by Steve Timmer

Nov 26, 2013, 3:00 PM

Pathological liars

Glencore/Xstrata? Never heard of ’em!

In a great case of anticipatory whining, the PR wizards at PolyMet decided to get out in front of what they figured would be a negative story. And they created an even more negative one on their own.

PolyMet was concerned about being tied to its largest shareholder, Glencore/Xstrata — probably the biggest blackguard in the mining industry, and maybe in mining history — in a story that ran on KARE – 11 TV.

So the wizards wrote a press release that said: Hey! We’re minding our own business. Glencore/Xstrata? Never heard of ’em. Who’s Glencore? Here’s a bit from that release:

Unfortunately, based on questions Ms. Volpe  [the KARE reporter] asked in interviews with us and others and on the promotional teasers the television station is running for tonight’s story (also scheduled for 10 p.m.), we worry that the series may lose its balance and fairness.

By all indications, tonight’s story will attempt to raise doubts about PolyMet’s stewardship of the environment by drawing links, through our largest shareholder, to events that are unrelated and irrelevant to our project.

* * *

The stock of publicly held companies such as PolyMet Mining is traded on the open market; companies have no control over who buys shares or the volume purchased. Shareholders and the boards they elect do not control or manage the day-to-day operations of companies. They leave this responsibility to the CEOs and presidents and their management teams.

The press release, available at the link, never once mentions Glencore/Xstrata.

Yes, sadly, kids, the KARE story might tie the virginal PolyMet to Glencore/Xstrata, the union-busting, earth-despoiling mining behemoth.

This would be a regrettable veering into the truth.

PolyMet already has an agreement with Glencore/Xstrata to purchase the ore mined at Hoyt Lakes, a so called “offtake” agreement. Brad Moore, the executive president of PolyMet, said so in a presentation he made in September of this year at a Canada Minnesota Business Council breakfast (I was there). Moreover, PolyMet has said the same thing in press releases to potential investors.

Glencore/Xstrata did not simply acquire its shares on the open market, in spite of what PolyMet says. PolyMet is really a “junior mining company” to Glencore. That means, in the vernacular, that it is Glencore’s lap dog. You don’t need to believe me. But believe Edison Investment Research. Since PolyMet is a customer of Edison, you know it is reliable. Here’s what it says about the minding-its-own-business Polymet:

Glencore Xstrata relationship – a strategic advantage

PolyMet’s relationship with Glencore is a major strategic plus for PolyMet. Glencore back stopped PolyMet’s recent rights offering, has made a series of equity investments following the initial convertible debt investment and has signed an offtake agreement. We believe Glencore will be very helpful to PolyMet when PolyMet is raising money to fund the NorthMet project. To date Glencore has invested $140m in PolyMet.

Since 31 October 2008 PolyMet and Glencore have entered into a series of financial transactions and negotiated a marketing agreement whereby Glencore Xstrata committed to purchase all of PolyMet’s production of concentrates, metal or intermediate products on market terms at the time of delivery, for at least the first five years of production. This will involve shipping copper concentrate to Japanese smelters [yes, we dig it up, send the ore concentrate to Japan, and live with the pollution; swell] and PolyMet being paid on an LME basis on the date of delivery.

As part of the 2013 financing, PolyMet and Glencore entered into a corporate governance agreement. From 1 January 2014, as long as Glencore holds 10% or more of PolyMet’s shares, Glencore has the right, but not the obligation, to designate at least one director and not more than the number of directors proportionate to Glencore’s fully diluted ownership of PolyMet. Glencore is not to exceed 49% of PolyMet’s board members.

Glencore currently owns 78.7m shares or 28.6% of PolyMet’s issued shares. It also owns US$25m of floating-rate secured debentures due 20 September 2014, or US$31m including capitalised interest [meaning that the interest tab is currently 6 million dollars]. Including capitalised interest as of 31 July 2013, these debentures are exchangeable at US$1.292 per share into 24.18m shares of PolyMet when PolyMet receives the permits necessary to start construction of NorthMet. Glencore also holds warrants to purchase 6.46m common shares at US$1.30 per share at any time until 31 December 2015, subject to mandatory exercise if the 20-day value weighted average price of PolyMet common shares is equal to or or greater than 150% of the exercise price and PolyMet provides notice to Glencore that it has received environmental permits. If Glencore exercised all its rights and obligations under these agreements, it would own 109.4m common shares of PolyMet, representing 33.9% on a fully-diluted basis.

In addition to the “dilution” that would occur if Glencore exercised its options and warrants is the dilution from the exercise of  stock options of people like public affairs VP Brad Moore and the rest of the bunch who wrote the press release, if the deal is a go.

But this isn’t all of it, by any means. PolyMet mouthpieces like Brad Moore have told the story far and wide (as, for example, at the CMBC breakfast that I mentioned above) that a small copper mine in Wisconsin on the Flambeau River was closed successfully and didn’t pollute, and that it is a perfect exemplar for what PolyMet is going to do. The proposed PolyMet mine(s) are orders of magnitude larger and hardly provide a direct comparison.

But never mind. Brad Moore is flat wrong:

After a victory in a recent lawsuit, mining advocates have been pointing to the Flambeau mine in Wisconsin as an example of the ability of the copper-mining industry to protect water.

But is the water really unpolluted?

The federal court of appeals did not breach this issue, deciding instead it would be unfair to hold Flambeau to the legal standards because the Wisconsin Department of Natural Resources had told the company it did not need a permit for its discharge.

The stream is clearly polluted; it contains levels of copper and zinc that exceed the acute toxicity standards for aquatic life and is included on the state’s “impaired waters” list. The district court looked at the evidence and found that the pollution came from Flambeau’s discharge. The court of appeals did not revisit these facts; it simply held that no lawsuit could be brought to enforce the standards.

So much for help from the EPA or the Wisconsin equivalent. Would Minnesota do better?

If PolyMet will serially lie about things that are ineffably easy to check, what about when they aren’t? PolyMet obviously cannot be trusted.

The virginal PolyMet’s problem is that credibility is really like virginity: easy to lose (for both sexes; don’t bother to write in) and impossible to recover.