Dig through the legalese of the proposed power deal between Yukon Energy and Sherwood Copper and you find kilowatts, copper and barges of cash.
Yukon Energy wants to sell Sherwood’s Minto mine surplus electricity it currently has no customers for. In the process, it will justify the cost of connecting the territory’s two electrical grids between Carmacks and Stewart Crossing.
And Sherwood sees an opportunity to get cheaper electricity that will wring even more money from its copper deposit.
Each side has something the other wants, and both describe the still-unapproved deal as a mutual “win-win.”
But who really profits?
Sherwood and the Crown-owned YEC say the mining company and Yukon ratepayers benefit equally.
But others say Sherwood is getting a sweeter deal than Yukoners, and they question why YEC released the proposed deal just before Christmas.
“We think we’re contributing too much, and I’m sure Yukon Energy feels they’re contributing too much,” says Sherwood president Stephen Quinn from the company’s headquarters in Vancouver.
“If everybody is equally unhappy it’s probably a fair deal,” he says.
The terms of the proposed pact were released on December 21, following nine months of negotiations.
If approved, YEC will build a 138-kilovolt-transmission line from Carmacks to Pelly Crossing, and a 25-35-kilovolt-extension spur line to the Minto mine.
If all goes according to the utility’s playbook, construction of the project — estimated at $24 million — will begin in 2007 with electricity arriving at the mine by 2008.
Once connected to the grid, Minto will purchase electricity at a new “firm mine rate” of approximately 10 cents per kilowatt hour.
Currently, household customers pay 10.45 cents per kilowatt hour, though the utility provides discounted power to people who use less than 1,000 kilowatt hours a month. Those customers pay 9.86 cents per kilowatt hour.
The mine is expected to use about 32.5-gigawatt hours of electricity per year, worth about $3.25 million.
In exchange for the power lines and cheap electricity, Sherwood is providing YEC with several incentives.
The company will immediately pay $7.2-million towards YEC’s costs to build the $20-million extension between Carmacks and Pelly Crossing.
After receiving power for seven years, the company will pay the entire cost of the $3.8-million spur line to the mine — though for the first four years it will only make interest payments on that advance.
By next year, Sherwood must commit to continue buying at least 30 gigawatt-hours of electricity per year until 2016, or the company must repay interest and principal on the estimated $11 million it will owe YEC. That money would have to be paid back by 2011.
That power alone is worth $24 million to the territory. If the company fails to buy that power, it still must pay for it. And it must pay back all the money it owes for the transmission lines.
That has the potential to bring electricity prices down for everyone, says Quinn.
“What Yukon Energy and Yukon ratepayers are getting is a guaranteed minimum $24 million that they would not otherwise get,” says Quinn. “There’s no customers for that power — it’s just going over the dam.”
When waterways are swollen with melting ice and snow in the spring and summer, YEC makes a lot of electricity at its two hydroelectric stations in Whitehorse and Mayo.
But beyond what Yukon residents and businesses currently consume, there is nobody to sell the surplus power to because the territory’s grid is not connected to the Outside.
“This is a win-win for everybody,” says Quinn. “We get lower power costs, so we benefit; Yukon Energy gets to sell power that it’s currently throwing away, which means there’s more revenue for Yukon Energy for no incremental costs.
“There’s a grid built, a big chunk of which we pay for; and because there’s more power sales, hopefully power rates go down for everybody, because the cost of generating the power is the same,” he says.
But many critics fear Sherwood is coming out on top in the deal, and that YEC is putting too much risk on the shoulders of ratepayers.
Mines in the Yukon have often shut down and pull out of the territory when the price of the metal they mine drops unexpectedly, says Liberal energy critic Gary McRobb.
“Typically what happens is the mines, after they connect to the grid — if they’re running into financial difficulties — they tend to discontinue paying their power bills,” says McRobb.
“That racks up a sizeable bill.”
In the past, mines have threatened to shut down unless YEC cut them a deal on outstanding bills, he says.
Despite that checkered history, Sherwood’s deal with YEC doesn’t require the company to provide a cash bond as security against it walking away.
The proposed agreement isn’t a make-or-break factor for the mine. Minto will produce copper with or without YEC electricity.
And critics say Yukoners are giving the mine a lot of money without asking for much in return.
There is “no evidence of Minto taking on any risk in the proposed customer-contribution scenario,” reads a response to the deal by the Yukon Utility Consumers’ Group.
“Why isn’t Minto being asked to contribute something upfront that would be equivalent to the immediate savings they will incur by switching from diesel generation to a YEC supply?”
Nothing prevents Sherwood from limiting its early payments under the take-or-pay deal, “then abandoning operations prior to the requirement to pay the remainder of the $24 million,” adds Energy watchdog Peter Percival.
But YEC does have security from Sherwood in several different ways, says Quinn.
If the mine goes broke, YEC gets to sell its assets after bank lenders recover their debts.
And under normal business circumstances, Minto should be “very profitable regardless of what happens to commodity prices,” he says.
About 100 million pounds — or 65 per cent of Minto’s entire estimated copper production — has been pre-sold to customers in Asia at a fixed price, says Quinn.
That means the mine isn’t as vulnerable to the ebb and flow of copper prices as a typical mine, he says.
“Our cost of operation is 57 cents per pound,” he says. “Our minimum price we’ve for-sold at is $2, and the maximum is $3.17.”
Connecting to the electrical grid reduces costs by about 10 cents per pound, worth about $4 million in pure profits for Minto each year.
However, increased profits translate into more taxes paid to the Yukon government, Quinn quickly adds.
Still, Minto’s healthy financial outlook means the proposed power deal will fatten an already fat bank account.
But Quinn says the deal boils down to risks taken for goals sought.
If YEC wants to link the Yukon’s two grids, this deal allows it to minimize costs and maximize profits, he says.
Sherwood, on the other hand, could refuse any proposed deal and go into copper production using diesel-generated electricity.
“We don’t have to have grid power: the feasibility assumes we’ll have diesel for the entire mine life,” he says.
“Essentially governments and utilities have to decide whether they want to generate more profit. You don’t get that for nothing.”
McRobb is concerned YEC is acting for interests other than Yukon ratepayers.
The draft deal was released on December 21, and that fits into a pattern for the utility, he says.
“This happens almost every year. You can circle December 22 on a calendar and expect some kind of filing from the power company that is going to consume the time of interveners over the holiday season, and therefore result in a compromised public review.
“On an issue as important as this, we’ve got to ensure there’s a proper process.”
The finalized deal is expected by the end of January.
In the deal, YEC says it is committed to full hearings on the agreement.