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Poised for growth.

Potential dangles unfulfilled before Alaska's minerals industry.

Metal prices are down, and proposed regulations continue to darken the horizon, but Alaska's mineral industry has been humming with activity in recent months. At least five major projects -- four gold mines and a new coal mine -- are poised to move into the development stage, and aggressive exploration continues in many areas throughout the state.

Mining has produced some pretty favorable statistics in the last year, and some eyebrow-raising developments as well. Placer miners got a boost when the state started handing out permits to dredge a creek bed within Denali National Park, upping the ante in a brewing conflict with the federal government over navigable waters. Then, upon his return from the environmental summit in Rio de Janiero, Gov. Walter Hickel in June abruptly called a halt to further permits, at least for the time being.

Another interesting twist came when miners made common cause with environmentalists to resolve Alaska's most paralyzing land status dilemma, the mental health lands trust issue. Despite their efforts, that issue remains mired in legal and legislative limbo.

But while land tenure remains a major political concern for the state's mining industry and a practical impediment to new development, statistical indicators note a continuing high level of interest in Alaska's hard-rock and coal resources. According to preliminary data published by the state Division of Geological and Geophysical Surveys in the Department of Natural Resources, exploration expenditures declined by $25.4 million between 1990 and 1991, but both development expenditures and production values increased by healthy margins.

Development expenditures grew by 72 percent in 1991, to $24.6 million. Total value of the state's mineral industry rose from $610.6 million in 1990 to $617 million last year.

Spending Shift. The drop in exploration expenditures reflects both a softening in metal prices worldwide and the movement of projects from the exploratory to the development stage. An increase in gold and other metal prices would be especially welcomed by those companies working remote areas far from the established transportation infrastructure. Among those holdings are the Illinois Creek gold and silver deposit being developed by North Pacific Mining Co. in western Interior Alaska and the Pebble Copper gold/copper deposit being analyzed by Cominco near Lake Iliamna.

Development and production costs are substantially higher at such sites than at tidewater mines or prospects accessible by road or rail. Experts say transportation costs alone -- transporting construction supplies and equipment and hauling out ore -- can run to 20 percent of operating costs in the production phase at some remote mines in Alaska, compared with 4 percent or 5 percent elsewhere. As a result, development of distant sites is much more sensitive to metal price fluctuations.

According to Jerry Booth, vice president of minerals and coal for Cook Inlet Region Inc. and president of subsidiary North Pacific Mining Corp., gold prices have been sliding for the last three years. "It was $370 an ounce at the end of last year. We thought it would stabilize but it did just the opposite. It's $340 an ounce now," he says.

Booth notes that prices reflect continued dumping of gold in the market by former communist countries, as well as persistent recessionary pressures. "The price of gold is in the dumps," he adds. "We need prices to be near last year's and stay there for a while." Booth explains that price stability is important because staging and preparation for production activities takes a year.

Gold mines moving closer to development include the Alaska-Juneau (A-J) and Kensington mines near Juneau and the Fort Knox deposit near Fairbanks. Intensive permitting work continues for both the Juneau mines, and unless prices fall dramatically or major political or environmental opposition erects new barriers, they will likely move forward.

Fort Knox moved from the exploration to development phase and was purchased from Fairbanks Gold Ltd. of Vancouver by Amax Gold Inc. of Golden, Colo., earlier this year. Because of its large size -- 3.2 million ounces of gold -- and large anticipated production -- 300,000 to 350,000 ounces of gold per year for 10 or more years -- development of this deposit has a higher threshold of tolerance for price fluctuations than do smaller or more remote mines.

Another mine ready to advance into development is the Wishbone Hill coal mine. The site near Palmer is expected to be able to produce more than a million tons of coal annually for about 15 years.

First, however, Alaska's mental health lands issue must be resolved. Exploration and development of the site have been halted since issuance of a July 1990 court injunction affecting lands designated to pay for mental health services.

Laying Claim. Despite the optimism reflected in progress on several projects in Alaska, mining companies still are concerned about unresolved land status and regulatory issues that they feel impede mineral development. Although miners still hope to defeat pending congressional measures to institute mineral fees and royalties on federal lands, a number of industry members concede the mining law changes have substantial political momentum.

On the other hand, while rental assessments that became effective in 1989 and exact a fee on claims have resulted in a net reduction of mining claims on state lands, the decline appears to have leveled off. According to Sam Dunaway, acting director of the Alaska Department of Natural Resources' Division of Mining, many claims were dropped, but many new ones were filed.

"Total claims are down a bit, but we still see fairly large companies staking large blocks of claims. If anything, it has caused claims that are redundant, that they really don't think are worth anything, to be dropped," he says.

Currently about 34,000 active claims exist on state lands, while claims on federal lands in Alaska number roughly 24,500.

In addition to stability in claims, Dunaway says another positive development on state lands has been increased interest in mining leases by the big mining companies. Leasing affords more flexibility in developing an efficient exploration program. Compared to a claim, a lease allows more control over operations and enables a tenant to respond more quickly to changing circumstances, such as price increases.

The chief difference between a claim and a lease is that a leaseholder receives a commitment from the state that no other mineral entry will take place on the affected acreage, giving the leaseholder exclusive rights to conduct exploratory and development work. A claim holder receives no such assurance. In fact, the state expressly refuses to become involved in property disputes among claim holders.

To pursue the Illinois Creek project, North Pacific Mining Corp. secured two leases for a total of 62,479 acres. "It's a big step for a company that's testing the waters. And it's long-term, not year to year," says Dunaway.

According to North Pacific's Booth, the firm is waiting for better gold prices to advance to the development stage. When the decision is made to mobilize for development, North Pacific will need a summer to barge materials up the Yukon River and the fall and winter seasons to move from the staging area to the mine site 22 miles from the river.

Current estimates slate recoverable gold at Illinois Creek at 500,000 ounces. Booth hopes continued efforts to delineate the Illinois Creek deposit can boost reserve estimates, thus reducing the anticipated cost of production per ounce.

"We did all of our (original) economics on a small deposit. If our program this year reveals a larger resource, we'll look at the numbers again. We're not planning on putting this thing on the shelf," he adds. North Pacific expects to hire 20 to 50 seasonal workers and 8 to 10 year-round employees from Galena and other nearby river communities.

Locked Lands. Despite the advantages afforded to mining ventures that acquire leases on state lands, the procedure seems to offer no relief from the seemingly endless nightmare of the mental health lands trust issue, says Bruce Bouley, manager for Cominco Alaska Exploration in Anchorage. "We have as aggressive an exploration program as we've ever had, but we're tremendously concerned," he says.

The trust, created before statehood to generate revenues for mental health services, was dissolved by the state in 1978 with a promise to annually appropriate 1.5 percent of the state's annual income from land and resources for mental health programs. Mental health services advocates sued the state in 1982 for its failure to keep that promise.

Last year the legislature enacted a framework, known as Chapter 66, to resolve the issue, setting the stage for settlement negotiations within court-established guidelines. A settlement was reached in April, but involved only three of the four groups that originally sued the state.

In the meantime, environmental groups last fall sued to intervene in the case, challenging the legislative framework for the settlement. The mental health group that didn't sign onto the settlement offered its own solution: several amendments to Chapter 66.

Bob Stiles, project manager for the Diamond Chuitna Coal Project, an effort to mine Southcentral's Beluga coal that is backed by a group of individual and corporate investors, has actively represented the mineral industry in efforts to put the issue to rest. He believes that the amendments offered hope until legislators started playing politics unrelated to the proposal's merits.

"For all intents and purposes, we're at the same place today that we were a year ago," Stiles complains. "The amendment package had something in it for everybody, but it got caught in a political whipsaw. It creates a lot of uncertainty."

Stiles says the amendments are easy to understand and would remove the cloud of uncertainty, including the pall cast by the environmentalists' suit to intervene. If the amendments are passed, the intervenors say they'll withdraw their challenge.

"We could not find anyone or any group that was opposed to these amendments. There were some groups that didn't support them, but there wasn't anybody that opposed them. It was a really unusual coalition," Stiles says. He recalls that in strategy sessions with representatives from the Sierra Club Legal Defense Fund and Alaska Center for the Environment, the parties joked that if they could just get through the mental health lands issue, they could get back to suing each other.

Stiles says, "We developed some respect for some of the environmental groups. When they made a commitment, they'd stand behind it. I'd like to think they developed some respect for the industry. This may have set the stage for some things we can work together on in the future."

Cliff Eames, issues director for the Alaska Center for the Environment, agrees that unprecedented alliance was "an extremely positive experience." He expects the group, which also includes a significant number of mental health advocates, to continue pushing for solution of the mental health lands trust issue in the next legislative session.

Paralyzed Prospects. Mining industry proponents note that as long as the mental health lands issue remains unresolved, projects such as those managed by Stiles face barriers that can be even more frustrating than those posed by regulation. Stiles and others point out that when mining companies, financiers, potential investors and prospective customers hear of such problems, they often go looking elsewhere for development and investment opportunities.

"What happens when you have a cloud over tenure or the ability to get tenure is Alaska gets de-selected for those mineral exploration programs. That's money that goes away and never comes back," Stiles says. He notes that for coal buyers seeking long-term contracts, land status problems cast doubt on the reliability of supplies.

"They're deciding this year for coal delivery in 1995-96," Stiles says. "When Alaska gets de-selected because of a cloud over tenure, that's a sale that you don't make. That's a piece of market share that you lose forever. Somebody else gets that niche. It's an onerous extra burden on you from a marketing standpoint."

What makes the mental health lands issue even more frustrating for coal operators such as Diamond Chuitna and Wishbone Hill is that near-term coal market projections identify increased demand and opportunities for sales. According to Stiles, by the year 2010, Alaska realistically could be shipping 10 million to 15 million tons of coal annually to traditional and newly-developed foreign and domestic markets, based on a conservative market share of 5 percent to 10 percent of current growth in demand.

He adds, "The markets look good, both in terms of demand and price. But when you're playing the market share game, perceptions are 90 percent of the battle. The thing we need to have happen is to have the tenure cloud cleared up as soon as possible."

Notes Dave Germer of McKinley Mining Consultants, a contractor for Wishbone Hill operator Idemitsu Kosan of Japan, "All our expectations are pending resolution of the mental health lands issue."

North Pacific's Booth adds, "There's so much mineral land that's tied to mental health lands. Alaska mining is a $600 million a year industry, but we should be in the $3.5 billion range."

He notes that other sectors of the state's mineral industry are seeing positive developments, though. For example, he points out that all major gold companies are now doing work in Alaska for the first time since the 1970s, and interest has increased in base-metal mining.

"There's a lot of interest in Alaska because it's the last place in North America that we can come to without a lot of regulation," says Booth. "We've got enough regulation to protect the environment, but we're seeing overregulation in the Lower 48."

Booth says development of the Red Dog zinc mine near Kotzebue proves what the industry has always claimed: that mining can provide a substantial regional economic stimulus, replacing state and federal transfer payments with solid year-round wages. He warns, though, that with no serious exploration programs on federal lands in Alaska, remaining doubts about the status of state lands could have a chilling effect on future exploration, resulting in the same overseas exodus occurring in the oil industry.

"It's encouraging, but there could be a lot more going on," Booth says. "We've got a lot of things going against us. We're not getting the big money here that we'd like to."
COPYRIGHT 1992 Alaska Business Publishing Company, Inc.
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Title Annotation:Special Section: Slow Bore: A Tale of Obstacle Courses, Bright Prospects & High Hopes; Alaska's mining industry
Author:Richardson, Jeffrey
Publication:Alaska Business Monthly
Article Type:Cover Story
Date:Sep 1, 1992
Previous Article:Seeking cures for health care employment.
Next Article:Small mines struggle to survive.

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