BSNC and the land, Part IV

The four installments of BSNC and the Land were organized to bring our shareholders and their descendants a sense of BSNC’s history as an Alaska Native Corporation. We looked at the state of the region just prior to and immediately following ANCSA in the first installment. The troubled years during and following bankruptcy were discussed, and our emergence from those years with a careful regional focus were reported in the second installment. In the third installment, we traced the growth of BSNC as we expanded our business line beyond the region and eventually into an international company. And in this last part, we have tried to convey a sense of the mining industry and where BSNC has been in terms of resource development and preservation and where we are headed as we move toward a bright Arctic future.

Forty years after ANCSA, the corporation continues to meet challenges and strive for success. We reach for excellence in all of our ventures, from exploration for minerals on BSNC lands, to real estate, to government contracting and, importantly, for the maintenance of the land base granted on which many of our people depend for their subsistence and spiritual well-being.

While the winds of business have not always blown fair for BSNC, the land base granted through the Alaska Native Claims Settlement Act to all corporations has provided a stabilizing effect. A key to the long-term economic health of the regional corporations was the timber and mineral rights granted through the Act. This final installment provides an overview of how BSNC resources are managed, the positive effects of the Section 7(i) requirements, and what the future may bring in terms of development and preservation of BSNC’s land base.

THE EARLY YEARS: INTERIM CONVEYANCES AND EXPLORATION

The history of Nome is intimately linked with the gold rush of 1898. The lands in the region hold significant deposits of precious and strategic metals. Since these deposits do not adhere to man-made boundaries, many of them lie within a combination of BSNC, state, and federal land.

Prior to making its selections under ANCSA, BSNC was contracted for an evaluation of the mineral wealth in the region. When BSNC received interim conveyance of many of these lands in the early 1980’s, exploration and mining companies began to approach the corporation to negotiate exploration agreements.

Beginning in the early 1980’s, BSNC actively sought to market the mineral estate of its ANCSA land base. Some of these exploration programs focused on the large tin deposits of the Lost River/Tin City area, while others were for gold ore deposits such as Rock Creek, Big Hurrah, Bluff, Mount Distin and Christmas Mountain. Throughout BSNC’s history, only one exploration program resulted in the execution of a mining lease: Novagold’s Rock Creek Project.1

THE MINING INDUSTRY: A GENERAL DESCRIPTION

It is worthwhile to describe how the exploration and mining industry operates and BSNC’s position within the overarching commodities market.2

Most exploration efforts on BSNC lands have been guided by what is commonly called an Exploration and Option to Lease agreement. This type of agreement has two parts: 1) the exploration phase, and 2) the option to enter into a mining lease at any point during the exploration phase.

During the exploration phase, an exploration company will usually have from three to five years to explore the property, during which drilling and collecting core samples, stream and surface sampling, and minor trenching may occur. The terms of the agreement carefully define what property may be accessed and require responsible work practices. Most of the exploration programs have used helicopters and tracked vehicles to access the lands of interest, resulting in very minimal impact to the surface. All crossings of anadromous fish streams must be done in compliance with state law and access across state lands and village corporation surface estate is preferably done on existing legal easement.3 Any work conducted during the exploration must also comply with laws governing environmental and safety compliance.

Benefits that are derived by BSNC from exploration programs are increased knowledge about the quantities and qualities of a specific resource, and annually increasing payments to BSNC for the right to explore corporate-owned property. Many prospects have been explored over the years by various companies, and with each project our knowledge of the resource improves. Fees paid to landowners for exploration rights depend on the type of commodity (gold, tin, etc.), the size of the company, the general health of the mining industry at that point in time, and the scale of the exploration program.

Most agreements are multi-phased: the exploration agreement may be transformed into a mining lease at any time during the exploration term. What this means, as far as the organization of the Exploration and Option agreement is concerned, is that the mining lease is included as an exhibit and referred within the language of the exercise of the option to lease (which is a section in the exploration agreement usually entitled, “Option to Lease”). The terms of the mining lease are directly tied to the type of ore body being mined, the mineral being mined, the current and projected price that the mineral will fetch on the market, the cost of developing the mine infrastructure, and the cost of production. Most mining leases have a 20-year term and some have a renewal clause for very long term projects. As an owner of the mineral being mined, the corporation will receive payment for the extraction of the commodity throughout the life of the mine. What form that payment takes may vary from agreement to agreement, but it is usually in the form of a Net Smelter Royalty (NSR), a Net Profit Interest (NPI) or a combination of both. Other benefits and payments can be negotiated for a mining lease, including local or shareholder hire requirements, contractual preferences, or an option for the landowner to “buy-in” to obtain an ownership portion of the project. The level of risk and ownership assumed by the landowner in any given project will also affect their returns.

Certain aspects of the mining industry are speculative, in large part because the commodities being mined do not have fixed prices and the market is susceptible to fluctuations caused by global influences. For instance, a few years ago, there was a great deal of attention on the markets and mining of Rare Earth Elements (REEs). China controls the vast majority of the exports for REEs and these minerals are increasingly important in high tech applications (cell phones, defense technology, alternative energy technologies). The stock price of many REE-focused exploration and mining companies went through the roof and companies were able to invest in more programs focused on REE exploration. However, the rush has been subsiding. Subsequently companies are not pursuing agreements for properties as they were a few years ago.

Much of the exploration and mining industry in North America is driven by what are referred to as “junior” companies. These companies incorporate and raise funds through the Toronto or Vancouver Stock exchanges.4 Due to the significant economic downturn in 2008 – 2009 and again in 2013, many junior companies found it difficult to raise the capital necessary for advancement of exploration on mineral prospects. Exploration in the north has slowed as a result, and it has been further affected by uncertainties in permitting and environmental review.

REVENUE SHARING UNDER ANCSA: SECTION 7(I) AND 7(J)

ANCSA anticipated that development of the land and resources conveyed to corporations would not happen overnight and that resources are not distributed equally across Alaska. The first article of this series (Part 1: ANCSA and the Bering Strait region, Autumn 2013), reported that ANCSA has a sharing provision that has proven an effective mechanism for redistributing profits from resource development to all regional and village corporations. This provision is commonly referred to as “Section 7(i).” The framers of ANCSA created a specific section that requires a major portion of all proceeds from subsurface resource development to be redistributed to all regional and village corporations. This is a means of insuring that the benefits from development accrue not only to the subsurface owner (regional corporations) but also to the surface owner (village corporations). Section 7(i) of ANCSA also applies to timber resources and requires that 70 percent of all profit from resource development be distributed to all other regional corporations on a per capita basis. Each regional corporation, in turn, must distribute 50 percent of the 7(i) receivables to their village corporations. These annual, semi-annual, or quarterly payments to the village corporations are called 7(j) payments.

In effect, village corporations (surface estate owners) receive 35 percent of all profit generated from any mining, oil, or timber development on ANCSA lands. If a shareholder of the regional corporation is not a member of a village corporation (an “at-large” shareholder), that person receives a portion of the 7(j) funds based on the per-capita formula. It is important to remember where this source of money comes from and that Section 7(i) was an equitable distribution derived from the irregular pattern of resource wealth in the state.

The village corporations and at-large shareholders witness fluctuations in the commodities markets through the varying payments they receive as a result of the 7(i)/7(j) distributions. In the case of BSNC, a check is issued annually to at-large shareholders for their portion of the 7(i) payment to BSNC (payments to village corporations are done quarterly). The amount of the check may vary significantly from year to year as a result of the price of zinc (NANA has the profitable Red Dog Mine), or oil (ASRC). Though the market price of zinc, oil, or timber is reflected in the 7(i) and 7(j) payments, so are the costs of expanding and maintaining the respective resource businesses. In years when the price for the commodity is high and production costs low, the 7(i) payments are high. Payments are low or non-existent when the commodity price or demand drops and/or production costs rise.

Variability in production, the price of commodities, the level of exploratory and mining activity, and the global economy directly impact 7(i) revenue and therefore the bottom line for Alaska Regional Native Corporations.

VARIABILITY IN RESOURCE REVENUES AND PERMANENCE OF THE ANCSA LAND BASE

While the extractive industry holds promise for economic development in Alaska, the volatility of the commodities market and the cost of doing business in the Arctic has effectively checked rapid development of mine projects. While BSNC has endeavored to have exploration programs on BSNC lands, we know that significant inroads must be made towards reducing the cost of power, improving the permitting process, and developing practices and technologies that help mitigate the negative impacts that come with mining.

Mineral exploration will continue as BSNC works toward improving other economic opportunities in the region such as the acquisition of Point Spencer. Protection of the land base for subsistence purposes is paramount, and we are advocating for expanding the opportunities for conservation easements on corporate-owned lands. BSNC sees all of these as important tools or means for ensuring that your ANCSA entitlement is protected and also used to enhance the quality of life for you and the future generations of BSNC shareholders and descendants.

¹ The Rock Creek Mining Lease was signed in 2006. Novagold constructed the mine but was unable to bring it into production. BSNC purchased the Alaska Gold Company (Novagold’s subsidiary) which included the Rock Creek Mine in November of 2012. BSNC has been evaluating the possibility of re-opening the mine, but current conditions, including the price of gold, indicate that mining there would not be profitable.

²As explained in an earlier installment, BSNC holds nearly two million acres of mineral estate in the region, most of which underlies the village corporations’ surface estate.

³Village corporations develop Surface Use Agreements with the exploration companies for access across village lands.

4The Toronto and Vancouver exchanges are the primary points for investment in mining in North America. Though many people think Alaska mining is run by Outside or Canadian companies, these companies employ many U.S. citizens in managerial and technical positions.