SMR October 2019

2019 OCTOBER IN REVIEW

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Vol:108.No:10

1912-2

019

UNITED STATES STEEL STOCK STRUCK A NEW 1-YEAR LOW P 06

HALF OF U.S. COAL FROM 16 MINES P 12

INSIDE STATISTICS

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SKILLINGS MINING REVIEW. 350 W. Venice Ave. #1184. Venice, Florida 34284

OCTOBER 2019 VOL.108. NO.10

...From the Editorial Desk

T

he

Minnesota Supreme Court has refused to hear a request

for review from environmental groups concerning the

PolyMet mining project. Twin Cities-based Minnesota Center for Environmental Advocacy and Friends of the Boundary Waters Wilderness petitioned the state court to reconsider a Court of Appeals decision that declared the environmental review for the Skillings Mining Review publishes comprehensive information on global mining, iron ore markets and critical industry issues via our monthly magazine, weekly E-newsletter, annual mining directory and real time website.

PUBLISHER CHARLES PITTS chas.pitts@skillings.net MANAGING EDITOR JOHN EDWARD john.edward@cfxnetwork.com SENIOR SALES MANAGER STAN SALMI stan.salmi@skillings.net SALES REPRESENTATIVE, CANADA RON SANDERSON ron.sanderson@cfxnetwork.com CONTRIBUTING EDITORS SARAH HART KATIE SIMS DAVID WILSON CAROLINE DAVIS ART DIRECTOR MO SHINE mo.shine@cfxnetwork.com CIRCULATION & SUBSCRIPTIONS Subscriptions@skillings.net SALES & MARKETING CHRISTINE MARIE advertising@skillings.net

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project which was prepared by the Minnesota DNR. In a news release Tuesday, PolyMet president and CEO Jon Cherry stated, "This action effectively shuts out any residual challenges to the country linked to the environmental inspection and makes it possible for us to sharpen our focus on funding, building and operating Minnesota's initial copper-nickel-precious metals mine."

In a decision Tuesday, the court refused that the environmental groups' request for the DNR to prepare a supplemental Environmental Impact Statement. PolyMet intends to run the first copper-nickel mine of Minnesota.

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October 2019 SKILLINGS MINING REVIEW | 3

IN THIS ISSUE

United States Steel Stock Struck a New 1-Year Low at $10.16 P 06

P 12

Twin Metals states it's going to use union labor P 11 to construct mine

HALF OF U.S. COAL FROM 16 MINES

COVERSTORY

DNR issues decision on requests to

United States Steel Stock Struck a

revise PolyMet tailings basin permits.......................20

New 1-Year Low at $10.16.........................................06

IRON RANGE REGION

COAL

State’s largest newspaper urges

More coal company are filing for Bankruptcy..........05

Tim Walz to halt work on Twin Metals......................10

Almost of half of U.S. coal from 16 mines...............12

Twin Metals states it's going to use

Coal Mine Reclamation Green

union labor to construct mine...................................11

Project in Canada.......................................................14

MINING FINANCE

Navajo Nation's very delicate bet on coal.................16

Why Cleveland-Cliffs Lost Steam Following

IRON ORE

A Revenue Growth Of 50 Over

PolyMet releases pre-mining financial reports.........08

The Last 2 Years.........................................................18

Rio Tinto sees iron-ore market

STEEL

staying stabilized through 2019................................15

U.S. Steel companies: Is Buffett’s

China iron ore picks-up, but set for its first

Prophesy happening..................................................13

monthly decline in nine..............................................17

Statistics.............................................................. 22/23

4 | SKILLINGS MINING REVIEW October 2019

Mining People............................................................ 21

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More coal company are filing for Bankruptcy

O

ur condolences go out to all the

Eastern Kentucky house-

holds impacted by another

major coal firm filing for bankruptcy.

The

Cambrian. This B lack Mining LLC filed

most recent is

follows the insolvency of jewel.

Blackhawk Chapter 11 court protection in Delaware, according to Bloomberg.

for

With each filing, countless families are affected in one way or another.

In the instance of Blackjewel news repor ts indicate paychecks have dropped, prompting protests in Harlan County which have received global media attention. Cambrian employs more than 600 people, based on news

accounts that suggest, however, that the mines have been kept available and the company is continuing to pay its employees as they proceed with their filing. Tens of thousands of jobs throughout Kentucky, West Virginia and other coal-producing states have been threatened by bankruptcy. It is a sad time for the industry. But it does appear that the president has done what he could although promises have not materialized. The government just recently put out an arrangement looking to prolong the use of older coal-fired power plants as the industry has gone through a transformative development. We've got some basic ideas on all this. Although, our utmost

concern is our deep condolences for all those impacted. Any financial assistance that can be generated or collected through the Blackjewel bankruptcy has to go to the workers who now face an uncertain and frightening future. We also expect that those presiding over these bankruptcy proceedings will put the families and employees impacted first.

The drive to combat climate change was devastating for coal Producers and their own employees. There aren't any easy answers here. We expect that the industry can be revived in the context of pursuing a balanced energy portfolio across the country. In the meantime, we offer our prayers to those affected by this relentless happening of bankruptcies.

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October 2019 SKILLINGS MINING REVIEW | 5

COVERSTORY

United States Steel Stock Struck a New 1-Year Low at $10.16 U.S Steel Corporation manufactures and sells flat-rolled and tubular steel products in North America and Europe. It operates through three segments: North American Flat-Rolled, U.S. Steel Europe, and Tubular Products. The Flat-Rolled segment offers slabs, strip mill plates, sheets and tin mill products, in addition to all iron ore and coke. United States Steel Co. (NYSE:X) struck a new 52week low during trading on Wednesday. The stock traded as low as $10.16 and last traded at $10.57, with a volume of 1892150 shares traded. The stock had formerly closed at $10.34.

6 | SKILLINGS MINING REVIEW October 2019

V

a r i o u s b r o k e r a g e s h av e

recently commented on X. D e u t s c h e B a n k l ow e r e d United States Steel from a "hold" rating to a "market" rating and set a $12.64 price target for the company in a report on Thursday, May 30th.

Bank of America reissued an "underperform" rating and set a $12.00 price

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have rated the stock with a market rating; eight have assigned a hold rating while four have assigned a buy rating to the company's stock. United States Steel now has a consensus evaluation of "Hold" along with a consensus target price of $18.94.

The stock has a 50-day moving average of $13.20 plus a two-hundred day moving average of $16.23. The firm has a market cap of $1.90 billion, a P/E ratio of 2.07, and a P/E/G ratio of 2.00 and a beta of 2.97. The company has a debt-to-equity ratio of 0.59, a fast ratio of 0.74 and a current ratio of 1.41.

United States Steel (NYSE:X) last released its earnings results on Thursday, August 1st. The fundamental materials company reported $0.45 earnings per share for the quarter, topping the Zacks' consensus estimate

of $0.40 by $0.05. The company had earnings of $3.55 billion during the quarter, compared to the consensus estimate of $3.43 billion. United States Steel had a return on equity of 19.27% and a net margin of 6.95%. United States Steel's quarterly revenue was down 1.8 percent compared to the exact same quarter this past year. During the same quarter in the previous calendar year, the company posted $1.46 EPS. As a group, sell-side analysts predict that United States Steel Co. will bill 0.7 EPS for the current fiscal year.

The company also recently declared a quarterly dividend, which would be paid on Tuesday. Investors of record on Wednesday, August 14 th will be given a $0.05 dividend. The dividend's ex-dividend date is Tuesday, August 13th. This signifies a $0.20 dividend on an annualized basis and a return

target on shares of United States Steel in a report on Friday, May 31st. UBS Group lowered United States Steel from a "neutral" rating to a "market" rating and cut their price target for the stock from $22.00 to $10.00 in a report on Wednesday, May 8th. In another report on Monday, May 6 th , BMO Capital Markets reissued a "market perform" rating on shares of United States Steel.

They noted that the move was a valuation call. Lastly, ValuEngine reduced United States Steel from a "sell" rating to a "strong sell" rating in a report on Monday. Six study analysts

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October 2019 SKILLINGS MINING REVIEW | 7

COVERSTORY

of 1.81%. United States Steel's payout ratio is 3.73 percent. Lots of big Investors have added to or reduced their stakes in the stock. Quadrant Capital Group LLC raised its position in United States Steel by 1,151.3percent in the first quarter. Quadrant Capital Group LLC now owns 2,440 shares of the stock valued at $45,000 after purchasing an additional 2245 shares during the last quarter.

NEXT Financial Group Inc lifted its position in United States Steel by 139.8percent in the second quarter.

NEXT Financial Group Inc currently owns 3,153 shares of the company's stock valued at $48,000 after buying an additional 1,838 shares during the previous quarter.

Rational Advisors LLC lifted its position in United States Steel by 178.5percent in the second quarter.

Rational Advisors LLC currently owns 4,280 shares of the basic materials company's stock valued at $66,000 after buying another 2743 shares during the previous quarter.

PolyMet releases pre-mining financial reports

P

CenterStar Asset Management LLC purchased a new stake in the U.S. steel market in the second quarter valued at approximately $77,000.

Ultimately, Coastal Investment Advisors Inc. raised its position in United States Steel by 5,611.0percent in the second quarter. Coastal Investment Advisors Inc. currently owns 5,711 shares of the basic materials company's stock valued at $90,000 after purchasing additional 5,611 stocks during the last quarter. Institutional investors possessed 62.34% of the company's stock.

8 | SKILLINGS MINING REVIEW October 2019

olyMet

Mining Corp., which hasn't yet improved its mining earnings flow, reported a $900,000 loss for the three months ended June 30 compared with $2.7 million for the previous year period. The reduction

was attributed to lower finance costs on a property exchange in the previous year period.

Excluding non-cash compensation, general and administrative expenses for the three months were $900,000 compared with $1.2 million for the previous year period. The loss for the six months was $6.7 million compared with $10.4 million for the previous year period as a result of a lower non-cash reduction on debenture alteration and a non-cash loss on the land exchange during the last year period. Excluding non-cash settlement, general and administrative expenses for the six months ended June 30 were $2.5 million compared with $2.8 million a year ago.

"We proceeded with our striking momentum in the second quarter with the completion of the rights offering, cleaning up our financial books and allowing us to progress financing alternatives for the project," Jon Cherry, CEO of PolyMet mining, stated in the report. PolyMet released an updated technical report that included an assessment of greater potential production scenarios and secured additional financing to complete permitting, including required wetland credits and financial assurance, innovative ultimate engineering and others.

PolyMet said it made significant progress thus far from 2018 till date, getting approvals and essential permits required to construct and operate its NorthMet mining job. In addition, it also secured title rights over and around the NorthMet mineral rights. In June, the firm completed a $265 million rights offering together with the profits used to repay the outstanding debt. Glencore's ownership of shares increased to 71.6 percent, which is an issue of controversy with project opponents.

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IRON RANGE REGION

State’s largest newspaper urges Tim Walz to halt work on Twin Metals

T

he state's largest newspaper, this week called on

Walz

Gov. Tim

to order state agencies

Twin Metals mine near Ely until the Trump administration releases scientific inforto suspend work on the proposed

mation that national officials had accumulated as part of a two-year study that considered the potential

consequences of the mine.

The Trump administration canceled the analysis shortly before its completion, and it has refused to release the science gathered up despite requests from Congress, newspapers, and environmentalists to do so. "Gov. Tim Walz ought to utilize the immense leverage he has as the state's governor to lift this awful veil of secrecy," wrote the Star Tribune's editorial board in their Aug. 23 edition. "Gov. Tim Walz should direct the Department of Natural Resources along with the Pollution Control Agency to suspend approving work for the projected Twin Metals Minnesota mine until the feds release the information."

The Obama administration had directed the two-year study shortly before leaving office, and Trump officials had promised to complete the research. But the Trump administration has failed to honor the commitment.

Last year, just months before it was supposed to materialize, he canceled the withdrawal study, and then issued new mineral leases to Twin Metals

Gov. Tim Walz

back in May this year. Antofagasta, the proprietor of Twin metals, has vowed to launch a mine plan later this year. Although It must pass through review and permitting, according to the Star Tribune, the company is already working with state officials on pre-development work. That's the work that the Star Tribune is currently calling on the governor to end.

"It makes sense to stop working now," writes the newspaper. "Twin Metals is the likeliest beneficiary of maintaining any harmful science from the aborted research under wraps. Unlike PolyMet, another Minnesota copper mine, the projected Twin Metals mine is truly within the BWCA watershed, a reality that dramatically amplifies worries about potential pollution." Concerns about the secrecy of Trump administration were intensified by Agriculture Secretary, Sonny Perdue, who had

10 | SKILLINGS MINING REVIEW October 2019

been to Farmfest earlier this month in Minnesota. Perdue leads the U.S. Forest Service, which conducted the study.

When asked about the controversy, He said he has no plans to release any of the science which Forest Service had gathered during the 20 months the study was ongoing. Also, he suggested that it was the state of Minnesota that was ultimately accountable for ensuring the safety of the Twin Metals mine.

The governor didn't agree with the secretary's remark. It's outrageous that Secretary Purdue is not able to take any obligation for a mining project in the Superior National Forest," said Walz, in a statement issued to the Timberjay.

"As Governor, I've got a duty to ensure that mining projects in Minnesota do not proceed unless there's a rigorous environmental review and permitting process. This is true for a project that's so near to the boundary Waters. The manner in which we do our work can either reinforce or undermine the confidence Minnesotans have in political decision-making. Canceling the Forest Service environmental review and refusing to publish the information accumulated during the study undermines public trust in the procedure. The Forest Service must finish the study."

It's uncertain what impact the current newspaper editorial will have, but it indicates the distinction that Minnesotans are currently making between the projected PolyMet mine, which the Star Tribune has generally supported, with the Twin Metals project. Former Gov. Mark Dayton, who supported the PolyMet project was plain in his opposition To the Twin Metals proposition and had ordered state agencies not to assist the firm in advancing the project.

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Twin Metals states it's going to use union labor to construct mine Twin Metals, owned by mining conglomerate Antofagasta, is currently hoping to construct its mine within the Rainy River Watershed and on the edge of the BWCAW. Opponents of the project assert toxic runoff from the mine and tailings would induce the BWCAW.

B

before it can begin construction. Twin Metals CEO Kelly Osborne stated in a statement to the News Tribune Tuesday that the organization is "pleased" to work with executives and noted that it used union labor when it constructed its core storage facility in 2013. "As we prepare to file our mine plan of operations, it's important that we further solidify our partnership with labor and make sure that the building phase of our project will be completed by professionals whose specialized skills are essential to the maximal excellent work we insist on," Osborne said.

ut any building at

Twin Metals

is years away

and hinges on whether federal and state regulators approve the project.

Twin Metals

has not

officially applied for permits, but the company has said it plans to submit its own mine plan of operations later this season, which would

activate the permit procedure

that was years long.

Let’s show the world what we can do together.

The Organization and the Iron Range Building and Construction Trades Council are set to sign a project labor agreement. In accordance with union president Mike Syversrud, the agreement ensures local, and unionized employees will be hired to build the underground mine with other facilities and dry-stack tailings storage. All of that may take an estimated 2.5 million construction hours, Syversrud explained. In a news release, Twin Metals said the project "would be comparable in scope to the construction of U.S. Bank Stadium in Minneapolis." "It's enormous," Syversrud said of the agreement. "For starters, it is likely to be three years of work for our members."

PolyMet, the first copper-nickel mine to eventually become permitted In Minnesota, started the regulatory process in 2004 and made its licenses 14 years later.

Likewise, PolyMet signed a project labor agreement promising Union labor in 2007 before it received its permits.

PolyMet still wants to raise almost $1 billion in funding

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October 2019 SKILLINGS MINING REVIEW | 11

COAL

decrease by 12 percent in 2019. Both U.S. Total coal generation and PRB coal generation peaked in 2008 have since diminished. In 2008, PRB coal generation reached a high of 496 million short tons (MMst) and fell to 314 MMst in 2016 but has since increased slightly to 324 MMst in 2018.

Almost of half of U.S. coal from 16 mines Over 40 Percent of coal Produced in the United States comes from 16 mines in the Powder River Basin (PRB), a mining area primarily located in northeast Wyoming and southeast Montana.

Four firms own more than half of those PRB mines, and those ten mines generated 87 percent of the Basin's coal in 2018.

T

his year, two of those compa-

nies , B lackjewel and C loud P eak filed bankruptcy . T he two other companies, Peabody and Arch Coal, are currently proposing a joint venture that involves some of the

PRB

mines.

Majority of the coal-generated by the PRB supports electric power generation in the United States. Beginning in the 1990s, many coal-fired energy plants switched from the PRB to subbituminous coal —that has low sulfur content—to meet tightening Clean Air Act emission standards. By 2003, the Powder River Basin yielded more coal than the Appalachian coal basins.

Coal use in the U.S. energy generation sector has diminished as overall electricity demand has stayed relatively flat and other fuels— specifically natural gas and renewables—have gained market share. Coal's share of the U.S. energy generation mix was 48% in 2008 and has since fallen to 28 percent in 2018.

The U.S. Energy Information Administration's (EIA) Short-Term Energy Outlook anticipates coal's share of power generation to be 24% in both 2019 and 2020. EIA predicts that coal generation in the Western region, which comprises coal production in the Rocky Mountains as well as PRB, could

12 | SKILLINGS MINING REVIEW October 2019

Declines in domestic coal consumption had been partly offset by increasing demand for coal in export markets.

Though most U.S. coal exports are bituminous coal (used for steelmaking), the United States has exported a large amount of subbituminous coal from PRB mines to Asian countries for coal-fired power plants.

But, these volumes are relatively small— In 2018, the United States exported 7.7 MMst of subbituminous coal, accounting for 7% of total U.S. coal exports and 2% of total PRB coal production.

Coal mines in the PRB are just using about two-thirds of their productive capacity. Productive capacity refers to the amount of coal that mines could generate annually using their equipment. PRB coal productive capacity increased in 2010 at 575 MMst and has since declined to 476 MMst in 2018.

PRB coal prices have exhibited little volatility in the last ten years. In 2008, the average annual selling price for PRB coal with a heating value of 8,800 British thermal units per pound was $13.31 per short ton, compared to $12.31 per short ton in 2018. Transportation rates to deliver coal from PRB mines to power plants, mostly by railroad account for about two-thirds of their total price of the coal, compared with 56 percent in 2008.

www.skillings.net

US STEEL COMPANIES

Is Buffett’s Prophesy happening U.S. steel Firms U.S. steel firms see Chinese steel overcapacity and exports as a big challenge. Internationally, their counterparts also see subsidized steel exports from China as a challenge.

Many countries, including the U.S., have high tariffs to stop Chinese steel goods from dominating the markets.

Last year, President Trump went a step further and imposed a 25% tariff on U.S. steel imports, thereby affecting U.S. steel stocks such as U.S. Steel (X), A.K. Steel (AKS), and Nucor (NUE).

changes. U.S. steel prices dropped in 2015 due to China's slowdown concerns. But when China's downturn concerns eased in 2016, U.S. steel prices bounced back. Weak trade war uncertainty and Chinese steel prices lower firms' pricing power. We should remember that U.S. steel companies declared three rounds of price hikes after U.S. steel prices fell to multiquarter lows in May. U.S. steel prices U.S. steel prices increased between June and July. The pricing momentum has stalled in August amid the trade

warfare between the U.S. and China.

Steel market sentiments turned negative after the trade war escalated. The U.S. Steel market sees China's designation as a "currency manipulator." However, increasing trade tensions aren't helping U.S. steel companies' stock prices.

Stock prices are soaring now Stocks are higher today. As of 11:00 AM ET, U.S. Steel, AK Steel, and Nucor have climbed 3.3 percent, 0.92%, and 1.2%, respectively. China's remarks about having a "calm attitude" from the trade talks raised the Markets today. Mining and metal stocks are outperforming broader markets due to optimism surrounding the trade discussions.

Remarkably, China has taken some controls to reduce its excess steel capacity. The nation's steel exports have dropped from their 2015 highs.

Also, U.S. steel imports have decreased since the Section 232 tariffs. So far, the changes look encouraging. But, U.S. steel firms' stock prices have been low.

What is hurting U.S. steel firms' inventory Costs China's downturn trade tensions and concerns have taken a toll on international steel rates. U.S. steel prices cannot be out of sync with global

We thrive on challenges golder.com

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October 2019 SKILLINGS MINING REVIEW | 13

COAL

Coal Mine Reclamation Green Project in Canada Canada's mining and minerals industry are important to our financial growth and to communities throughout the country. Developing Canada's natural resources in a more sustainable way will create good middle-class jobs, increase competitiveness, and reduce environmental pollution as we proceed towards a clean energy future.

T

he Honourable Amarjeet Sohi, Canada's Minister of Natural R esources , announced $3.8 million to finance the BIOSALIX program , a renewable energy coal mine reclamation project near Forestburg, Alberta.

A Collaborative effort led by environmental group firm Sylvis, the project utilizes municipal waste that is organic as an additive to grow a willow crop on the reclaimed land. The willow is then harvested to make woody biomass that can be used to produce renewable heat, energy, and other goods. Overall, this project will help providently manage

14 | SKILLINGS MINING REVIEW October 2019

"The Canada Gover nment continues to invest in projects that are positioning Canada's mining sector to lead the clean energy future.

Restoring mined land to a natural state contributes to our goal of growing the economy, creating jobs and building the competitive and sustainable mining industry of tomorrow."

The Honourable Amarjeet Sohi Canada's Minister of Natural Resources

"The change to a clean growth economy is one of the biggest challenges that confront Canadians today and also the most critical for our common future. The BIOSALIX program embodies clean growth — the combination of process and technology to drive technical, carbon, and social gain.

While meeting the challenges that confront today's society, it offers communities of all sizes, the chance to transit i o n a n d g r o w b e yo n d natural resources into a clean technology market."

John Lavery Principal Scientist

www.skillings.net

their organic waste, develop a renewable feedstock to produce bioenergy, reclaim expired mine territory, and create a new chance for communities affected by mine closures.

Federal Funding for the project will be provided through Natural Resource Canada's Clean Development Program. Additional funding in the amounts of $1.5 and $2 million will be provided accordingly

by Alberta innovates and Emission Reductions Alberta. Natural Resource Canada's Canadian Forest Service may also lend its biomass expertise and research to the project.

The Clean Development Program is a $155 million investment fund that helps clean technologies further decrease their impacts on water, land, and air while improving competitiveness and creating employment.

Canada's climate strategy includes measures to protect the environment and leave a safer planet for future generations, including activities to protect our oceans, phase out coal-fired electricity, invest in renewables and public transit and decrease plastic pollution.

Renewable energy technology and green infrastructure are a key part of the strategy to combat climate change while growing the economy.

SYLVIS ENVIRONMENTAL SERVICES Quick Facts • For this project, EPCOR Water Services will provide the biosolids; Westmoreland Mining will provide the reclamation floor, in addition to the part of the workforce; and the willow plantation will be developed by Bionera Resources. • T he clean Development Program includes federal laboratory assistance for innovators. This project Falls within the Science and Technology Assistance for Cleantech (STAC) Part of the program, intended to help bring clean technologies to market by providing federal research experience, facilities, and equipment.

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Rio Tinto sees iron-ore market staying stabilized through 2019

R

Tinto, the world's second-biggest iron ore miner, expects strong demand for its steel-making ingredient, mainly because of its high-grade iron ore as Chinese io

steelmakers concentrate more on greater productivity and reduced emissions. market to

Rio Tinto expects the worldwide iron ore remain balanced throughout 2019 despite the

fact that a possible moderation in steel demand growth in China, the world's largest steel consumer, a senior executive said on Friday.

Greater quality ore generates more steel for each tonne that is processed because less coke is used in manufacturing, and can reduce emissions. "We will see slow growth in China's economy through 2019, Chris Salisbury, CEO of iron-ore at Rio Tinto noted, but the miner will continue to increase the output of higher-grade ore to meet demand in China.

"We have gone through a building slowdown during the winter period, but steel manufacturing was still quite strong during the time and what we're seeing is a bit of an imbalance between steel production and construction offtake," he explained. "It's not catastrophic." Rio Tinto, which supplies about 330-million tonnes of iron-ore a year to mostly Asian clients, plans to spend $1-billion annually over the next three years for maintenance of its iron ore mines. It will spend another $3-billion to construct new iron ore mines, including the Koodaideri mine in the Pilbara area in Australia, Salisbury said. The company was on track to complete a feasibility study for the projected "intelligent" Koodaideri mine, which will fully integrate technologies such as robotics and driverless trains and trucks on a single site this year, he explained.

Salisbury downplayed the impact on the steel market of US Tariffs and the possibility for retaliation by other countries.

America is imposing import duties of 25 percent on steel and 10% on Aluminium starting from Friday, although US President Donald Trump on Thursday temporarily excluded six states along with the European Union from the levies. "US steel exports to customers in Japan, South Korea, Taiwan, and China Is quite modest," he explained.

October 2019 SKILLINGS MINING REVIEW | 15

COAL

Navajo Nation's very delicate bet on coal

A

Navajo Nation-owned company to buy Montana and Wyoming assets of bankrupt Cloud Peak Energy comes at a hard time buying into the U.S. coal sector – an industry that is sinking fast. Several logical issues concerning the proposal by the Navajo Transitional Energy Business (NTEC) to purchase push by a the

Cloud Peak need to be addressed.

The major problem is the mindset behind driving the proposal. The management team at NTEC — made up of three non-Navajo executives that come from previous professions in U.S. coal mining — appears trapped in an obsolete fixation on coal. The NTEC executive group would have the Navajo Nation, through NTEC, become owners of three coal mines located 900 miles off. The plan, which was recently approved by a U.S. bankruptcy court but has not been completed, is an ill-timed gamble, to say the least.

It's also reminiscent of an effort by NTEC to purchase the failing coal-fired Navajo Generating Station in Arizona and its fuel-source Kayenta Mine. That campaign failed due to

16 | SKILLINGS MINING REVIEW October 2019

the fact that Navajo Nation leaders denied demands that the tribal government backstop NTEC and obtain reclamation obligations. Navajo Generating Station will close in December and Kayenta Mine would cease operations this month.

This deal — for Navajo acquisition of Cloud Peak assets — can and might draw suspicions from tribal leaders. While NTEC's position seems to be that it is independent of tribal oversight and can do anything it wants, the proposed acquisition of Cloud Peak's assets definitely contradicts tribal policy declared in April naming "clean and renewable energy development as the Navajo Nation's top energy priority."

Beyond policy enquiries, NTEC's plan comes with several additional red flags: • Cloud Peak's plantations attracted just three buyers, at least one of which is apparently unqualified and none of which are major coal industry players. To put it differently, NTEC is currently trying to buy a company which nobody wants.

• NTEC would be buying a firm that is being battered by economic forces — Cloud Peak's customer base is shrinking since utilities are currently moving to cleaner and cheaper electricity-generation sources and competition by larger producers is fierce.

• It might be placing hundreds of millions of tribal dollars at risk through high reclamation liabilities if NTEC were to close the deal.

• NTEC's revenue forecasts surrounding the proposed deal are suspect. While NTEC says the deal would push its yearly revenues past $1 billion, that amount seems wildly optimistic based on the fiscal condition of the mines and future output for the mines in question.

The company bases its projections on previous Cloud Peak revenues and production rather than on future ones and ignores the fact that Cloud Peak's earnings have fallen off a cliff over the last four years. There is not much of a business case for how NTEC could gain by purchasing, at any price, a remote and bankrupt coal firm facing many insurmountable difficulties.

A more forward-looking approach would have the firm spend on the current energy sector that favors other renewable forms of electricity generation — solar and wind, for instance, both of which are rapidly gaining market share nationally.

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China iron ore picks-up, but set for its first monthly decline in nine

I

ron ore futures in

China increased on Friday, buoyed

as some requirements for the steelmaking substance emerged, but were on track for their first monthly

decline since

November 2018

as rising supply and low

demand prospects sparked selloffs. ore on the

The highly-sort iron Dalian Commodity Exchange, for January

2020 delivery, gained as much as 2.1% to 596 yuan ($84.03) a tonne, extending the recovery after hitting its lowest in nearly three months earlier in the week.

FUNDAMENTALS • Benchmark spot 62% iron ore for delivery to China was stable at a 5-1/2-month low of $85 a tonne on Thursday, sliding from its July 3 peak of $126.50, according to SteelHome consultancy information.

• Construction steel rebar on the Shanghai Futures Exchange increased at 0.8% at 3,330 yuan a tonne, as of 0322 GMT, recovering from recent selloffs sparked by concerns about demand amid an intensifying U.S.-Sino trade war.

• Imported iron ore inventories at China's ports climbed for six straight weeks, hitting 124.65 million tonnes, as of Aug. 23 SH-TOT-IRONINV, the highest since end-May, SteelHome data proved.

• Coking coal was 0.4% higher at 1,303 yuan a tonne, while coke rose 1.5% to 1,901 yuan.

• Hot-rolled coil, used in cars and home appliances, increased by 0.4% to 3,392 yuan a tonne.

On the front-month October 2019, the Singapore Exchange iron ore contract has been 2.2% higher at $79.33 a tonne in early trade. Dalian iron ore is set to release more than 20% Slump in August, while spot prices have retreated from peaks struck in July, as imports of the material from Brazil and Australia climbed and domestic steel demand declined.

China which produces half of the global steel supply, is affected by a seasonal lull in demand weighed on prices of the construction and manufacturing material in recent weeks. "The iron ore price fall was caused by Macro events, but there were also fundamentals in the market that hinted at a correction," stated Erik Hedborg, iron ore analyst at metals consultancy CRU Group in London.

Some restocking demand has surfaced to support iron ore prices, as steel mills plan production curbs in China's steelmaking city of Tangshan to be eased in September, and also prepare for a possible increase in steel demand.

Darren Toh, a data scientist from Tivlon Technologies in Singapore, stated that "steel inventories are easing from the highs." Our data steel analytics model is expecting an increase in steel demand beginning from the second week of September, he said.

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October 2019 SKILLINGS MINING REVIEW | 17

IRON RANGE REGION

Why Cleveland-Cliffs Lost Steam Following A Revenue Growth Of 50 Over The Last 2 Years Cleveland-Cliffs (NYSE: CLF) has added nearly $0.78 billion in earnings between 2016 to 2018, which has led to total revenues increasing from $1.55 billion in 2016 to $2.33 billion in 2018.

This increase was driven by a rise in iron ore volume sold and superior prices for its high-quality ores.

T

in Minnesota and Michigan, for use in blast furnaces as part of the steel manufacturing process, as well as iron ore concentrate.

hough freight revenue diminished in

2018, strong iron ore

sales have increased healthy

earnings growth.

However, despite increased iron ore prices, the firm is not expected to replicate this performance in the near future, together with Trefis expecting CLF to just add roughly $0.04 billion within the next two years, largely driven by a reduction in shipments and loss of earnings from the sale of their Asia-Pacific operations.

Before taking a Look at the Iron Ore Revenues of the firm, let's first understand CLF's business – (a) What Does CLF Offer?

• CLF generates iron ore pellets from its mines and pellet plants situated

• A variety of grades of iron ore are manufactured and delivered to customers based on their preference, which primarily depends on the qualities of the customer's blast furnace operation. (b) Who is paying?

• CLF iron ore production is mainly marketed to integrated steel manufacturers, generally pursuant to term supply agreements with different price adjustment provisions.

• ArcelorMittal is the largest customer for this division, accounting for 57 percent of the earnings of the U.S. Iron Ore operations in 2018.

18 | SKILLINGS MINING REVIEW October 2019

• A K S t e e l a n d A l g o m a a r e t h e division's other key customers. (c) What Are The Alternatives?

• Major opponents are steel companies which own significant interests in North American iron ore mines, such as U.S. Steel, in addition to important British and Australian iron ore producers such as Vale and Rio Tinto.

Iron Ore Shipment • After increasing its shipments by 2.4 million tons from 2016-2018, CLF is likely to see net volume decrease by 0.4 million tons in the subsequent two years (with volume decreasing by 0.6 million tons in 2019, followed by a 0.2 million ton increase in 2020), mainly due to reduced production.

• Iron ore production is expected to stay low in the long run, driven by the reduction of volume in the Asia-Pacific industry (which was sold in 2018) and unplanned maintenance at the Tilden site.

• However, the new hot-briquetted iron plant is expected to increase

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the organization's volume from mid-2020.

Iron Ore Price Realization • Iron ore prices have observed a gain in the past, because of China's new environment policy, under which the country will import ore with Fe content of 62% or more.

• CLF, which has high-grade ores, in the form of premium pricing for its own output, has been benefited by this.

• As Vale has announced production cuts due to an accident at its site in Brazil, global prices are expected to remain high in the near term due to supply constraints.

• Therefore, CLF price realization is anticipated to increase further; however, the rate of increase in price will be much lower when compared to the previous two years.

Conclusion • Within the next two years, Iron ore is expected to add only $90 million to its revenue base, compared to $793 million over the previous two years.

• This translates into an expected CAGR of about 2% over the next two years (2018-2020 period), substantially lower than a CAGR of 25.5% in the previous two years (2016-2018 period).

Despite CLF being set to lose its

NORTH AMERICAN MARKET (LTU)

Equipping the mining industry with legal services since 1893.

Company

IRON ORE PRICE REPORT

Ore Type

Pellets, FOB Michigan Mines Pellets, FOB Cleveland-Cliffs Inc. Minnesota Upper Lakes Port Source: CLEVELAND-CLIFFS INC. Cleveland-Cliffs Inc.

steam in the near term, dependent on Cleveland-Cliffs Valuation by Trefis. We have a price rate of $13 per share for CLF's stock. We believe that premium pricing to the high quality ore of the company, Expansion of production capacity from 1.6 million metric tons to 1.9 million Metric tons at the new HBI (hot-briquetted iron) plant in Great Lakes, also upgradation of its Northshore plant to replace around 3.5 million long tons of blast furnace pellet production with DR-grade pellet production, is expected to lead to higher production and earnings from late-2020, which might, in turn, encourage growth in the stock price going forward.

Per Iron Unit

Per Gross Ton at 64%

Per Ton at 64% Reporting Date

$1.28

$81.92

12/31/17

$1.42

$90.88

12/31/17

∙ Mineral purchase agreements, leases and options ∙ Land assembly and mineral rights acquisition ∙ Severed mineral registration and title work ∙ Environmental permitting and compliance ° MINING & MINERALS LAW °

›› Paul Kilgore ›› Paul Loraas

fryberger.com

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October 2019 SKILLINGS MINING REVIEW | 19

IRON RANGE REGION

DNR issues decision on requests to revise PolyMet tailings basin permits Sarah Strommen Commissioner for Minnesota Department of Natural Resources has now issued an order refusing requests from the Fond du Lac Band of Lake Superior Chippewa, multiple environmental organizations and some individuals to revise the tailings dam permits issued to PolyMet on Nov. 1, 2018.

T

he

DNR

takes the safety of

tailings dams it regulates seriously , and they under -

stand the questions raised about recent dam failures in other nations.

PolyMet’s

tailings dam proposal was

Reasons for the DNR’s decision After assessing the reconsideration requests, the DNR stated that no issues were raised by the requestors that materially affect the decision of the DNR to issue the tailings dam permits.

earlier subjected to years of rigorous modeling and independent assessment.

The agency’s review was conducted by seasoned DNR engineers, in addition to nationally and internationally professional dam safety experts.“While we’re confident in our first evaluation of the PolyMet tailings dam, we have examined the requests for reconsideration and related details regarding recent dam failures in different parts of the world,” Strommen said.

“We know people’s issues with those dam failures and whether these events indicate a basic design problem with PolyMet’s dam. Our analysis demonstrates that there are important differences in site conditions, technology design, and operating requirements, and we remain confident in the safety of their PolyMet tailings dam as allowed.”

The requests for reconsideration raised the following questions about the authorized PolyMet tailings dam permits: • the failure of the Brumadinho Dam in Brazil is evidence of new stability issues concerning the upstream structure design of tailings basins; • t he use of the “Olson Method” to analyze the strength, liquefaction, and stability of the Brumadinho dam inherently suggests that its use to examine the PolyMet tailings dam was flawed; and • recent reviews of the existing LTV tailings basin at the PolyMet site call into question assumptions about tailings drainage and materials strength in the basin.

‘Critical’ differences Between Brumadinho and PolyMet dams The DNR’s dam safety professionals

20 | SKILLINGS MINING REVIEW October 2019

evaluated each of the claims in the request for reconsideration. The DNR discovered that while both the PolyMet and the Brumadinho dams include the use of “upstream structure” methods, there are crucial gaps that must be understood and evaluated to draw technically valid comparisons and decisions.

There are multiple things that go into the construction of a safe dam, and PolyMet’s approved dam layout is significantly safer and different compared to Brumadinho dam in the following ways: • Security factors for the PolyMet dam were created using conservative assumptions to assess the basin’s stability under extreme conditions.

These assumptions include that the basin had liquefied, been exposed to extreme rainfall, and been subjected to an earthquake. This Brumadinho dam’s analysis failed to add anything close to this level of assessment.

• PolyMet’s dam has virtually no inflow of surface water into the basin. The Brumadinho dam had inflow from the watershed that necessitated the diversion of runoff from surrounding hillsides away from the tailings dam and basin. It seems this diversion system failed, resulting in heavy flows to the basin for months before the dam collapse.

• PolyMet’s dam will be built on flat topography, far from the community, and using ring-dike construction.

The Brumadinho dam was built on a hillside, directly above a community, with higher-risk valley construction.

• PolyMet’s dam is going to have very gradual side slopes (7:1 overall) which are inherently more stable compared to Brumadinho dam which had a general slope of 4:1.

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• The PolyMet tailings dam is situated in an area of little or no seismic activity.

The Brumadinho dam is located within a place of moderate seismic activity.

• PolyMet’s dam is approximately eight miles from its mine site, which minimizes any risk of blasting impacts into the dam. Reports indicate that there had been mine blasting in close proximity to the Brumadinho dam on the morning of the failure.

Modeling applied to PolyMet dam correctly The Olson Method, called after dam engineer Dr. Scott Olson, is a recognized and peer-reviewed method which was incorrectly applied at Brumadinho, resulting in inaccurate safety factors for the site and failure to recognize that at the tailings at the site proved highly liquefiable. The analysis PolyMet supplied to the DNR properly applied the Olson Method, with Dr. Olson’s oversight; assumed complete liquefaction; and resulted in higher factors of

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safety. The Olson Method analysis was subject to review by DNR’s dam safety experts and independent specialists under contract to the DNR. The modeling used to examine the undrained strength of the tailings in the LTV basin already accounted for the conditions observed during inspections.

Whether these portions of the basin are now drained has no bearing on this dam’s strength evaluation. Each of the material possessions in the basin has been obtained to the existing conditions and utilized in the undrained strength evaluation.

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The DNR remains convinced that the permitted PolyMet tailings basin dam, even if properly constructed, operated, and maintained, will be safe and protective of human health and the environment. The DNR will continue to find out from the tailings dam failure at Brumadinho and use that information to help secure long-term safety of all tailings dams in Minnesota.

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October 2019 SKILLINGS MINING REVIEW | 21

STATISTICS

August 2019 Raw Steel Production

I

August 24, 2019, domestic raw steel production was 1,877,000 net tons while the capability utilization rate was 80.6 percent. Production was 1,861,000 net tons in the week ending August n the week ending on

24, 2018 while the capability utilization then was 79.4 percent. The current week production represents a 0.9 percent increase from the same period in the previous year. Production for the week ending August 24, 2019 is up 1.1 percent from the previous week ending August 17, 2019 when production was 1,857,000 net tons and the rate of capability utilization was 79.8 percent.

Adjusted year-to-date production through August 24, 2019 was 63,546,000 net tons, at a capability utilization rate of 81.0 percent. That is up 4.4 percent from the 60,862,000 net tons during the same period last year, when the capability utilization rate was 77.3 percent.

Broken down by districts, here's production for the week ending August 24, 2019 in thousands of net tons: North East: 202; Great Lakes: 681; Midwest: 204; Southern: 719 and Western: 71 for a total of 1877.

July 2019 crude steel production

By John Edward, Associate Publisher

W

64 countries World Steel Association (worldsteel) was 156.7 million tonnes (Mt) in July 2019, a 1.7% increase compared to July 2018.

China’s crude steel production for July 2019 was 85.2 Mt, an increase of 5.0% compared to July 2018. India produced 9.2 Mt of crude steel in July 2019, an increase of 1.7% compared to July 2018. Japan produced 8.4 Mt of crude steel in July 2019, down 0.4% on July 2018. South Korea’s crude steel production was 6.0 Mt in July 2019, a decrease of 2.1% on July 2018. orld crude steel production for the reporting to the

The US produced 7.5 Mt of crude steel in July 2019, an increase of 1.8% compared to July 2018. Brazil’s crude steel production for July 2019 was 2.4 Mt, down by 20.7% on July 2018. Turkey’s crude steel production for July 2019 was 2.9 Mt, down by 10.6% on July 2018. Crude steel production in Ukraine was 1.8 Mt this month, down 1.7% on July 2018.

Statistics based on World Steel Association Report 

22 | SKILLINGS MINING REVIEW October 2019

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CRUDE STEEL PRODUCTION, JULY 2019. Source – World Steel Association COUNTRY

JULY 2019

JULY % CHANGE 2018 JULY-19/18

2019

% CHANGE

COUNTRY

Austria

577

354

63,1

4 539

8,7

Mexico

Belgium

660 e

704

-6,3

4 665

-1,4

Bulgaria

55 e

51

7,8

362

-9,0

Croatia

JULY 2019

JULY % CHANGE 2018 JULY-19/18

2019

% CHANGE

1 440 e

1 754

-17,9

10 924

-10,3

United States

7 514

7 383

1,8

51 827

4,8

North America

10 124

10 278

-1,5

70 751

1,7

418

464

-9,8

2 737

-9,2

Brazil

2 449

3 086

-20,7

19 691

-4,3

Chile

80 e

96

-16,5

523

-17,0

2e

10

-80,2

52

-16,2

Czech Republic

391

444

-11,9

2 839

-3,8

Finland

220

346

-36,4

2 158

-12,3

France

1 330 e

1 338

-0,6

9 006

-3,3

Germany

3 360 e

3 395

-1,0

24 077

-4,6

Colombia

95 e

115

-17,6

601

-12,6

Greece

130 e

136

-4,4

891

-2,3

Ecuador

55 e

51

7,9

357

4,7

Hungary

136

179

-24,2

1 072

-8,9

Paraguay

1e

2

-51,9

8

-14,1

2 130 e

2 156

-1,2

14 697

-1,9

Peru

110 e

103

6,8

718

1,4

Luxembourg

200 e

205

-2,3

1 386

0,7

Uruguay

5e

5

-3,7

33

0,3

Netherlands

605

589

2,7

4 043

-1,9

Venezuela

5e

9

-44,4

39

-61,9

780 e

809

-3,6

5 692

-5,6

49

52

-4,4

381

-5,6

South America

3 218

3 931

-18,1

24 708

-5,3

Egypt

526

660

-20,2

4 623

3,7

1 100 e

951

15,7

8 518

1,8

Libya

60 e

43

38,7

340

49,9

Sweden

352

349

0,6

2 909

0,3

South Africa

464

535

-13,2

3 598

-3,6

United Kingdom

645

687

-6,1

4 432

-3,6

Africa

1 051

1 238

-15,1

8 562

1,7

920 e

919

0,1

6 468

0,7

Iran

2 200 e

1 981

11,1

14 988

6,4

European Union (28) 13 641

13 673

-0,2

98 186

-2,4

Qatar

230

224

2,7

1 519

-1,4

64

69

-7,2

485

57,5

Saudi Arabia (1)

440 e

503

-12,6

3 023

-0,8

20 e

24

-15,8

153

-1,1

UAE

225

274

-17,9

1 877

1,0

Norway

20

15

34,4

348

11,2

Middle East

3 095

2 982

3,8

21 407

4,2

Serbia

136

179

-23,7

1 169

-0,6

China

85 223

81 180

5,0 577 064

9,0

Turkey

2 925

3 272

-10,6

19 919

-10,2

India

9 215

9 059

1,7

66 188

4,6

Other Europe

3 166

3 559

-11,1

22 075

-8,5

Japan

8 387

8 420

-0,4

59 473

-3,1

Byelorussia

230 e

224

2,7

1 550

13,4

South Korea

6 041

6 173

-2,1

42 487

0,6

Kazakhstan

350 e

367

-4,6

2 313

-14,1

Pakistan

310 e

436

-28,9

1 979

-32,9

35 e

42

-16,7

215

-32,2

Taiwan, China

1 890 e

1 976

-4,4

13 306

-0,7

6 200 e

6 293

-1,5

42 462

0,4

Thailand

415 e

568

-27,0

2 550

-34,3

1 784

1 815

-1,7

12 717

4,2

Vietnam (2)

1 773

1 165

52,2

12 046

57,1

65 e

52

25,0

374

-1,3

Asia

3,9 775 093

7,0

8 664

8 793

-1,5

59 631

0,6

Australia

1 120 e

1 088

2,9

7 650

0,7

New Zealand

Cuba

15 e

18

-18,3

118

-2,4

Oceania

El Salvador

10 e

9

7,9

59

4,8

Total (64 Ctry) (3)

Guatemala

25 e

26

-2,0

174

2,0

Italy

Poland Slovenia Spain

Other E.U. (28) (e) Bosnia-Herzegovina Macedonia

Moldova Russia Ukraine Uzbekistan C.I.S. (6) Canada

Argentina

113 254 108 977 429

516

-16,8

3 147

-8,5

55

62

-10,5

390

0,4

484

577

-16,2

3 538

-7,6

156 697 154 009

1,7 1 083 951

4,6

(1) HADEED only. (2) partial data, approximately 75% of national total. (3) the 64 countries included in this table accounted for approximately 99% of total world crude steel production in 2018. e – estimate | r – revised

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October 2019 SKILLINGS MINING REVIEW | 23