Zinc prices help NANA rebound from oil crash

  • Things are looking up at the Red Dog mine in Northwest Alaska, where rebounding zinc prices have led to increased production and helped NANA Regional Corp. recover from low oil prices of the past two years. (Photo/File/AJOC)

Strong returns from the Red Dog mine are helping NANA Regional Corp. overcome oil and gas industry losses.

NANA CEO Wayne Westlake said in an interview that the Northwest Alaska zinc mine is outpacing production forecasts at a time when zinc prices are high.

The open-pit Red Dog mine sits about 90 miles north of Kotzebue, the largest community in the region.

NANA, the Alaska Native regional corporation for the area, owns the mine that is operated by Vancouver-based Teck Resources Ltd.

Teck expects production from Red Dog to be between 525,000 and 550,000 metric tonnes this year, according to a September release from the company. Output in that range would be about 10 percent above prior production forecasts.

The uptick in production is the result of changes to mine sequencing and advancements in metallurgical recoveries, Teck states. It also comes at a time when zinc prices are more than double what they were less than two years ago.

Zinc sold on spot markets for between 80 cents and about $1 per pound for several years before dipping to 70 cents per pound in early 2016. Since, the corrosion-resistant metal commonly used in steel coatings has steadily increased in value to its current spot price of about $1.45 per pound.

For an owner of one of the largest zinc mines on Earth, like NANA, the production bump and price spike add up to a big deal.

It’s also a positive equation for the other 11 Alaska Native regional corporations and the roughly 200 Native village corporations that share in the mine’s revenues.

The Alaska Native Claims Settlement Act mandates Native regional corporations share 70 percent of their timber and subsurface resource revenues with their fellow Native corporations in the state in a system known as 7(i) resource revenue payments.

Much of the 7(i) revenue dispersed amongst the Native corporations has historically come via oil and gas royalties from production on Arctic Slope Regional Corp. holdings on the North Slope and Cook Inlet Region Inc. lands in Southcentral Alaska. NANA also became a significant 7(i) contributor when Red Dog opened in 1989.

However, when oil prices started to drop by roughly half in late 2014, 7(i) revenues fell accordingly as well.

Westlake said Red Dog’s increased revenue of late has largely made up for the recent decline in 7(i) distributions brought on by $50 oil. He noted that the resource development payments are often one of few private cash flows going into rural Alaska communities.

“It’s not coming from the state; it’s not coming from the federal government. It’s coming from another Alaska Native corporation,” Westlake said of the 7(i) funds. “It’s been very important to the state especially with the price of oil down.”

While the oil price depression hit Native corporations through revenue sharing, NANA is among the group of corporations that is heavily invested in the business side of Alaska’s oil and gas, with seven subsidiary firms working on the support services side of the industry in Alaska, Colorado and the Gulf Coast.

About 40 percent of NANA’s revenues come from the oil and gas sector in some fashion, according to company leaders.

That led to NANA absorbing a $109 million loss in 2016 and its business operations company, NANA Development Corp., also had its credit rating downgraded last year as a result of its oil business struggles.

“The good news is that we’re doing better than last year; we’ve taken a number of steps to make that happen,” Westlake said.

NANA shuttered two of its challenged subsidiaries doing work outside Alaska — NANA Pacific and NANA Australia — and has sold other companies working Outside to refocus on its strong federal contracting businesses and in-state operations, according to Westlake. Which companies NANA has divested are still confidential at this point, he added.

“You just got to keep cutting and trimming,” he said, given oil prices and Alaska’s associated recession.

Another positive for NANA on the mining side this year came in April when Teck agreed to a 10-year payment in-lieu of taxes, or PILT, deal with the Northwest Arctic Borough for the severance tax the borough levies on mineral production.

The previous PILT agreement expired in 2015 and when a new deal couldn’t be reached the borough moved to impose a tax that would have increased Teck’s severance payments from $12 million in 2015 to somewhere between $30 million and $40 million. Teck sued, contending the borough was singling out the mine operation, which is a primary economic driver in the region.

The new PILT is about 30 percent larger than the prior agreement, according to Teck.

Westlake said the 10-year deal provides NANA and Teck with greater business stability versus the PILT arrangements that had been made previously.

“We can at least now have some ability to plan, to understand what the tax would be and in the past it was over five years and its seemed like in a few years you had to be thinking about planning for the next round of negotiations,” he said.

Westlake further described the successful PILT negotiations as a “win-win,” not only because it settles a contentious issue for the companies and the local government, but also because the PILT payments go directly to fund services used by NANA shareholders.

“It’s something that we look at as a cooperative exercise because of where the (PILT) benefits go,” he said.

Teck focused long-term

While Red Dog is a current bright spot for NANA, its future is looking equally as positive.

Teck is in the midst of a $110 million upgrade to the mine’s mill, which should increase its production capacity by about 15 percent. That ultimately will help keep zinc production steady despite the declining grade and harder ore in the existing deposit.

Red Dog’s current life is expected to expire in 2031, but with Teck describing the mill upgrade as having “robust economics” in a September release, the company is clearly looking further out with its investment.

Teck also announced in September that the Aktigiruq deposit it has been exploring for several years on state land about 7 miles northwest of the mine could hold up to 150 million tonnes of 16 percent zinc ore with smaller amounts of lead as well.

If the estimates prove out, the Aktigiruq deposit is another world-class zinc discovery near what is already a world-scale zinc mine.

Westlake said the new find could potentially support Red Dog many decades to come.

To date, Red Dog has milled 78 million tonnes of ore of 19 percent zinc and 5 percent lead, according to Teck.

Elwood Brehmer can be reached at [email protected].

10/25/2017 - 10:31am