Here's to the crazy ones, the misfits, the rebels, the troublemakers, the
round pegs in the square holes... the ones who see things differently -- they're
not fond of rules... You can quote them, disagree with them, glorify or vilify
them, but the only thing you can't do is ignore them because they change
things... they push the human race forward, and while some may see them as the
crazy ones, we see genius, because the ones who are crazy enough to think that
they can change the world, are the ones who do.

Steve Jobs
US computer engineer & industrialist (1955 - 2011)

Sunday, June 3, 2012

Muskrat Falls Deducted

It's important to remember that in the beginning the Muskrat Falls project was billed as Newfoundland and Labrador's green alternative to replacing the Holyrood thermal plant, and bypassing Quebec to be a major exporter of electrical power to the US via Nova Scotia. If there was any surplus power it would: "be recalled as needed for industrial development in Labrador". The word "mines" was not mentioned once in the government's press release . Despite the fact that the government was fully aware of the many mining developments that were at various levels of development, and despite the fact that the government was assisting in those developments, and despite the fact that the government knew full well the mining developments would require massive power that was not currently available, it did not use the word "mining" even once in its press release announcing the Muskrat Falls project. So it flew under the radar.

That was 2010. Fast forward to today. Today there is no agreement between Nalcor and Emera to transmit power to Nova Scotia - the original term sheet expiry date is now some 7 months old. There is no federal subsidy, or even a mention of it, for the Maritime Link that would have seen Emera receive over $300 million to assist with the undersea cable. There in fact is no formal agreement signed between Nalcor and Emera to construct the Island Link from Labrador to Newfoundland. There is no written loan guarantee from the federal government. None of these previously crucial aspects of the original Muskrat Falls agreement are in place. That could mean several things. It could mean everything is just moving incredibly slow - slower than it takes for say many international treaties to be formed and signed. It could also mean that they were never intended in the first place.

Take the private conversation between Emera's CEO and the US consulate:

Given that legacy, Spurr (Emera) remarked that he and his senior colleagues are equally cautious in dealing with the premier (Williams), with knowledge it makes more financial sense for N-L to do a deal with Quebec than with them.
“In fact, Spurr indicated he wouldn't be surprised if Williams ended up doing just that, and leaving Spurr and colleagues to speculate that Williams might be using them to exert more pressure on Quebec to offer a better deal for N-L.”

Of course Mr Spurr may have only been correct in his suspicion, but not in his conclusion. It could also be the case, knowing Williams' penchant for trying to play the federal government for funds, that the real goal was to have the federal government grant the provincial government a loan guarantee based on an "Atlantic Gateway" concept. Once the loan guarantee was granted Newfoundland and Labrador could back out of the Emera deal, and use a portion of that loan guarantee for a dam only project at Muskrat Falls. In other words, it could be that Williams' plan was not to build a link between Newfoundland and Labrador, and the same goes for the Newfoundland and Labrador/Nova Scotia Maritime Link. Knowing how Williams' tends to use the nationalist card in his dealings with the feds, it is entirely likely a threat of nationalist backlash might be used against the federal government if it did not provide a loan guarantee, at least proportionately, for a dam only project -as is happening right now.

We don't know for sure. All we can do is deduce from the evidence. Here's one bit from Williams on April 3, 2012:

" we have a federal loan guarantee worth up to a billion dollars"
Now a loan guarantee of up to a billion dollars would be insignificant on a $6-8 billion dollar project, but a dam only project could cost as little as $3 billion. A billion dollar loan guarantee in that context would make more sense, and at least have an overall impact on the financing costs. That's if you believe a dam only project could work in Labrador.

Here is where more evidence comes. The greatest source of clues lately has actually been in the House of Assembly itself. Minister of Natural Resources Jerome Kennedy has laid it out there in plain language. From Hansard:

Hansard 29 March, 2012

MR. KENNEDY: "Thank you, Mr. Speaker...
We have a very small market here and the oil companies are telling us that we are not going to build an infrastructure to bring a very small amount of natural gas to power Holyrood when, Mr. Speaker, there is no market. I say to the member for - the Opposition House Leader, even if we refurbished Holyrood, what does that do for Labrador mining projects? "

Hansard 30 May, 2012

MR. KENNEDY: "Yes, Mr. Speaker
What we are doing and what we have indicated is that there will be power available with Muskrat Falls, Mr. Speaker, if it is sanctioned and developed. Mr. Speaker, there are no firm contracts signed. I have met with all these companies. There is only one company that said we are willing to buy power. We are in discussions, Mr. Speaker, with these companies and if they want to sign firm contracts, then we will guarantee the power if Muskrat Falls is sanctioned, Mr. Speaker."

MR. KENNEDY: "Thank you, Mr. Speaker.
On March 27, the Member for Cartwright - L'Anse au Clair asked the Minister of Natural Resources to table in the House any correspondence, analysis or reports that government has in relation to the current and projected demand for electricity in Labrador and how such demand can be met.

Newfoundland and Labrador Hydro, Mr. Speaker, is a Crown corporation owned by the people of Newfoundland and Labrador. Its focus is on delivering safe, reliable, least-cost power to residents, businesses, and industrial customers in Newfoundland and Labrador.

Newfoundland and Labrador Hydro, Mr. Speaker, is also mandated to ensure that adequate planning occurs for the future generation, transmission, and distribution of power in the Province. There is currently 525 megawatts of available electricity from the Churchill Falls Generating Station to meet demand in Labrador. This includes the 225 Twin Falls or TwinCo block and the 300 megawatt recall block.

Labrador industrial customers, Mr. Speaker, currently use the full 225 megawatt Twin Falls block and an additional sixty-two megawatts of firm power from the recall block. After Hydro's rural customers and industrial contracts are supplied, there is between eighty and 280 megawatts of recall power available, depending on the time of year. At peak during the winter, Mr. Speaker, in Labrador, 220 megawatts of power is required, thereby leaving eighty megawatts for other use in Labrador or for other export purposes.

Strong commodity prices, Mr. Speaker, have resulted in record levels of mineral exploration in Western Labrador resulting in the announcement of a number of new mining projects. If all projects go ahead, Mr. Speaker, there will be an estimated $10 billion to $15 billion in capital investment for mining developments in Labrador in the next ten years. These new developments will require an adequate supply of electrical power at competitive rates to proceed. So much depends, however, on the need for iron ore in China. The demand for iron ore is affected directly by the Chinese economy.

If Muskrat Falls does not proceed, Mr. Speaker, there will not be sufficient power available for all of the mining projects to proceed. Over the last number of months the minister and departmental officials have held numerous meetings with mining companies, including: the Iron Ore Company of Canada, Cliff's Natural Resources in Wabush, Alderon Iron Ore Corporation, New Millennium Iron Corporation, Tata Steel, Labrador Iron Mines, Vale, and Grand River Ironsands. These meetings have covered numerous topics, Mr. Speaker, and have included discussions regarding power requirements and transmission infrastructure.

As stated earlier, these projects are at various stages, Mr. Speaker, ranging from early stage, pre-feasibility studies, environmental assessment studies, and those that have commenced construction. The normal process, Mr. Speaker, for a new industrial or large commercial customer will be to approach Newfoundland and Labrador Hydro to identify their projects' needs and make a formal request for power.

The following companies, Mr. Speaker, have identified a need for power: IOC, Alderon, Tata/New Millennium, Vale, Labrador Iron Mines, and Grand River Ironsands. Once received, Nalcor then undertakes initial engineering studies that are required to provide the customer with a preliminary estimate of cost and timelines. There is a chart prepared by Nalcor, Mr. Speaker, which summarizes their assessment of potential new demand in Labrador. The chart is based on an aggregate of electricity demand from these projected projects. Some of the companies the department has spoken with have indicated other possible power requirements, such as multiple expansions, but formal requests for service have not yet been made. Projects currently under construction include Tata Steel, Canada's DSO project, and Phase 2 of the Iron Ore Company of Canada's Concentrate Expansion Program. Labrador Iron Mines is already in production and is exploring the potential to transition from electricity supplied by diesel units to hydropower supplied by the isolated Menihek substation.

Projects undergoing feasibility study included Alderon's Kami Project, Grand River Ironsands Churchill River Project, IOC's CEP stage three Project, IOC's Long-term Expansion Program, Tata's LabMag Project, and Vale's underground mine at Voisey's Bay.

Longer term developments included a second phase for the Kami project, the Julienne Lake Project, a second phase for Grand River Ironsands, further expansion associated with IOC, and the Paladin Aurora Michelin Uranium Project near Makkovik."

To satisfy these future mining developments in Labrador, there clearly needs to be a new source of power supplied. While our government would like to develop Gull Island, Mr. Speaker, it is not an option at present. Gull Island can only proceed if our Province can arrive at a favourable arrangement with Quebec on transmission. Gull Island, if developed, can supply an additional 2,250 megawatts of power for Labrador industrial use or export.

Muskrat Falls is an ideal source for new electricity. At 824 megawatts, Mr. Speaker, this project will meet the growing needs of the Island population, and enable us to close the expensive and environmentally unfriendly Holyrood Thermal Generating Station. It will also enable us, Mr. Speaker, to meet the growing needs of the mining industry. Approximately 40 per cent of the output from Muskrat Falls will be available to meet this energy demand. Until such time as the power is required, the excess power will be sold on the spot markets in the Maritimes and Northeastern United States.

The development of Muskrat Falls, Mr. Speaker, will also support significant regional economic development in Labrador. Power will be available for industrial expansion and development in the region at competitive rates, encouraging development, which brings further business opportunities."

The nuts and bolts of Kennedy's comments are utterly at odds. On the one hand he says power to the mines will be provided once Holyrood is replaced. On the the other hand he lists off nine plus mining projects that will require all and more of the 824 MW that Muskrat Falls could produce. Of course, that does not factor in the 20% or 165MW that have been promised to Emera in return for their investment in the Island and Martime Links. There is clearly something not right with the Minister's math. Especially considering his analysis that during the winter months, with full recall of the 300 MW from the Upper Churchill, that there was only 80 MW left for use.

Then, on the evening of May 29, 2012 Premier Dunderdale stands in the House of Assembly and does an hour or so rant of which the following is a partial transcript

"Mr Speaker we have to pay for generation of power. So if we, unless there is a huge population explosion in Labrador, Mr Speaker, something absolutely unbelievable happens in Labrador, along with the great mining developments that are going on up there now Mr Speaker, Muskrat Falls would never be developed because people would never be able to afford the electricity and the mining companies would never be able to afford the electricity. And we had a mining, the Minister of Natural Resources and I met with a mining company in my boardroom on Friday, Mr Speaker, and they are very interested in whats happening in Labrador, because they are ready to move on their project...
They need Muskrat Falls to be developed Mr Speaker...Mr Speaker, they understand that if Muskrat Falls does not go ahead what happens in Labrador from that point on lies squarely in the hands of Hydro Quebec and the province of Quebec Mr Speaker...We enable development in Labrador Mr Speaker, because we absorb so much of the costs. We are able to sell electricity power to atleast six mining developments we hope in Labrador Mr Speaker...Mr Speaker, does anyone have confidence that when mines go to Hydro Quebec looking for energy for developments in Labrador that they are going to get the best industrial rates in Atlantic Canada? Not likely Mr Speaker...All those benefits are on the horizon Mr Speaker, but they need power."

So again we can see the pattern. There are numerous mines in Labrador putting pressure on the provincial government to move forward with Muskrat Falls quickly as their developments are ready to go - or close to it. The twist in Dunderdale's comments:
 "...are going to get the best industrial rates in Atlantic Canada?"
Kennedy's comments to the Telegram were close as well:
“I have met with IOC, Tata Steel, Alderon Resources, Labrador Iron Sands, Labrador Iron Mines, and Vale Inco; they all need power. They are saying to us: where can we get the power? They want the power at industrial rates because industrial rates in Quebec and in Manitoba, you have to be competitive. So, we are still in the process of determining what those rates will be.”

To listen to, and believe the government, you would think there were mines begging for power, at competetive rates, and that at this time no decisions had been made. That any number of senior mining executives would be chewing their nails in nervous fashion over the apparent state of flux the project is in. Certainly, there is a hint of that in Alderon's annual return filed with the US Securities Commission:

"Alderon needs to enter into contract with external service and utility providers

Mining, processing, development and exploration activities depend, to one degree or another, on adequate
infrastructure. In order to develop a mine at the Kami Property, Alderon will need to negotiate and
conclude various agreements with external service and utility providers for rail transportation, power and
port access and these are important determinants which affect capital and operating costs.
The Company’s future operations will require rail transportation from the Kami Property to a sea port
(expected to be the Port of Sept-Îles) and ship berthing, storage and loading facilities at such port. The
Company has not yet concluded agreements with the relevant rail companies or port operators
necessary for the transportation and handling of the Company’s planned production of iron ore and
there can be no assurance that agreements on acceptable terms will be concluded. The inability to
conclude any such agreements could have a material adverse effect on the Company’s results of
operations and financial condition and render the development of a mine on the Kami Property unviable...

Although low cost power from a major hydroelectric development at Churchill Falls to the east is
currently transmitted into the Wabush region for the existing mine operations, the current availability of
additional electric power on the existing infrastructure in the region is limited. The solution to the current
power capacity situation is the construction of a third 230 kV line from Churchill Falls; however, no
agreements have been reached for such construction and there is no certainty it will occur. If the current
power capacity issues in the Wabush region are not resolved in time for the Kami Property’s
development, Alderon will have to investigate other sources of power. There is no certainty that the
Company will be able to access sources of power on economically feasible terms and this could have a
material adverse effect on the Company’s results of operations and financial condition and render the
development of a mine on the Kami Property unviable."

However, and in a seeming direct contradiction to that statement, Alderon's Chief Executive Officer Tayfun Eldem, states in a corporate promotional video on the Kami project :
"We have very cheap power available to us at competitive rates that we believe will be a great advantage to Alderon."
That comment does not seem to square up with the comments made by the government. That comment does seem to square up with the comments of  Alderon's Executive Chairman Mark Morabito when, in the same promotional video, he states:
"There is no other iron ore project in North America, and very few in the world, get to production faster than we can and particularity at our low cost. In order to create an iron ore mine what you need is access to infrastructure, because you are required to move tons and tons of material. And so you need rail, you need power, you need ports. There are alot of iron ore deposits in the world that have been identified that have none of these things and if you want to put those things in it requires billions of dollars in capital and years of time to build that infrastructure. Here we are, we've found a deposit inside an existing iron ore mining camp with rail, with power, and with port."

So, to summarize by way of deduction, we have a government desperately trying to push a hydro electric development through to supply mines with power in Labrador. That government is being dishonest with its citizens as to the intent of the development, and its reasoning does not hold up to the least amount of scrutiny. For example, somebody should ask the Premier how much power (how many MW) would Alderon's Kami project require? Or any number of the rest of them that they've admitted to being in talks with. A simple question. Then the Muskrat Math will become quite evident. Cap Ex, by way of consumption example , apparently needs around 250 MW for it's mining project in Quebec. With only about 659 MW available after Emera gets their supposed share, does it defy common sense to believe that mining operations in Labrador could be satisfied? Not even close. Does it mean that that Maritime and Island Links are likely not on the table and never were? Yes. Does it mean the vast majority of KWHs being produced by a Muskrat Falls project will be sold at 3-4 cents per KWH to mining operations? Yes.

Does that mean the taxpayers/ratepayers of Newfoundland and Labrador will be massively subsidizing mining operations in Labrador for generations? Yes it absolutely does. 

It's just a matter of simple deduction.

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