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UPDATE: The GNWT’s case for buying Mactung

UPDATE: The GNWT’s case for buying Mactung

You have to spend money to not lose money
By Herb Mathisen
Nov 19
2015

No, the GNWT isn’t looking to annex pieces of the Yukon, nor is it seeking riches by getting into the mining game. According to Mark Warren, deputy minister of the GNWT’s Department of Lands, the government’s purchase of North American Tungsten’s undeveloped Mactung property is all about fulfilling obligations to the Government of Canada following the transfer of the defunct Cantung mine to the feds. Basically, it’s the GNWT doing Canada a solid after passing Cantung and its clean-up costs back to the feds.

I’ll explain. Or at least try to.

This spring, North American Tungsten was operating the Cantung mine at a loss and it owed a lot of people a lot of money—around $80 million in total. That included the GNWT, which was owed $21.7 million in securities for environmental liabilities under Cantung’s water licence. (Those securities totalled $11.6 million until June, when an amendment to the mine’s water licence was approved and the securities required more than doubled to $27.9 million. Before that amendment, North American Tungsten had paid the GNWT $6.2 million in cash, with the remaining $5.4 million in the form of a promissory note against Mactung—using the property’s value as collateral)

The company went into creditor protection and its assets were eventually put up for sale through a court process. Potential buyers had the option to bid on Cantung exclusively, Mactung exclusively or both assets together. Warren says no one bid on the combo or on Cantung, but there were some suitors for the attractive, undeveloped Mactung property. This meant that Cantung had essentially become an abandoned mine.

Provisions in the devolution agreement allowed the GNWT to transfer responsibility for Cantung—and its future clean-up costs—back to the feds. “In the case of the Cantung mine, it operated for 40-odd years under Canada’s responsibility, therefore why should the taxpayers of the NWT be responsible for the clean-up that that generated?” says Warren. The $6.2 million in cash, along with responsibility for the rest of those outstanding securities, went to the feds too.

But there’s always a catch. A wrinkle in the court sales process shuffled the priority of those would be paid by any sale of Mactung: instead of the government being first in line to get back the money it was owed, the lawyers, the court-appointed monitor and all other court costs would move to the front of the line and get settled first. That outstanding $21.7 million once owed to the GNWT—now held by Canada—would come second.

But why did the GNWT buy Mactung? Well, included as part of the terms that allowed the GNWT to hand Cantung back to the feds is the legal obligation for the GNWT to do the aforementioned solid for Canada. (“I’m not sure I would use the terminology ‘a solid’ but that’s exactly right,” notes Warren.) Here’s how Warren explains it in his words: “If we are to return a property to Canada, we have to do whatever we can to maximize the value of the securities that we’re giving back to Canada.”

According to Warren, the GNWT and the Canadian government found the bids for Mactung “disappointing”—though he can’t get into details due to confidentiality agreements that were signed. “In today’s market, we thought that [property] should have resulted in higher bids. And we also think today’s market is close to the bottom of tungsten prices.” So the GNWT agreed to offer up to $4.5 million for Mactung, which would pay off the costs associated with the court process. This gives the government the mineral rights to Mactung, with the idea that it would sell the property once—and again, if—market conditions improve. If the GNWT were able to sell the property, then the money it spent to buy Mactung would be recouped first, and then the $21.7 million in outstanding securities now on the feds’ books would start getting paid off. If the GNWT made more than that through the sale of Mactung, the next creditors in line would get paid off. “A lot of people seem to think we’re doing this just to have a big windfall on Mactung. No, it’s to cover the environmental obligations of either government,” says Warren. If the GNWT hadn’t put up the money for Mactung, the governments may not have gotten anything from the Mactung sale.

The GNWT won’t incur any lease renewal costs or be required to do any exploration work on the Mactung property, which sits primarily on the Yukon side of the Yukon-NWT border, says Warren. He's careful to add there’s also an appeals process for the sale, so there’s a chance the deal doesn’t go through. And there are no plans yet on how to proceed with a potential sale of Mactung; that will be up to the next government to figure that out.

 

The Mactung Purchase: GNWT as Junior Miner?

Making sense of the territorial government’s foray into the mining biz

The new owner of the Mactung tungsten property won’t have a scapegoat to blame if it can’t put its mine into production. The oft-repeated complaints about the lack of infrastructure, a long regulatory process or even local opposition to development are hard to make when the new owner is actually in charge of building new roads, funding regulatory boards and has the final authority on most land-use decisions in the territory.

The Government of the Northwest Territories’ announcement today that it bought Mactung had us at Up Here scratching our heads. Not only because it’s the territorial government’s first step into the exploration industry, but also due to the timing of the news. The territorial election is in its final week and, while they’re campaigning, ministers relinquish their cabinet positions (in every respect other than in title) so they can’t have any undue influence on the electorate’s poll booth decisions. Any new spending is only approved by special warrant—that means, in exceptional circumstances. And this apparently constitutes such a case.

North American Tungsten, owner of the Cantung mine and the Mactung property, was granted creditor protection in June as it fell deep into debt, partly due to mill upgrades made at Cantung during a crash in tungsten prices. The company had also been ordered to increase its security deposit from $11 million to more than $30 million. And to do that within 90 days. The Cantung mine—located on the NWT side of the Yukon-NWT border, accessible only through the Yukon—closed its doors in October, its employees were laid off and the B.C. Supreme Court appointed a monitor to sell the company’s assets to pay off its creditors. Bids were submitted and creditors—those owed money—were able to approve or nix any deal. The GNWT was one of those creditors and it felt the bids were too low, so it stepped in and offered a maximum of $4.5 million for Mactung. According to cabinet spokesperson Andrew Livingstone, this decision was made by cabinet and was taken during the election period because the B.C. Supreme Court would not wait until after the election.

The GNWT then transferred responsibility for Cantung—along with the money it had collected from North American Tungsten for its security deposit—to the federal government, meaning the Government of Canada is now on the hook for Cantung’s clean-up. The territorial government was able to do this due to a clause in the devolution agreement, allowing a five-year window to transfer closed mines back to the feds. (UPDATE: In order to transfer Cantung to the feds, the GNWT was required to purchase Mactung as a condition, says Livingstone.)

But the GNWT will hold onto Mactung—located primarily on the Yukon side of the NWT-Yukon border—and look to flip it once (if?) tungsten prices recover. (Tungsten is currently at a ten-year low.)

It is still unclear how long the GNWT intends to hang onto this property, what it will cost to complete the baseline work on the property required to maintain a mineral rights lease, and then what sort of process it would use to sell Mactung. (And, you guessed it—we can’t ask ministers about any of this because they can’t talk about government business during an election.)

Government investment in mining properties isn’t unheard of in Canada. The Quebec government, for one, put up $220 million through an investment arm into Stornoway Diamond’s Renard mine. But this is a first for the GNWT and it will be interesting to see whether this sets a precedent for investment elsewhere.

We reached out to the feds, to the GNWT lands department and to the court-appointed monitor Thursday afternoon, because there are so many questions to ask, but we haven’t heard back yet.

What are the feds planning to do with Cantung and the tens of millions of dollars of infrastructure in place at a mine that was churning out tungsten just months ago? What would the consequences have been if the GNWT hadn’t swept in and picked up North American Tungsten’s properties? We’ll let you know when we find out.

(Story updated Nov. 20 11:30 a.m.)