The $24-million power deal between Sherwood Copper and Yukon Energy Corporation may be critically wounded, but it isn’t dead.
“It’s always worth another run at it,” said Energy Corp. president David Morrison at a news conference Wednesday.
On Monday, the Yukon Utilities Board rejected the proposed deal between YEC and Sherwood — owners of the Minto mine near Pelly Crossing — and called for the two to revise and re-submit it before May 9.
Energy critics roundly applauded the decision as one that protects electrical customers.
But it has caused Sherwood to dig in its heels and is forcing Morrison to scramble not only to save the deal but also his larger dream of connecting the Yukon’s two grids between Carmacks and Stewart Crossing.
That project has been proposed for years to prepare for anticipated electrical demand increases and is estimated to cost more than $30 million.
But without a major customer or major government investments the line isn’t economical.
On Tuesday, Sherwood president Stephen Quin issued a terse news release stating the utility board’s proposed revisions to the power agreement are “unworkable.”
The company will “consider whether it will continue to pursue a grid power option,” according to Quin’s release, but it is prepared to go into copper production at Minto using diesel generators.
Before the power deal was proposed, Minto secured about $80 million in bank loans on a business feasibility study that used the more expensive diesels for electricity.
Therefore, the company can play hardball for grid power — despite acknowledging it will save the mine about $4 million per year.
Morrison knows he’s got a difficult task ahead.
“You need a couple of days to step back, think about it for a minute or two, put some heads together and see if there isn’t a way to resolve some of this,” he said.
“I don’t know what those are, and I don’t know if we’re going to get these guys there. But from YEC’s point of view, we are going to give it another try and see what we can salvage here.”
A quick fix is not going to be easy given the revisions the board is demanding and Sherwood’s recalcitrance.
Quin isn’t even in North America at the moment.
Reached through e-mail, he refused to comment on the deal and said he has spoken to Morrison over e-mail about the potential — “if any” — of meeting in future.
After a brief meeting with other Sherwood officials on Tuesday, Morrison said he hasn’t received a list of concerns.
But he believes they will center on the “certainty” the rejected deal contained, and which the board revisions curbed.
Much of the agreement the two reached after six months of negotiations was aimed at providing both Sherwood and Yukon electrical customers with that certainty, he said.
Sherwood wanted a fixed price for electricity, as well as a set price for its contribution for the spur-line connecting it to the grid and the $20-million grid extension from Carmacks to Pelly.
The power price came out to 10 cents per kilowatt hour, and the contribution was set at $7.2 million over four years for the main line and about $3.8 million over seven years for the connection for the spur.
But the utilities board only approved the electricity price on an “interim” basis until a full pricing study is completed, and balked at approving YEC’s offer to loan Sherwood so much money for the infrastructure.
It also rejected the fixed prices and demanded that if YEC’s costs to build the lines go up, so too must Sherwood’s contributions.
Morrison expects these to be major sticking points, but hopes to save the agreement because there’s a lot at stake, he said.
“We have surplus assets. The ratepayers are paying for all of the assets we own and getting about 60 per cent of the benefit because we can’t sell the surplus power,” he said.
“We were just looking for a customer.”
Negotiations on the agreement came midway through preparations to build the grid connection without any substantial customers along it, said Morrison.
The government was asked if they would pay for the line because it wasn’t economical to build otherwise, he said.
“Then Minto came along and said, ‘Hey, we need some power.’”
That changed the way the project was pursued, he said.
The goal is to bring more electrical capacity into the system without putting huge burdens on Yukon customers, he explained.
Selling power to a mine is the cheapest and easiest way to do that.
For six months, the two sides hammered out a deal that satisfied YEC’s goals, he said.
Those included having the company agree to pay a large chunk of YEC’s costs to build the main transmission line from Carmacks to Pelly.
“We never thought they’d give us $7.2 million as a contribution. So we were really happy with the number they agreed to,” he said.
But the Utilities board has agreed with interveners that YEC financing Sherwood’s contributions for several years was unacceptable.
Pressed on whether an equal amount of certainty for Yukoners was actually in the deal, Morrison pointed to the ‘take-or-pay’ provisions.
Those meant Sherwood either had to buy $24 million in electricity by 2016 or give that amount to YEC.
And he noted the Energy Corp. hired mining experts from Colorado to do an independent study of the Minto mine and Sherwood’s financing.
“To me, we protected the Yukon ratepayers. But that obviously hasn’t swayed the utilities board completely,” he said.
“We’ve never had a take or pay contract in this territory with a mine.”
The Utilities board also rejected YEC’s offer in the deal to purchase Sherwood’s four high-speed generators for $2.24 million because a case wasn’t made that they are needed, reads the decision.
Morrison isn’t batting an eye on the diesels.
“We already think we need them. Minto could sell them to us or 10 other people,” he said. “You can’t buy diesels today.”
The clock is ticking for a new deal.
The Utilities board has given YEC and Sherwood until May 9 to make revisions because the upcoming review of the Carmacks to Stewart Crossing transmission project is scheduled for May 15.
The deadline will not be met as Quin is travelling in Europe, said Morrison.
“We’re going to meet with Sherwood next week, but that doesn’t mean we’re going to do a deal next week,” he said.
If the deal isn’t fixed before May 15, the YUB ‘part three’ review of the extension project doesn’t necessarily die, he explained.
He wants to tell the board the deal may be salvageable and the hearing should go ahead, he said.
“Can I guarantee the board next week that I have a document? No. But if I believe I have the ability of still making a deal with Minto, I would want the part three to go ahead,” he said.
“If I don’t think I can get a deal, yeah, if we don’t have any customer, the point of building the line is gone.”
And if the deal dies, both Sherwood and the Yukon will lose out, said Morrison.
“Sherwood has said they’ll turn their diesels on. I really think that if people don’t think they’re serious, they should re-think that,” he said.
It has been estimated Sherwood’s diesels will emit about 20,000 tonnes of CO2 into the atmosphere annually.
“They look at this deal as a business deal,” said Morrison.
“I do think at some point they’ll say, ‘We’re not interested in doing this deal if it’s not one that benefits us,’” he said.
“My view of the world is that Yukon Energy is going to take another run at convincing them there’s still a deal here.”