Tag Archives: nickel

Mozambique, Michigan, and the SEC Complaint Against Rio Tinto

Chinde_Rusting_boats

Rusting boats at the port of Chinde, where Rio Tinto proposed to barge Riversdale coal via the Zambezi River.

Yesterday, the Securities and Exchange Commission brought a complaint in New York City against Rio Tinto, charging Tom Albanese, the former CEO of Rio Tinto, and Guy Elliott, his Chief Financial Officer, with fraud. According to the complaint, Albanese and Elliott actively misled the Rio Tinto board, audit committee, auditors, and the investing public about their acquisition of the Riversdale coal business in Mozambique in 2011.

The fraud that Albanese and Elliott are accused of perpetrating looks awfully familiar to those who have followed the development of Eagle Mine and the controversy over County Road 595. Having noticed the parallel between Mozambique and Michigan back in 2013, when Tom Albanese was forced to step down, I now have to wonder whether prosecutors will take the company’s representations around the Eagle Mine into account when building their case.

In Mozambique, they told investors, coal would be transported by barge to the Indian Ocean port of Chinde. Although their technical advisors “highlighted the ‘showstopping’ risks” associated with the barging proposals before the acquisition, Albanese and Elliott blundered recklessly ahead. Then eight months later, the Mozambique government denied Rio Tinto a permit to transport the coal by barge down the Zambezi River. Suddenly, the coal business they had acquired for $3.7 billion appeared to be worth a negative $680 million. According to the SEC’s complaint, Albanese and Elliott “concealed and glossed over” the fact that they had no viable haul route for the 30 million tons per year they projected in their business plans, and misled investors as they raised $5.5 billion in US debt offerings.

In that very same period, Rio Tinto was also promoting Eagle Mine to investors and promising economic renewal in the Upper Peninsula, though they had not yet secured a transportation route — a haul route — for Eagle’s sulfide ore. In Michigan, it appears, the company took the same cavalier attitude toward planning and risk that the SEC complaint says got them into trouble in Mozambique.

Way back in 2005, John Cherry, who was then a Kennecott Minerals project manager and is now President and CEO of the Polymet project in Minnesota, characterized Eagle as a “direct ship” operation, “meaning that the rock would not be processed on site, thereby avoiding the storage of highly toxic debris left over, called tailings.” Presumably this is what Michigan DEQ’s Robert McCann had in mind in 2007, when he told The Blade that Kennecott’s permit “would require them to keep the ores underground, put them in covered rail cars, and ship them to Ontario for processing”; the Marquette Monthly told roughly the same story that year, only now there were trucks in the picture: “ore would be transported by truck and rail to a processing site in Ontario.” This seems to have been nothing more than a cover story.

Everything changed in 2008, when Rio Tinto bought the Humboldt Mill. Those permit requirements the DEQ’s McCann touted back in 2005? They were quickly abandoned. Covered rail cars come into the picture only after the ore is crushed, ground into a slurry, floated and rendered into concentrate at Humboldt Mill. A glossy 2010 company publication promoting Eagle Mine includes not a single word about how Rio Tinto and Kennecott plan to travel the 30 kilometers from mine to mill: “Happily, processing of the nickel and copper can take place in Humboldt, around 30 kilometres [sic] away, at a previously abandoned iron ore plant.” By 2011, the company had “considered more than a half dozen transportation routes” from mine to mill, according to a Marquette Mining Journal article by John Pepin published in February of that year, but they still had no viable haul route.

A good prosecutor with a rigorous and thorough discovery process would probably be able to determine whether the evasions and misrepresentations perpetuated on the public over the Eagle Mine haul route also amounted to fraud, or were part of a larger pattern of deliberately misleading statements. It’s clear Rio Tinto never came clean — and perhaps never really had a firm plan — on mine to mill transport at Eagle before it sold the works to Lundin Mining in June of 2013 and decamped. As long as regulators in Michigan continued to be more accommodating than those in Mozambique, the company seems to have been content to let the people of Marquette County fight out the haul route issue among themselves.

Northern Exposure

Investor Bill Foote says he’s “looking at Lundin Mining for exposure to nickel ore,” because he thinks that Vladimir Putin might restrict the supply of nickel to the world. The standoff over the Crimea may send ripples across Lake Superior, where Lundin’s Eagle Mine is scheduled to go into copper and nickel production by the end of 2014. Eagle will be the only nickel mine operating in the United States, at least until the mining boom around Lake Superior really gets underway.

Foote and those considering his advice on nickel exposure should take note that the Eagle project may be on schedule, but still faces a number of obstacles. First, Lundin has not yet managed to build a haul road from mine to mill, and won’t until Marquette County seizes the Hingst property using eminent domain. That could get messy. In the meantime, Lundin will haul its ore around and through the city of Marquette. That will, at the very least, test the patience of its citizens. Oddly enough, Lundin CEO Paul Conibear touted the good roads and transportation routes around the mine from the moment Lundin acquired the Eagle Mine from Rio Tinto. Was he misled by the mining giant? Did he and his team fail to perform due diligence before making the largest acquisition in Lundin’s history? I doubt he would deliberately mislead investors.

It would be worth asking what due diligence was performed when it comes to the technology in place at the Eagle Mine as well. Debasish Mukhopadhyay, a Palo Alto based inventor who has licensed water purification technologies to General Electric, Intel and Aquatech, has brought a lawsuit against Lundin for “willful” infringement of his patented method of reverse osmosis. The trouble goes back to 2011, when Rio Tinto’s Kennecott Minerals awarded Veolia Water Solutions and Technologies a contract for building a wastewater treatment plant at Eagle Mine. Veolia installed its Opus reverse osmosis technology, which Mukhopadhyay claims infringes his patented process. No matter how the dispute will be settled — and the last news story I saw suggested that Debasish Mukhopadhyay wants a jury trial — there is a question whether this was looked into (and, if so, why it was not resolved) before Lundin purchased Eagle from Rio Tinto.

It’s not as if the reverse osmosis process is just some obscure, behind-the-scenes machinery, the stuff that only mining engineers and wastewater treatment geeks worry about. Most people living around Lake Superior have probably heard of reverse osmosis by now. At Eagle and in discussions of the Polymet project in Minnesota, reverse osmosis has been repeatedly promoted as a twenty-first century solution to the risks of sulfide mining. It’s central to what Steve Timmer calls the “miracle of immaculate extraction” and to the mining companies’ claims that they are going to mine responsibly and sustainably — whatever “sustainable” means when it comes to extracting ore from the ground. You’d think someone would have asked some hard questions about the high-profile technology and intellectual property Rio Tinto was selling along with Eagle, or tracked down Mukhopadhyay, who is hardly unknown in water treatment technology circles, if only to solicit his expert opinion on the reverse osmosis process used at the mine. Apparently no one did.

When uranium was detected in the water at Eagle last year, Kristen Mariuzza expressed her confidence “in the system and the methods being used to ensure that only clean water is released back into the environment”; and the Rio Tinto press release in which she was quoted held up reverse osmosis as one of the “two methods are recommended by the EPA for removal of uranium from drinking water.” (Elsewhere, reverse osmosis has been likened to the benign process used to produce bottled water.) There’s no doubt Mariuzza knows her stuff when it comes to reverse osmosis; and it’s surprising she was not familiar with the shady provenance of the Opus technology: after all, she was the Michigan DEQ official who reviewed and signed off on Rio Tinto’s wastewater treatment plans — before she stepped through a revolving door and went to work for Rio Tinto.

There will continue to be litigation around Eagle Mine’s groundwater discharge permit, which comes up for renewal this year. Four plaintiffs — Yellow Dog Watershed Preserve, National Wildlife Federation, Keweenaw Bay Indian Community, and the Huron Mountain Club — have charged that in 2007 the MDEQ approved an application that did not satisfy Part 632 of the Michigan Non-Ferrous Metallic Mining Law. As Mindy Otto cannily notes over at her blog, “it is clear that the 2007 groundwater permit standards set by the MDEQ are not suitable to regulate groundwater quality, and Eagle Mine LLC would likely agree”: that’s why they’ve asked the DEQ, this time around, to relax the water quality standards of the original permit, to accommodate or excuse their exceedances.

Of course it’s possible that Lundin went into this project with eyes wide open, fully aware of the permit litigation it was signing on to, ready to prevail against the patent-holder of its reverse osmosis technology or cover whatever costs a Mukhopadhyay lawsuit might entail, and confident that the Marquette County Road Commission would eventually bend and give the mining company its haul road. Maybe that’s just the cost and the risk of doing business. It’s at least equally possible, of course, that these are unforeseen complications, in which case they suggest a troubling pattern. Investors like Foote might wish to do a little due diligence of their own, lest their investment in Lake Superior mining expose them to a lot more than the ups and downs of the global nickel market.

Update 8 April 2014: Yesterday the US Supreme Court declined to intervene in the dispute over the permitting process, rejecting the Huron Mountain Club’s appeal of a decision by the 6th U.S. Circuit Court of Appeals.

Update 9 April 2014: Debasish Mukhopadhyay has voluntarily withdrawn his patent-infringement lawsuit. “Court documents did not indicate why the suit was dismissed.” In the past week alone, Lundin has cleared two significant legal hurdles. My more general question about due diligence stands.

Update 4 June 2014: Eagle Mine has not yet overcome all legal hurdles. The Michigan Court of Appeals yesterday heard oral arguments over the permitting process in National Wildlife Federation v. Michigan Department of Environmental Quality.  An Eagle Mine press release made all the predictable statements and reassurances, and the local news station, ABC10, dutifully ran it without question or comment. The trial also brought over 500 members of the Keweenaw Bay Indian Community to Lansing — the most attendees ever recorded at a Michigan Court of Appeals hearing, according to Yellow Dog Watershed Preserve.