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Yukonomist: Three questions on Yukon Zinc and China

The case heard recently in Yukon Supreme Court is particularly troubling

What would you like the Yukon government to spend $35.5 million on? Perhaps more nurses at the hospital? Some green power plants to fight climate change? Affordable housing? More front-line teachers?

Well, never mind. Judging from Yukon Zinc’s bankruptcy case, it looks like the government will be spending it cleaning up another abandoned mine.

This case is particularly troubling.

First, it’s recent. The mine opened in 2012. Unlike Faro, we can’t blame this one on 1960s-era mining techniques and long-dead mining executives and regulators.

Second, it’s on the Yukon’s tab. Devolution meant gaining authority over our own resources. It also meant that we would be on the hook for mining mishaps authorized by the Yukon government. The Yukon government is already going into deeper debt each fiscal year, and a $35.5 million hit will have to come out of the hide of other public programs.

Third, the mine’s ultimate owners have deep pockets and don’t seem to be contributing to the clean up.

Yukon Zinc was acquired by new owners in 2008, with China’s Jinduicheng Molybdenum Group (JDC) playing a lead role. According to Yukon Zinc’s website, JDC “is located in China’s northwest Shaanxi province and is one of the largest molybdenum companies in the world, ranking first in Asia and third in the world. JDC has the biggest open pit Molybdenum mine in Asia with a reserve life of more than a hundred years. JDC is a publicly traded state owned mining enterprise with strong support from both Chinese state and provincial governments.”

The new owners invested significantly to open the mine in 2012. It then ran for three years, reportedly losing more than $100 million each year. In March 2015, it sought protection from creditors. Ultimately, Yukon and Outside businesses recovered 11 cents for each dollar Yukon Zinc owed them.

As part of this deal, Yukon Zinc kept ownership of the mine but had to top up its reclamation security deposit to $10.6 million. Now, conditions at the closed mine have deteriorated. The Yukon government calculates $35.5 million is actually required. Most of the diesel generators on-site no longer function and the receiver’s court report features extensive photos of damaged and wheel-less vehicles with “Danger” tags that have been locked down by workers compensation officials.

Meanwhile, Yukon Zinc and the Yukon government are in court. The Yukon government is trying to get its claim to $35.5 million put ahead of other claims in the bankruptcy. Yukon Zinc is opposed, and is also arguing the Yukon government can’t go after Yukon Zinc’s 2,495 mineral claims.

There is theoretically a chance that someone else will buy the mine, a deal with the bonus feature that you get to top up the $25 million required for the security deposit. This seems unlikely. Yukoners are on the hook. The mine is best described as a variation of the Pottery Barn rule: “They broke it, you own it.”

All of this raises three big questions.

Question 1: What has the Yukon government done to get China to backstop the clean up? While JDC and the Chinese government are within their legal rights to use Canadian bankruptcy law to avoid further liabilities from their costly Yukon adventure, that does not mean they can escape responsibility completely.

It is hard to picture a big American or European mining multinational risking the reputational damage involved in letting one of their subsidiaries leave a big unresolved environmental mess on the front pages.

Consider the situation in a reverse, if a Canadian state-owned company made a mess in China. Picture Yukon Energy getting a contract to build a power plant for a remote mine in Shaanxi province, then spilling $35.5 million worth of diesel in a Chinese river.

You get one guess as to whether the Chinese government would let Yukon Energy’s Chinese subsidiary file for bankruptcy while its executives flew home to Whitehorse and washed their hands of the mess.

Obviously, China is a global economic superpower and the Yukon is not. But that doesn’t mean our best option is to quietly drop the matter and pretend China wasn’t involved. We’re talking about a lead-zinc mine upstream of iconic rivers, wildlife habitats and human communities.

Has the Yukon government raised the matter with China? In public? Have we asked federal diplomats in Beijing to raise it? Have we shared our experience with other countries where JDC and other Chinese state-owned mining companies are developing plans?

There could be consequences for publicizing China’s role in the debacle. They might not invest in future Yukon mining projects. However, if Yukon Zinc is a sign of how Chinese state-owned companies operate, how worried should we be? China might also discourage Chinese tourists from visiting the Yukon. That would be a cost. But, again, is that worth suffering a lead-zinc environmental incident and a $35.5 million hole in the budget?

Question 2: Does the Yukon government have a credible process in place to make sure future security deposits are both sufficient and collected before a mine opens?

Mining security deposits are a classic political challenge. As a mine moves towards opening, ministers are excited to take credit, the business community is keen on contracts and voters crave jobs. It is all too easy for a mining company to push for lower or delayed security deposits, dropping unsubtle hints that the project might not go ahead without some “flexibility” from the Yukon government.

Think of the original $10.6 million security deposit. You can’t even do a minor highway upgrade project around Whitehorse for such a measly sum. This was supposed to provide for the clean-up of a lead-zinc mine in the middle of nowhere?

We probably need to have an independent body define the security deposit required for future mines. If a mine can’t afford to post the deposit, then it shouldn’t open.

Question 3: Does the Department of Energy, Mines and Resources have the resources and capabilities to intervene quickly and forcefully when things go off track?

Yukon Zinc has been a learning experience following devolution and the Yukon’s new mining responsibilities. Have we had an objective post-mortem on the period from closure in 2015 to when the Yukon government assumed responsibility for the site in 2018? Could something have been done differently that would have reduced the $35.5 million number? The fact that the mine is now flooded, with contaminated water coming out of the mine portal, suggests the answer.

Whether or not mistakes were made in the past, we need to know this to make sure the Yukon government is ready for the next mining project.

Yukoners deserve answers to these questions. If they don’t get them, it will leave the mining industry and Yukon government with an image problem that will haunt future mine proposals. The next abandoned mine could cost a lot more than $35.5 million.

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.