Tax chasm widens
Northwest Arctic Borough argues Red Dog can afford higher severance tax
Last updated 2/7/2016 at Noon
Nearly three weeks after Teck Alaska, operator of the Red Dog Mine in northwest Alaska, sued the Northwest Arctic Borough over a steep tax hike implemented at the beginning of the year, the chasm between the two sides seems to have only widened.
In preparation for its plans to "aggressively pursue a satisfactory legal resolution" to the charges brought by Teck, Northwest Arctic Borough has released information outlining its perspective on the argument.
In a Jan. 26 statement, the borough said during the past 25 years, Red Dog has evolved from an uncertain prospect located in the remote Northwest Alaska Arctic to a world-class zinc mine that "has made C$5.2 billion in gross profits for Teck since 2005."
Considering the profitability of the zinc mine and the Northwest Arctic region's growing needs, the borough contends that the US$11.5 million per year average that Red Dog has recently paid to the local borough and school district is not adequate.
"The borough's leadership will not sit idle while a multinational mining company refuses to pay its taxes for a billion-dollar mine that pays large corporate salaries and shareholder dividends," the borough wrote.
Since Red Dog began production in 1989, the Northwest Arctic Borough has been the recipient of payments in lieu of taxes paid by the mine.
These "PILT" payments are the result of agreements negotiated between the Red Dog Mine and Northwest Arctic Borough every five years. The latest negotiated agreement expired at the end of 2015.
Northwest Arctic Borough said it spent six months in negotiations with Teck Alaska but the two sides could not come to a PILT settlement before the latest agreement expired.
"The borough expended considerable time, effort, and money to negotiate with Teck in good faith without success," Patrick Savok, director of government affairs, Northwest Arctic Borough, told Mining News in an email.
Unable to reach an agreement with Teck on the PILT, the borough reworked a severance tax first adopted by the borough in 2009.
While this tax has been around for a few years, Teck was exempt as part of the PILT agreement.
The borough increased the severance tax rate from 3 percent under the plan adopted in 2009 to 4.5 percent in 2015. However, Savok told Mining News that the new tax is actually lower due to its structure.
"Under the revised structure, the tax allows significant deductions in calculating the tax base," he explained.
During the past five years, the negotiated Red Dog PILT payments to the Northwest Arctic Borough have averaged roughly US$11.5 million per year, a total of US$57.5 million for that span.
In its Jan. 26 bulletin, the borough says this payment is an 80 percent discount, compared with what the mine would have paid under the severance tax adopted in 2009.
Accordingly, the local borough would have collected US$287.5 million in taxes from Red Dog over the previous five years, or US$57.5 million per year, if the mine had been taxed under the 2009 severance tax.
Under the 2015 tax, Teck figures it will pay somewhere between US$30 million and US$40 million a year in borough taxes, or about triple what was paid under the expired PILT agreement.
The borough says income from the increased taxes is needed to provide basic services across its vast service area of Northwest Alaska, and Red Dog is a highly profitable mine that can afford to bear the increased tax load.
"In the first three quarters of 2015 alone, the mine's gross profit was just under C$500 million," the Northwest Arctic Borough penned in a talking points bulletin published on Jan. 26.
"The Red Dog Mine is now one of the largest zinc mines in the world and Teck enjoys the benefits of low, set tax payments to maximize profitability for its shareholders," it added.
Teck argues that Red Dog already pays the highest municipal tax in Alaska under the now expired PILT agreement. The company says that if the Red Dog Mine was located in one of the other mining municipalities in the state - such as Fairbanks, Juneau or Delta Junction - it would pay between US$3.7 million and US$4.6 million in local taxes. This is about 10 percent of what the company anticipates paying under the Northwest Arctic Borough severance tax.
Bridging the chasm
NANA Regional Corp., which has strong business and personal ties to both Teck and Northwest Arctic Borough, is doing its best to get both sides of this taxing issue back to the table.
"NANA is committed to engaging with NAB and Teck to come to agreement on a reasonable PILT through structured mediation," the Northwest Alaska Native regional corporation responded to the filing of Teck's lawsuit.
NANA owns the Red Dog deposit and is 30 percent owner of the operation.
On the flipside, the Northwest Arctic Borough covers exactly the same area as the NANA region and the vast majority of the some 8,000 residents of the region are NANA shareholders, as well as beneficiaries of any tax the borough takes in.
Since mining began, NANA has received roughly US$1.3 billion in net proceeds payments from Red Dog, of which it has distributed about US$820 million to other regions and at-large shareholders via the 7(i) sharing provisions of the Alaska Native Claims Settlement Act. Of the US$480 million that NANA has kept, some US$221 million has been paid in dividends to shareholders.
This is on top of the more than US$469 million in wages Red Dog has paid to NANA shareholders working at the mine over the past 26 years, including the US$39.3 million paid to 604 NANA shareholders that either worked full- or part-time at Red Dog in 2015.
Seeking an equitable resolution, NANA said it "is committed to engaging with NAB and Teck to come to agreement on a reasonable PILT through structured mediation."
However, both sides believe the other is trying to dictate the terms of any past and future talks.
"Unfortunately legal action was one of the only remaining options, as the NAB has refused to engage in good faith negotiations to reach a reasonable payment agreement," according to Teck.
For its part, the Northwest Arctic Borough argues, "Teck's refusal to negotiate in good faith resulted in the borough implementing its severance tax to ensure the borough can meet the public service needs of our residents."
Despite the chasm, NANA hopes to "provide a bridge to reach a long-term, or interim, agreement."
UPDATE: This article was updated on Feb. 5 to remove a sentence that did not accurately represent the position of NANA Regional Corp.