SB 99-AIDEA: DEVELOPMENT LOANS  3:23:59 PM CHAIR OLSON announced that the first order of business would be CS FOR SENATE BILL NO. 99(L&C), "An Act relating to the Alaska Industrial Development and Export Authority revolving fund; limiting the use of the Alaska Industrial Development and Export Authority sustainable energy transmission and supply development fund for certain loans and loan guarantees and allowing the development fund to be used as security for a bond guarantee; amending the definition of 'qualified energy development'; and authorizing the Alaska Industrial Development and Export Authority to issue bonds to finance the infrastructure and construction costs of the Bokan-Dotson Ridge rare earth element project and the Niblack project." 3:24:07 PM JESSE LOGAN, Staff, Representative Lesil McGuire, Alaska State Legislature, stated that SB 99 corrects a few ambiguities in the existing statutes for the sustainable energy transmission and supply development program (SETS) within the Alaska Industrial Development & Export Authority (AIDEA). Primarily, the bill would clarify a few technical aspects of the SETS program which was created by the 27th Legislature. He explained that some ambiguity arises with the one-third capital cost limitation as it relates to loans, loan guarantees, and bond guarantees. He referred to page 2, lines 18-36 [Section 2], which relates to whether the loan guarantee limitation works in conjunction as a one-third limitation on the loans or was independent of that limitation. Additionally, the statutes were vague pertaining to AIDEA's authority to use the fund as security for a bond guarantee. He said AIDEA has received requests from project components and banks to utilize the fund in which AIDEA needed the authority to issue a bond guarantee for more than one-third of the capital project cost. This bill would clarify those ambiguities, he explained. Additionally, referring to the bottom of the bill, AIDEA is granted bonding authority on two projects, the rare earth elements at the Bokan Dotson Ridge site for $145 million and the Niblack mine site for $125 million. CHAIR OLSON commented that the fiscal note is zero. 3:25:47 PM REPRESENTATIVE JOSEPHSON referred to [page 3], Section 5-6, of SB 99. He asked for a description of the location of the rare earth mines. He said that the sites are both located on the southeastern corner of Prince of Wales Island, including a description of tailings moved to Gravina Island. MR. LOGAN deferred to representatives of the projects. 3:26:41 PM JAMES SULLIVAN, Director, Southeast Alaska Conservation Council (SEACC), expressed concern about the two projects being added, although SEACC does not have any issue with the original bill. Overall, SB 99 is a good bill; however, the way the proposed committee substitute [(CS) for SB 99 (L&C)] is worded to include the two mining projects and to allow AIDEA to either own or finance these creates a huge conflict of interest for the state. He explained that the state will be regulating the projects - the watchdog of the group - but will also be the owner. This conflict of interest has not been addressed by any of the committees thus far, he said. These projects also put the state "on the hook" for a combined $300 million, yet the bill does not have a referral to the House or Senate Finance Committees. He said SEACC finds this troubling. He cautioned that this does not suggest that AIDEA doesn't perform its "due diligence" since AIDEA has created a wonderful track record over the years. He reported the financing range could be anywhere from zero to $270 million. He said this as an unfortunate step since it places the state in ownership of an operation that should be regulated. 3:29:19 PM REPRESENTATIVE JOSEPHSON related his understanding that AIDEA loans money. MR. SULLIVAN agreed. REPRESENTATIVE JOSEPHSON asked for further clarification on the concern. He asked whether his concern stemmed from the state loaning money to itself. MR. SULLIVAN said that the conflict arises because the state could potentially own a project it must regulate. He noted that many mining operations in the state have done well and have been profitable; however, other examples in mining have not gone so well and the state has been "left with the bag" for the cleanup. He pointed out the Tulsequah Chief Mine near the Taku River [in British Columbia]. He reported that this mine is draining acid right now, has been for years, and will continue to do so for years to come. In response to a question, he acknowledged that the Tulsequah Chief mine was not an AIDEA project; however, he noted it is a mining project. He offered his belief that it puts the state in a difficult position. He would like the state to avoid possible problems in the years to come, which is why he is speaking out against it. 3:30:59 PM REPRESENTATIVE JOSEPHSON asked to set aside the issue of the conflict. He said that his cursory review of Bokan Dotson Ridge rare earth element project and the Niblack mine project is that these mines are underground mines, and one has a small footprint and, in the other, tailings would be moved to Gravina Island for processing. He asked whether SEACC has any concerns about the health of Prince of Wales Island from this or if the project is relatively benign. MR. SULLIVAN responded that he does not have a "crystal ball" and he does not know what situations will arise. He said that SEACC believes any type of mining in Alaska should undergo a rigorous permitting process, which should be constantly reviewed to ensure that it is operating in the way it is supposed to operate. In the event that problems do arise and the state has invested millions in the project, but another agency within the state has the regulatory responsibility to fine them or stop them, it creates troubling conflicts. He acknowledged he's raising hypothetical circumstances, but he asked how the Department of Natural Resources or the Department of Environmental Conservation [would regulate the activity]. He further acknowledged that he was unsure the mines will be financed so, again, this is hypothetical and could be years away from any decision. Still, it would be very troubling if problems did arise, noting that the Bokan-Dotson mine has uranium, and many issues potentially exist and should be constantly monitored. This isn't about being pro-mining or anti-mining but about taking care of the land appropriately that the state is entrusted to care for, he said. 3:33:28 PM REPRESENTATIVE SADDLER asked whether Tulsequah Chief Mine near the Taku River is in the U.S. MR. SULLIVAN answered no. REPRESENTATIVE SADDLER noted his comment that Alaska mining should go through a rigorous permitting process. He asked whether the Pebble Project should go through a rigorous state permitting process. MR. SULLIVAN answered yes, if it ever gets that far. 3:34:16 PM REPRESENTATIVE JOSEPHSON asked for a sense of what the project would look like. He said he has been to Ketchikan and has been all over Revillagigedo Island, but he does not have a sense of what this project will look like when it's done. KEN COLLISON, Chief Executive Officer, Ucore Rare Metals, Inc., explained that the Bokan-Dotson Ridge mine will be an underground mine with a small footprint and all the tailings will be put back underground. He reiterated that the tailings will not be on the surface at closure. He explained that the rare earth mine ore is acid consuming and the waste is acid consuming so acid-rock drainage issues don't exist. He said that basically what a person would see at the site would be a decline that goes into the ground with a 15-foot square opening, and several openings will also rise vertically for ventilation. Additionally, some buildings will be built, including a relatively small mill, an office building, and a camp. He pointed out a waste rock storage area for the mine would exist for the approximately 2.5 inch rock, which may make good aggregate; however, this is not yet known. In further response to a question, he agreed the mine would be in Alaska on the south end of Prince of Wales Island. 3:35:47 PM REPRESENTATIVE SADDLER asked for the impact of the financial prospects of the development of the Bokan-Dotson Ridge mine if the lending authority is authorized under the bill. MR. COLLISON answered that the mine would create approximately 200 fulltime jobs, most of which would come from Prince of Wales Island or Ketchikan. The typical mining job in the state pays approximately $80,000-$100,000 per year. These are good jobs that can support families. Additionally, the mine will create some indirect jobs in the area. 3:36:23 PM REPRESENTATIVE SADDLER asked whether he could identify where the product would be used. MR. COLLISON said that this project will put in a separation plant, which is new technology used to recover platinum and pluatium from catalysts. The mine is proposed to produce 16 rare-earth elements, including dysprosium, terbium, and europium. He said key uses of these elements are through a contract with the U.S. Department of Defense since high- technology weaponry requires rare earth minerals. Further, rare earth minerals are used for electric cars, hybrid cars, wind turbines, and solar panels. Currently, over 95 percent of the heavy rare earth minerals consumed on the earth are produced in China. He quantified that the Bokan-Dotson Ridge mine is anticipated to produce over 50 percent of the U.S. needs for dysproseum and about 10 times what the DOD will need. He characterized these minerals as unique and the advantage of the small size needed is why these minerals are used in motors, generators, and electric or hybrid cars. 3:37:44 PM REPRESENTATIVE CHENAULT asked for the life expectancy of the mine. MR. COLLISON answered that the mine expectancy is currently 11 years, but he thinks that once the mining operation reaches 10 years, it will stop drilling since adding five more years wouldn't justify the mine. He said, "Miners like to mine. The trick is to get it going." He pointed out that Red Dog and Greens Creek mines have lasted two or three times what they were originally planned, yet they each have ore bodies that have not yet been mined. 3:38:19 PM REPRESENTATIVE JOSEPHSON asked whether he had any sense whether processing minerals on Gravina Island is good for the environment. MR. COLLISON suggested that the Gravina Island is what the Niblack mine is proposing. The Bokan-Dotson Ridge mine project will process the tailings onsite. REPRESENTATIVE JOSEPHSON asked whether he could describe any local hire efforts for the 200 anticipated jobs. MR. COLLISON answered that the mine has begun efforts in Juneau at the University of Alaska Southeast and with the vocational training in Ketchikan and Craig. He said, "Local hire is one of my pets. It's the right thing to do for the area, but it's also the right thing to do for the mine." He related that he has built three mines thus far so this mine will be his fourth. He said that one mine, a small open pit mine in Nova Scotia, ran with two people in the pit who were not local, the blaster and the shovel operator, since the pit shovel was worth $5 million. He said two people were "from away" since they hadn't lived there for three generations. He said the rest were local people and the mine had very low turnover with a really good safety record. Additionally, he said, it is cheaper and better to run the mine for the community [to use local hire]. 3:40:28 PM PATRICK SMITH, President & Chief Executive Officer, Heatherdale Resources, Ltd. stated that his company has ownership of the Niblack [copper-gold-zinc-silver] project in Southeast Alaska. 3:41:16 PM REPRESENTATIVE JOSEPHSON asked for clarification on the processing at Gravina Island and why the decision was made to move the minerals across the water. MR. SMITH explained the Niblack Mine is a similar underground mine for the Niblack as for the Ucore project. The Niblack Mine would produce similar production rates as with 1,500 to 2,000 tons per day, similar to Greens Creek. He explained that when the mine investigated ways to improve the overall operation, the Niblack considered barging the material to an offsite location for the milling. He related that they looked at quite a few options in Alaska. The mine needs power capacity since the Niblack site mine would need to generate its own power through diesel or other means. The hydroelectric power capacity in Ketchikan was a very big "plus" with the infrastructure located at the Gravina Island industrial complex with an existing cable across the Tongass Narrows. Additionally, the workforce can live there, commute, and their children can go to school in Ketchikan. A third advantage would be the hydroelectric power usage so it would also provide cleaner energy for the mill site, which consumes a lot more energy than the mine itself. The Gravina Island processing location is a "win-win-win" situation since it provides local jobs and the tradeoff for barging materials looks good, he said. 3:43:30 PM REPRESENTATIVE JOSEPHSON asked whether the mine would be using chemicals on Prince of Wales Island. MR. SMITH said he couldn't say chemicals wouldn't be used on Prince of Wales Island, which is where the mining would take place; however, a stockpile would go on a pad, be loaded on a barge, and then offloaded at Gravina Island where the processing would take place. In the case with the Niblack mine, a large percentage of the material would be back-loaded to Niblack and put back underground. 3:44:25 PM REPRESENTATIVE SADDLER asked how the AIDEA funding fit into the mining project financing. MR. SMITH reported that the Bokan-Dotson Ridge mine is in the advanced stage of exploration. The company has conducted substantial engineering scoping work, and based on the production schedule, anticipates capital expenditures of approximately $200 million for mine, mill, and infrastructure. The project has been considering different scenarios so he characterized the figures as "ball park" figures. 3:45:15 PM CHAIR OLSON asked whether the original business model is similar to what is happening in Skagway in which the ore is being brought down from Whitehorse. MR. SMITH answered yes; the Skagway terminal project is another AIDEA project. 3:45:35 PM REPRESENTATIVE SADDLER asked for further clarification on the rest of the financing. MR. SMITH answered that the [Bokan-Dotson Ridge] project must still undergo pre-feasibility and a feasibility studies, and it must meet all the objectives internally. At that point, the financing becomes part of a larger group of potential financing, including AIDEA, or equity and debt financing elsewhere. He commented that AIDEA would be part of this process. One of the advantages of SB 99 is that the mining project wouldn't get caught up in a timeframe in which the mine is ready for production but must wait for legislative approval for AIDEA financing. This bill would remove that delay, he said. 3:46:35 PM REPRESENTATIVE SADDLER asked how critical the AIDEA financing is to the project. MR. SMITH answered that the AIDEA financing shows tremendous state support. He related that the project has a Memorandum of Understanding (MOU) with AIDEA, a MOU with the Ketchikan Gateway Borough, and will work over the next 14-18 months on how to collaborate with AIDEA and the Gravina Island Industrial site to make it a workable situation. 3:47:15 PM REPRESENTATIVE JOSEPHSON asked whether Heatherdale Resources Ltd. would take a similar position as Mr. Collison with Ucore's Bokan-Dotson project that it is beneficial to hire Alaskans and if it is something Ucore would plan to do. MR. SMITH said absolutely. Ucore has been very successful thus far over the exploration part of this project. He reported that since 2009, Ucore has spent $37 million on the project and have engaged with over 60 vendors in Southeast Alaska in the Ketchikan area and Prince of Wales Island. It has a partnership with the Prince of Wales Tribal Enterprise Consortium, LLC (POWTEC) that provides hiring and substantial logistical support, which he characterized as being "extremely good." 3:48:18 PM CHAIR OLSON asked if the lifetime of the Ucore mine project is projected at 10 years. MR. SMITH answered that it will depend on the production rate. Currently, Ucore has been projecting a 10 to 14-year mine life. He said he has every confidence that this mine will continue once it is up and running. 3:48:42 PM TED LEONARD, Executive Director, Alaska Industrial Development & Export Authority (AIDEA), Department of Commerce, Community, & Economic Development, in response to Chair Olson, agreed that AIDEA has approximately 29 years of a relationship with the mining industry through funding infrastructure for ports and facilities. For example, AIDEA funded the tailings facility for Fort Knox through a conduit revenue bond in the late 1990s. 3:49:47 PM REPRESENTATIVE JOSEPHSON asked whether he could respond to the concern about the conflict of the state being an owner and a regulator. MR. LEONARD answered that AIDEA is a political subdivision of the state as an independent corporation so it is not a department. Thus, he considered that a major firewall exists between AIDEA and its investments and any of the regulatory agencies. He reported that AIDEA's balance sheet rolls up into the state, but it is AIDEA's balance sheet. He recalled instances in which AIDEA has entered into agreements with the Department of Environmental Conservation for regulation of the Skagway Ore Terminal. Additionally, regulatory decisions have been made on the Red Dog Mine that affected AIDEA, but AIDEA would never attempt to influence a regulatory agency, which is not acceptable or probably legal. 3:51:16 PM CHAIR OLSON asked whether AIDEA also has financed roads to mines. MR. LEONARD answered that yes; AIDEA owns the port and road to the Red Dog mine. 3:51:29 PM REPRESENTATIVE CHENAULT asked for the balance in the [Sustainable Energy Transmission and Supply Development Fund (SETS)]. MR. LEONARD answered that the SETS fund balance is approximately $67.5 million, and AIDEA just requested transfer of the $125 million appropriated from passage of SB 23, but AIDEA has not yet received those funds. REPRESENTATIVE CHENAULT recalled the legislature is also considering a bill that would remove all the funding from the SETS fund. MR. LEONARD answered yes; he acknowledged that it would wipe out original SETS funding. 3:52:15 PM REPRESENTATIVE CHENAULT noted that AIDEA has loaned two amounts to natural gas entities in Fairbanks: $15 million to Fairbanks Natural Gas (FNG) for the initial build-out for pipes for the Fairbanks distribution system and $18.1 million to Interior Natural Gas utility to fund initial development work on the distribution system that surrounds the FNG. He said he realized 20-year negotiated loans. He asked for clarification on the effect of the potential $67 million transfer from the SETS fund to fulfill either of these projects. MR. LEONARD answered that the bill would not affect the loan obligations for these two loans since they would be derived from the second $125 million. He acknowledged two loans, one to the FNG for $15 million for the initial build out in 2014 for pipes for its system. The other loan would start the development of the second service area that somewhat surrounds the FNG area. MR. LEONARD related his understanding that the potential capital project [that would deplete the SETS fund] would stop AIDEA's ability to fund other projects for renewable energy, such as wind farm and other projects. He summarized that the SETS fund would become a holding fund for funding the [Interior Energy Project] IEP and any future projects that the legislature will fund, but it would not be an ongoing fund, per se. 3:54:36 PM REPRESENTATIVE CHENAULT referred to current SETS projects, including the FNG's proposed liquefaction plant in Port McKenzie. He asked for an update on the project with respect to other natural gas projects. MR. LEONARD explained that AIDEA is in preliminary pre- feasibility to see if the project will be feasible and whether the project would be using Cook Inlet gas. He said that thus far there hasn't been any true work on that, although AIDEA is in the process of considering a reimbursement agreement. He pointed out that would be in conjunction with working with the Alaska Gas Development Corporation (AGDC) and any other activities. In response to a question, he clarified that IEP refers to the Interior Energy Project funded from SB 23 for trucking natural gas to Fairbanks and to build out the distribution center. 3:56:25 PM DAN BOCKHORST, Manager, Ketchikan Gateway Borough (KGB), explained that the Ketchikan Gateway Borough assembly has endorsed SB 99. He thinks Mr. Leonard, Mr. Collison, and Mr. Smith have effectively addressed the issues raised by Mr. Sullivan. He reiterated that the KGB endorses SB 99. He urged committee members to support the bill. 3:57:19 PM CHAIR OLSON, after first determining no one else wished to testify, closed public testimony on SB 99. REPRESENTATIVE CHENAULT offered his belief that this would provide legislative intent to approve two of the projects. He asked whether the Niblack project is on Gravina Island. MR. SMITH said that the Niblack project is located on southern Prince of Wales Island. The Gravina Island industrial complex would be the site for the milling. REPRESENTATIVE CHENAULT related his understanding that there would be two sites for the project. REPRESENTATIVE REINBOLD moved to report CSSB 99(L&C) out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, CSSB 99(L&C) was reported from the House Labor and Commerce Standing Committee.