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High cost of operating in remote Alaska threaten Donlin gold mine

Craig Medred

The high costs of operating in remote areas killed a lot of mines in Alaska after World War II, and the problems of old seem to linger today. Barrick Gold, the world's largest gold mining company, warned Thursday the long-envisioned Donlin Creek gold prospect east of Bethel in Western Alaska doesn't "currently meet our investment criteria.''

Barrick cited potential capital investment costs of $6.7 billion to develop the mine as a major hurdle. The gold deposits at Donlin are valued at $20 to $30 billion, but Barrick said that given the variables involved it isn't comfortable with the present rate of return. A big problem is getting power to the isolated mine site.

Barrick's announcement that it was backing away from Donlin and a project in South America reportedly sent the stock of Donlin partner company NovaGold to the lowest level in three years. NovaGold quickly issued a public statement saying it was at least four years away from a final decision on Donlin, and stressing the value of the gold still in the ground.

Few doubt there is a lot of gold there in the Kilbuk-Kuskokwim Mountains, but getting it to market will be pricey. Donlin is about 12 miles up a remote valley from a 100-person speck of a village named Crooked Creek, which is itself about 120 miles upstream from Bethel, a community of less than 20,000 people considered an Alaska regional hub.

Crooked Creek has no infrastructure to support development. Bethel has little. Both communities are hundreds of air miles from Anchorage, the state's largest city, and there are no roads -- only wilderness. All of these things drive up the cost of development.

Donlin will require major construction in the form of docks, roads and most importantly a power plant. The companies involved at Donlin once considered barging diesel fuel up the Kuskokwim River, but largely rejected that idea as way too costly. Of late, they have been studying a natural gas pipeline from Cook Inlet through the Alaska Range to the Interior. The costs of that line was pegged at $1 billion, and the hurdles to development potentially significant. The route could require modifications to the historic Iditarod Trail, which some consider a national treasure. Donlin is one of four principal partners supporting the Iditarod Trail Sled Dog Race. In November of 2010, apparently wary of potential public relations pitfalls, Donlin signed a two-year deal, agreeing to donate $285,000 a year to join Anchorage Chrysler Dodge, GCI and Exxon Mobil among the upper crust of race sponsors.

The Donlin mine does have strong local backing. The subsurface land is owned by the Calista Corp., the regional Native corporation of southwest Alaska. It stands to earn tens, if not hundreds, of millions of dollars if the mine goes into operation. Even more importantly, though, a major new mine could provide hundreds of jobs in a corner of Alaska where unemployment is so high many people don't even bother to look for work.

Thus some are continuing to hold out hope for a Donlin mine.

While Barrick was telling shareholders of a 35 percent drop in quarterly earnings and suggesting it needed to find an investment better than Donlin, its mining partner tried to sound more upbeat.

"NovaGold, the owner of the other 50 percent of the prospect, tried to put a positive spin on the Barrick announcement'' is how Fairbanks Daily New-Miner reporter Dermot Cole cast the story. "It is reasonable for Barrick Gold not to be making a construction decision on this new, large-scale project at this time. NovaGold similarly is not making any such decision. The timeline of the permitting process means the co-owners have approximately four years to make any major decision on the project."

It is worth noting Barrick did not announce it was abandoning the project. Jamie Sokalsky, president of Barrick, said in a conference call with stock analysts that the company still plans to spend $30 million to $40 million a year on permitting and other studies.

"We are actually being more conservative,'' he said. "The message (that) we can continue to advance permitting is a message that I think will resonate with investors, that we aren't making these huge capital decisions which are going to further defer our ability to generate free cash flow."

Both Barrick and NovaGold are Canadian companies. The former is headquartered in Toronto, Ontario, the latter in Vancouver, British Columbia.

Contact Craig Medred at craig(at)alaskadispatch.com