JOINT MEETING HOUSE RESOURCES STANDING COMMITTEE SENATE RESOURCES STANDING COMMITTEE March 29, 2000 12:55 p.m. HOUSE MEMBERS PRESENT Representative Bill Hudson, Co-Chair Representative Carl Morgan Representative Reggie Joule HOUSE MEMBERS ABSENT Representative Beverly Masek, Co-Chair Representative John Cowdery, Vice Chair Representative John Harris Representative Ramona Barnes Representative Jim Whitaker Representative Mary Kapsner OTHER HOUSE MEMBERS PRESENT Representative Gene Therriault Representative Gail Phillips Representative John Davies Representative Alan Austerman Representative Eldon Mulder SENATE MEMBERS PRESENT Senator Rick Halford, Chairman Senator Pete Kelly Senator Georgianna Lincoln SENATE MEMBERS ABSENT Senator Robin Taylor, Vice Chairman Senator Jerry Mackie Senator Lyda Green Senator Sean Parnell COMMITTEE CALENDAR Cominco Presentation: Red Dog Mine PREVIOUS ACTION No previous action to record. WITNESS REGISTER DOUG HORSWILL, Vice President Environment and Corporate Affairs Cominco Ltd. 5660 B Street Anchorage, AK HELVI SANDVIK, President NANA Development Corporation 1001 East Benson Anchorage, AK JOHN KEY, General Manger Red Dog Operations Cominco Alaska Incorporated Red Dog Mine P.O. Box 1230 Kotzebue, Alaska 99752 ACTION NARRATIVE TAPE 00-26, SIDE A Number 0001 CO-CHAIR HUDSON called the Joint House & Senate Resources Standing Committee meeting to order at 12:55 p.m. Members present at the call to order were Representatives Hudson, Joule, Therriault, Phillips, Davies, Austerman and Mulder and Senators Halford, Pete Kelly and Lincoln. Representative Morgan arrived as the meeting was in progress. Number 0138 DOUG HORSWILL, Vice President, Environment and Corporate Affairs, Cominco Ltd., introduced those present. He informed the committees that he would be discussing Cominco and the zinc market, and the Red Dog Mine in relation to the zinc market. This presentation is entitled, APartnership for Prosperity.@ The primary partnership is between NANA, who owns the resource, and Cominco, who is the money company responsible for development; the state is also a partner through AIDEA (Alaska Industrial Development and Export Authority). Mr. Horswill noted that Cominco is a little less than 100 years old and is primarily focused on zinc. Cominco is the world=s largest zinc mining company and Cominco has the world=s largest ore reserves, which is really Red Dog. Cominco is the fourth largest zinc refining company. MR. HORSWILL turned to the primary product of Red Dog, zinc. He noted that lead is also produced and there is silver in the ore. He explained that the primary use of zinc is to protect steel from rust. Furthermore, brass is a component of zinc. Mr. Horswill pointed out that zinc is essential for human health as it is a micronutrient. Zinc is a product of the future and consumption is fairly widespread. Western Europe is the largest consumer of zinc. The United States makes up 20 percent of the world=s zinc market. The Asian and Latin American markets are the fastest growing markets. MR. HORSWILL said that zinc holds fairly strong growth that is, relatively speaking, tied to the growth of the world economy. For instance, the zinc market trend, from 1980 to 1999 grew at about 2.4 percent, which is about the level of industrial production growth in the western world. In 1997 and 1998 there was the decline in Asia, which impacted the growth of zinc, although it rebounded quickly. He anticipates a higher trend in the future as Third World countries catch up, in terms of construction and infrastructure development. Therefore, Red Dog and its future are based in a strong and growing world market. The Red Dog Mine is the largest zinc mine in the world. The second largest zinc mine in the world is named Century; it is located in Australia. It is yet to be seen whether Century will achieve its target of 500,000 tons of annual production. However, Red Dog is already producing above capacity at 520,000 tons. Number 0603 SENATOR LINCOLN inquired as to the impacts Red Dog would experience if Century comes on board at almost the same level as Red Dog. MR. HORSWILL said he anticipates that in the short term the amount of revenue that Red Dog earns from concentrate sales will be reduced for about a year. He explained that concentrate from the mine is sent to a smelter refinery complex in order to change it into metal and there is a charge at the smelter refinery that is implied. The more concentrate available in the market, the higher the charge and thus as that charge increases, the actual revenues of the mine fall. However, that impact is expected to be short term because with growth at 2.5 to 3 percent, the amount of zinc demand increase is rapid. Therefore, the additional production from Century will be quickly absorbed. Additionally, many major mines are close to the end of their life. Two such mines are owned by Cominco: Polaris, located in the high Arctic, and Kimberly in the Interior of British Columbia. Both of those mines will be going off production by the year 2001/2002. He said that it may take a couple of years for the market to catch up, but it will happen. Number 0725 MR. HORSWILL pointed out that another way to look at the size of an operation of a mine is in the ore reserves in the ground, which really determines the life, size and opportunities of that operation. In this area, Red Dog really shines because in terms of actual reserves and resources in the ground, Red Dog is almost twice the size of Century. In terms of reserves, Mc Arthur River, Australia, is the next largest producing mine, however, it is substantially smaller. Due to exploration in the last year and a half, it is known that Red Dog will be larger in the future. MR. HORSWILL turned to the benefits that Red Dog has brought to Alaska, such as jobs. He informed everyone that Red Dog employs around 380 to 400 people full-time and construction work increases those figures. Cominco=s spending in the state amounts to about $100 million. Therefore, he saw a significant impact as well as an opportunity for growth. He pointed out that over time more of the suppliers are located in Alaska and thus more capable of supplying the necessary things. He then discussed AIDEA and noted that the initial investment for the port was $265 million and Cominco payments amounted to $125 million of which about $5 to $10 million is retained by AIDEA and contributed to the statement. In the end, Cominco will have paid for a port that will be able to be used as a regional facility and infrastructure in Northwest Alaska. Number 0915 HELVI SANDVIK, President, NANA Development Corporation, explained that NANA Development Corporation is the financial owner of NANA Regional Corporation. She announced that she would briefly discuss NANA=s partnership and the impact of Red Dog. She said that Red Dog has allowed the NANA region to move down the path of self sufficiency as it has created job opportunities and allowed NANA to benefit from the royalty stream as well as to look for new business opportunities. For example, NANA service companies receive about $14 million of payments from Cominco for services provided to Red Dog. Through the life of Red Dog, NANA has received approximately $50 million in royalty payments, of which half has been distributed to the other regional and village corporations across the state. Therefore, the financial benefits of Red Dog have been spread across the state. Annually, Red Dog pays about $13 million in wages to residents of the NANA region and another $13 to $14 million in wages are paid to other Alaskans living throughout the state. MS. SANDVIK reiterated that Red Dog has opened the door to other opportunities. She explained, AEarly on the vision was that the infrastructure that would be put into place to support the mine would also be used as a benefit to reduce the cost of living within our region.@ As a Native corporation with a profit objective, NANA sees a larger benefit/obligation to reduce the cost of living. She noted that recently NANA has begun to realize the dream this past year. For example, NANA has been working with Cominco and other partners in order to take advantage of the port and large fuel storage capacity such that it would provide fuel delivery to some of the villages located on rivers where the barges can=t necessarily come up every year. Therefore, NANA has been able to deliver fuel at a lower cost to some of the villages that have historically struggled. Ms. Sandvik acknowledged that there are other opportunities as the current infrastructure will need to modified in the future; the benefit of that goes beyond Red Dog. Therefore, she believes that the state will experience the benefit of Red Dog for many years to come. From NANA=s perspective, Red Dog has had a tremendous start that is moving in the right direction. CHAIRMAN HALFORD inquired as to the current royalty percentage that NANA receives. MS. SANDVIK noted that the royalty percentage varies as it is dependent upon production. In 1999 NANA received about $6.5 million in royalty payments and in accordance with the [7I] sharing provisions of ANCSA (Alaska Native Claims Settlement Act), 50 percent of that was shared with other corporations. MR. KEY, in response to Chairman Halford, stated that would amount to 4.5 percent. Number 1140 JOHN KEY, General Manger, Red Dog Operations, informed everyone that Red Dog Operations is basically, the Red Dog Mine and the operating unit for the DeLong Mountain Transportation System. He pointed out that the Red Dog Mine began production in 1989 and has been on a steady growth pattern since. In 1999 Red Dog produced 1.1 million tons of concentrate of which 940,000 tons was zinc concentrate. Red Dog has demonstrated ten years of growth and in February Cominco and NANA jointly approved an expenditure of $90 to $100 million to increase zinc production at Red Dog. Therefore, Red Dog=s production will increase to 1.3 million tons of concentrate with 1.1 million being zinc concentrate. In regard to mill optimization, Mr. Key specified that $100 million will be spent of which $20-$30 million will be spent in Alaska. This will begin with the construction of two modules in the NANA Cominco Construction Facility in Anchorage and thus production of zinc concentrate will increase to 200,000 tons. Therefore, Red Dog Mine will secure its position as the largest zinc mine in the world. He echoed Mr. Horswill=s testimony in regard to Red Dog having the largest zinc reserves in the world. MR. KEY pointed out that there are a cluster of four ore bodies, which are located immediately around Red Dog. Furthermore, there is the Su-Lik, the original deposit, and the New Discovery, which holds 12 million tons of 20 percent zinc. Winter stopped the drilling and thus in another month efforts will continue in order to determine how large the New Discovery really is. The New Discovery is exciting because it is the first time that high grade zinc has been found away from the main pit. However, the tough part of the New Discovery is that it is 2,000 feet deep. Mr. Key specified that those six ore bodies represent exploration of about 10,000 acres of land. Cominco and NANA together jointly control over 200,000 acres of land with the same geology. Therefore, exploration of the area is just beginning. He informed everyone that about $4 million will be spent on exploration and the exploration program will continue for several more years. In response to Senator Lincoln, Mr. Key specified that New Discovery is six miles from Red Dog and Su-Lik is about 13 miles from Red Dog. MR. KEY turned to the following questions: AWhat=s it going to take to convert this to operations and what=s it going to take to start generating the jobs so badly needed in Northwest Alaska?@ In a word: infrastructure. He pointed out that Cominco, with bonding help from the state and the political will of NANA, was able to put Red Dog in and make it work in adverse conditions; Red Dog is one of a kind. None of the six deposits match Red Dog in terms of grade or accessibility. He expressed the importance of noting that Red Dog has paid its own way and has been a benefit to NANA, the Northwest Arctic Borough, AIDEA and to the state as it has generated jobs and revenue for each. Therefore, he said that a combination of infrastructure and new technology will be necessary to develop those six deposits. MR. KEY stated that the first infrastructure item that needs to be addressed in Northwest Alaska is power. He said, AThe continued duplication of five megawatt diesel generators, which is what we use, is not the long-term answer for power in Northwest Alaska.@ He pointed out that the power demand in Northwest Alaska has not been great enough to justify a power plant. However, in order for the Red Dog District to develop into multiple operations there has to be a stable, economic form of power. Although this region of Alaska is not known for its gas resources, Cominco has been working hard to develop shale gases in this region. He identified another solution for power as coal because 90 miles north of Red Dog, in the Arctic reserve, are some of the best coal reserves in the world. Initially, it is estimated that the Red Dog District=s power consumption in this area would be about 100 megawatts and would easily increase to 250 megawatts in ten years. MR. KEY identified the second requirement necessary for development in Northwest Alaska as the transportation system. He informed everyone that Cominco Alaska has been working since 1967 to develop a deep water port at the DeLong Mountain Transportation System Facility, which would be referred to as the DeLong Mountain Terminal. He reviewed the capacity that it could handle and noted that it would be upgradeable for the exportation of coal. The current barge loading terminal is inefficient and approaching capacity. Therefore, none of the other mines can be developed or brought on line until the port is addressed. He also noted that there is a 54 mile road, which connects the mine to the barge loading terminal. Further development of the other zinc ore bodies or coal will require transportation infrastructure whether it be additional roads or a railroad. MR. KEY moved on to the third requirement necessary for development in Northwest Alaska, which is people. Skilled people have to be available to operate the mines and the power plant. Although importing the skills to Northwest Alaska may be a solution, it is not the right solution for Northwest Alaska to address the needs and unemployment in the area. In order to develop the skills, there must be top-quality education, properly funded technical schools and a university system providing the skills. Mr. Key said that Red Dog realizes that this isn=t solely a state problem and thus Red Dog currently sponsors nine full-time university scholarships. Additionally, there are six job share participants in college and this year there are 18 persons enrolled in the pre- apprenticeships at the Alaska Technical Center. These efforts are beneficial in regard to those employed at Red Dog. In regard to skilled workers, Red Dog has experienced an increase from seven to 32 skilled shareholders over the last ten years. Furthermore, Red Dog=s management staff has grown from six to 22 and total shareholder employment has increased from 156 to 231, which represents 60 percent of Red Dog=s workforce. MR. KEY identified the last requirement necessary for development in Northwest Alaska as permitting. Presently, Alaskan industries= biggest concern is Athe federal government, this a federal government which we feel is committed to blocking further resource development in this state, maintains primacy over two out of three of the prime areas of air, water and waste.@ He pointed out that state primacy allows decisions to be made at a state level, by individuals who understand local conditions, issues and respond to state leadership. Furthermore, industry, under state primacy, has a better chance to see regulators work with regulators on their permits. Other benefits include timeliness and cost effectiveness. Mr. Key stated that the Environmental Protection Agency (EPA) has no flexibility in regard to water permits. The tools the state has are the following: mixing zones, reclassification, site specific criteria and variance. However, Alaska, at present, does not have a certified water permitting program. He noted that AIDEA and the Alaska Department of Fish & Game (ADF&G) have worked hard to ensure that Red Dog receives proper consideration for its natural conditions whenever they do permit certification for EPA. Still, the final decisions remain with EPA. Mr. Key remarked, AWithout the good work of AIDEA, to be quite honest, Red Dog would be a past mine instead of a developing mining district.@ He pointed out that state guidelines and regulatory authority for waste is also important in that Alaska=s reauthorization of its waste program could bring about simpler requirements. Specifically, simpler requirements could occur for monofill landfills and construction demolition waste landfills. Furthermore, Alaska=s waste program would have the additional benefit of the ability to work with the local group concerning tailing impoundments and being exempted from things such as fees based on volume, which are tough on mining companies. In regard to air permitting, that is the only area in which the state has primacy or Aat least we thought they did,@ he remarked. He informed everyone that EPA has recently told the state it can no longer make air decisions as it has for the last 18 years. The Governor and AVEC, the Alaska Village Electric Cooperative, Inc., have been fighting to maintain the state=s rights and Awe@ are standing beside the state in federal court. He said, AUltimately, the state must have the right to determine ... best available control technology, increment consumptions, monitoring, modeling requirements and protocol. An air program regulated by an office in Seattle will mean the end of any significant resource development in Alaska and Alaska would no longer be open for business.@ Number 1710 MR. KEY turned to the his vision of what the next ten to fifteen years could look like in Northwest Alaska. Currently, the Red Dog Mine is connected to the DeLong Mountain Transportation port, which has a barge loading terminal. At present, ships are loaded three miles off shore. He informed everyone that the first change has been to construct a deep water loading facility. The second requirement was the power plant, which if powered with coal would require a transportation system. Therefore, the transportation system will have to connect to the port. He pointed out that if these requirements are filled the New Discovery Mine could be developed as a conventional mine. However, the Hilltop Mine would require new technology, which would allow shipment of straight zinc metal, the finished product not zinc concentrate. The Su-Lik Mine is similar in that it could potentially produce zinc metal with new technology. He noted that the new technology requires huge power consumption as each operation would require about 90 megawatts of power. The power plants would provide power to the facilities, but Athey@ would also look towards taking power and setting an initial grid, which would solve some of the power problems in villages and move toward eliminating the need for assisted power in Northwest Alaska. He specified that this area is going from one mine and a barge loading terminal to five mines, services and a deep water port. This area will move from successfully training and employing 500 people to over 2,000 people. Furthermore, the power grid will solve problems and provide reasonably priced power to Northwest Alaska. Mr. Key emphasized that this is the vision for the next ten to fifteen years; Athese are the things we need help with to get there.@ He noted that there has been continued contact with Senators Murkowski and Stevens in regard to these plans and ideas; both senators have expressed great interest. He offered to answer any questions. Number 1951 SENATOR LINCOLN recalled a visit to Korea with the regional corporations, including NANA Regional Corporation. The Korean government and Korean industries were very interested in a coal mine in the Red Dog District. The only hesitation was in regard to getting the product to a deep water port. She asked if there was another site that Athey@ were looking for a deep water port. MR. KEY replied, ACertainly, I don=t believe it would be North.@ He recalled discussions with those from the Arctic Slope and pointed out that in that area one would have to go about 11 miles off-shore in order to be in deep enough water. Therefore, he guessed that perhaps they were referring to the area near Nome; otherwise he didn=t know. AN UNIDENTIFIED SPEAKER said that the original study looked at Cape Safety on the south side of the Seward Peninsula for a year round deep water port. However, that would require over 700 miles of transportation to move the product to the deep water site. She informed everyone that more recent studies have looked directly off-shore of the Holst Mine (ph) [indisc.] resources and then continuing to evaluate the DeLong Mountain [Transportation] System in trying to utilize Red Dog. SENATOR LINCOLN asked if this was the coal mine that Korea was interested in, which had a lower concentrate of moisture and could be burned more efficiently. MR. KEY indicated that Senator Lincoln was correct. REPRESENTATIVE PHILLIPS inquired as to how far one would have to go out for a deep water port, if Athey@ did tie into the DeLong Mountain [Transportation] System. MR. KEY explained, AThis extension is 2,700 feet of conveyor and then the actual dredge channel ... is about 10,000 feet long; the area that has to be dredged. It=s going from zero to about 20 foot of depth in the dredge.@ He noted that currently, the Corps of Engineers is permitting this, performing environmental studies this summer and checking the work that Red Dog has done. Therefore, it is anticipated that the Corps of Engineers will complete their work and have permits by June 2002. CO-CHAIR HUDSON thanked everyone. SENATOR LINCOLN noted her appreciation of seeing the AMade in Alaska@ symbol as well as the number of employees in Alaska and the money that stays in the state. REPRESENTATIVE JOULE remarked that one of the issues Alaska grapples with is subsistence in regard to development. He said he believes this is an excellent model with respect to how development can be achieved and still take into account the issues that are important to the people who live in the area of the development CO-CHAIR HUDSON agreed with both Senator Lincoln and Representative Joule in that the Red Dog Mine has been an excellent project. He expressed the need for everyone to work together to see that it happens. ADJOURNMENT There being no further business, the Joint House & Senate Resources Committee meeting was adjourned at 1:35 p.m.