Yukonomist: More twists and turns than a mining road

Yukonomist Keith Halliday

In James Bond thrillers, to launch a nuclear missile it always takes two people in the missile silo to turn keys simultaneously.

In the world of mining regulation, which is also pretty thrilling if your money or job is on the line, it usually takes more. Plus, unlike in a missile silo, you have YESAB recommending what the key turners should do, plus First Nations governments, environmental groups, unions and mining lobbyists shouting advice or lobbing lawsuits.

In the case of BMC Minerals’ Kudz Ze Kayah project, the number of keyholders is three: the territorial government, the federal Natural Resources department and the federal Fisheries department.

As reported in the News last week, when it came time to turn the three keys for Kudz Ze Kayah, only one keyholder did so: the Yukon government. Unlike the movies, however, this did not mean London was vaporized or the missile silo disappeared under a Soviet thermonuclear blast.

No, James Bond now has weeks, months or years to hold more meetings with the keyholders and try again.

The path of the Kudz Ze Kayah project from idea to operating mine has had more twists and turns than a mining road. Cominco pioneered the property in the early 1990s, and had a construction permit by 1998, but the project did not proceed. Then, Expatriate inked a deal to add Kudz Ze Kayah to its nearby Wolverine project, but this promising development also failed to materialize.

Fast-forward to 2015, when BMC acquired Kudz Ze Kayah. 2016 saw technical and environmental studies. In March 2017, the company kicked off the regulatory process.

By 2019, a feasibility study was completed and the Ross River Dena Council completed its own environmental assessment.

In November 2020, after 42 months, the company received news that YESAB finished its process and recommended the keyholders turn those keys.

We don’t know if champagne was uncorked at BMC corporate headquarters or if they merely exchanged cautiously optimistic emojis on Zoom sessions, but the mood was probably upbeat.

Then Natural Resources and Fisheries wrote back saying they were keeping their keys in their pockets. Unlike YESAB and the Yukon government, they have more questions. Some were about the measures planned to mitigate the mine’s negative effects. Others centred on how YESAB considered First Nations interests and rights.

The federal letter also said that the Liard First Nation does not support the YESAB recommendation and that the Ross River Dena Council has concerns about specific terms and conditions, particularly around the project’s impact on caribou.

It’s worth noting that the federal letter cites “insufficient explanation” on mitigation measures and First Nations issues, rather than outright opposition. One wonders how, after 42 months, two of the keyholders could surprise everyone by having insufficient explanation. Did YESAB not gather the right information? Was the Yukon government really not aware of federal concerns? Did the federal agencies bring up new questions late in the process? Or did something else happen?

In any case, month 43 of the process grinds on.

This situation raises some classic questions about Yukon regulatory processes. Everyone agrees that regulators need to protect our environment and that First Nations interests should be at the heart of the process. But if the process takes too long and is too unpredictable, investors will choose to put their money into projects in other jurisdictions.

Sometimes people talk about this as if it were a regulatory race to the bottom, with miners threatening to move to the Congo. But note that the Fraser Institute’s Annual Survey of Mining Companies in 2019 identified the top four most attractive jurisdictions for mining investment in rich, high-regulation countries: Western Australia, Finland, Nevada and Alaska.

The Yukon was 23rd, behind places such as Ontario and B.C.

The owners of Kudz Ze Kayah now have to decide whether to plough more money into the project in the hope of a more successful key-turn at some point in the future.

The business case in the project’s 2019 feasibility study sheds some interesting light on the question. This estimated pre-production capital costs would be US$381 million for a nine-year mine life. The Net Present Value of the project after estimated revenues, investments, costs and clean-up was US$527 million.

This worked out to an Internal Rate of Return of 39.6 per cent. This rate is a key figure, since investors can compare it to other investment opportunities.

It may strike the casual observer as high. Indeed, it’s about 100 times higher than you are getting from your savings account. But your savings account doesn’t face risk from multiple keyholders, lawsuits, cost overruns or unexpected collapses in mineral prices.

Some may look at this figure and think that it means the mining company has a very profitable project and it can easily tolerate a longer and more expensive approval process. Others might look at the same number and remark that it seems like a fair number when your returns are at the hazard of an unpredictable regulatory process.

If the latter is true, it suggests that only projects with the richest geology are worth pursuing in the Yukon. That is, you might invest in a project with a 20 per cent rate in Alaska, but require the geology to deliver a 40 per cent rate to greenlight a Yukon project. Such thinking leads to mining being a small part of the Yukon economy in the long run, with a small number of small but lucrative mines.

The good news is that BMC is signalling sustained interest in the Yukon. They plan to continue their exploration work this year and to file responses to federal questions in time for another key-turn opportunity in May.

But even then, Kudz Ze Kayah won’t be out of the buckbrush and into the alpine. It will still need to raise more investment capital, respond to First Nation concerns and start applying for specific permits. This thriller has more episodes to come.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He is a Ma Murray award-winner for best columnist and received the bronze for Outstanding Columnist in the 2019 Canadian Community Newspaper Awards.

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