Wardrop 2011 analysis assumed a contingency of 24.9% of direct capital costs and Donlin (2011) assumed 24.5%, both substantially higher than the 2021 PEA assumption of only 16.2%.
• If the Wardrop 2011 indirect, owners and contingency assumptions are applied to the Pebble initial direct capital estimate, the project capital cost would increase by over $800 million. . . . [B]ecause these costs would occur during the 4.5 year construction period, well before any project revenue, this refinement would decrease project NPV by an estimated $1 billion.

(4) The PEA speculatively assumes someone else will pay for $2.8 billion of pre-mining infrastructure. 

• The base case financial evaluation of the 20-year starter mine assumes some other company or entity will develop, finance, own and operate the port, access road and power plant, leasing the assets back to Pebble over the life of the mine.   The estimated capital cost of these facilities is $1.7 billion.  It is unclear what entity would consider putting so much capital at risk for the benefit of the mine, and the Pebble PEA does not identify any potential partners in the venture.  This assumption is, therefore, highly speculative and insufficiently justified in the financial evaluation.  None of the other recent PEAs that were reviewed proposed such a speculative financial arrangement.
• The Pebble PEA also assumes that some other company will provide $1.1 billion of up front capital for the right to buy gold at a reduced price in the future (gold streaming).  Although this is not an uncommon practice in the industry, the Pebble PEA does not identify any potential gold streaming partners.

(5) The PEA almost certainly overstates long-term copper prices and likely overstates long-term gold prices.  The Pebble PEA financial evaluation assumes long-term copper and gold prices of $3.50/lb and $1600/oz respectively. 

• The PEA states, however, that “a recent consensus published from major banks estimates a long-term copper price in the $3.20 to 3.70/lb range, with a median of $3.30 and average of $3.37 (page 263).”  A survey of fourteen recently published mining project financial evaluations also yielded an assumed mean long-term copper price of $3.08 (Table 2). 
• The Pebble PEA also states that “current analyst consensus for long-term gold prices are in the range of $1400 to $1800/oz, with a median and average forecast long-term gold price of $1600/oz.”  However, a survey of twenty-two recently published mining project financial evaluations yielded a mean long-term gold price of $1425/oz (Table 2).  
• If pre-pandemic short and long-term metals prices from 2019 are assumed ($3.00/lb for copper and $1300/oz for gold), there would be a greater than $1.5 billion reduction in project NPV (page 328). 

(6) The PEA has anomalously low operating costs compared to the last independent economic evaluation competed in 2011. 

• There has been 24% net inflation from early 2011 to mid-2021 (U.S. Bureau of Labor Statistics, data.bls.gov).  If the operating costs calculated in the 2011 Wardrop study are inflated to 2021 dollars, the net operating costs are about 20% higher than those quoted in the 2021 PEA (Table 3). 
• When the operating cost deficiency is applied to the 180,000 tons per day processing plan, the resulting operating cost shortfall in the 2021 PEA is $126 million per year for twenty years.  Discounted at 7% per year over the construction period and full mine life, this equates to a $1 billion reduction in overall project NPV.  

(7) The NPV of the 20-year starter mine is almost certain to be less than 700 million dollars in value, which is less than a third of the base case NPV stated in the 2021 Pebble PEA; and despite historically high commodity price assumptions, it is likely that the actual project NPV is negative. These NPV calculations also do not fully address the very substantial environmental, social and design risks associated with the project, which may make it impossible to ever permit or construct an economically viable project. . . .  If “likely justified” modifications are . . . applied to the based case, the calculated NPV falls to negative $700 million.  If short and assumed long-term metals prices returned to the values from 2019, immediately before the massive economic disruptions of the pandemic ($3.00/lb for copper and $1300/oz for gold), the 20-year starter mine would almost certainly have a negative NPV measured in the many hundreds of millions to multiple billions of dollars. 

(8) Although larger mine plans evaluated in the PEA have much more favorable economics, they would require a greater than ten-fold increase in environmental impacts and risks compared to the artificially reduced scale of the 20-year starter mine that Northern Dynasty is attempting to permit.  The larger mines evaluated in the 2021 PEA would run for 90 to 100 years and would produce over eight billion tons of tailings and 14 billion tons of waste rock (PEA page 44). . . .  These chemically reactive mineral wastes would pose a risk to the Bristol Bay salmon fishery forever, because it would be nearly impossible from an economic and operational perspective to return over ten billion tons of material to the open pit where it could be permanently flooded to control the acid rock drainage risk.   

Based on these and other findings, Mr. Borden concludes that, even with “exceedingly optimistic” assumptions, the Pebble Mine is an “exceedingly risky investment” unlikely to make a profit:

In summary, even with the current exceptionally favorable metals prices, the greater than $6 billion that the Pebble PEA estimates will be required to build the 20-year starter mine represents an exceedingly risky investment that is unlikely to yield a positive rate of return even under exceedingly optimistic permitting and design assumptions.

The transparent optimism on which Northern Dynasty’s PEA is based fails to meet not only more stringent regulatory standards but, according to Borden, “even industry standards for financial evaluations.”  Given the continuous failure of the Pebble Mine for so long and the relentless, steadfast, and broad-based opposition from the people of Bristol Bay for even longer, there is no persuasive reason to believe that this project—among the most universally opposed of its kind anywhere—will ever be permitted, funded, or constructed.

Never has this conclusion been clearer.  With the recent re-instatement by the U.S. Environmental Protection Agency of its 2014 Clean Water Act section 404(c) Proposed Determination precluding permitting of the Pebble Mine even as currently proposed, Northern Dynasty’s prediction of “strong economics” for its reckless scheme is simply not credible.  As summarized by Richard Borden:              

Given the extremely high environmental, social, permitting and engineering challenges faced by the project, it is likely to cost hundreds of millions of additional dollars, spent over many years to decades, before construction of any project could, if ever, begin.

It is time for Northern Dynasty to recognize the immutable reality of its financial failure, and the recent PEA does nothing to suggest otherwise.  The Pebble Mine is a threat to the people of Bristol Bay and an embarrassment to responsible miners everywhere.

Tell EPA now to veto the Pebble Mine—once and for all.