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Rural Alaska

Owner of Alaska zinc mine sues borough over new severance tax

  • Author: Dan Joling
  • Updated: September 28, 2016
  • Published January 15, 2016

The company that manages one of the world's largest zinc mines is suing an Alaska municipality over a new tax.

Teck Alaska Inc. says the Northwest Arctic Borough is improperly levying a severance tax that targets only the mine and threatens its future operations. The lawsuit filed Friday in state Superior Court in Kotzebue seeks an injunction to stop collection of the tax and a court order requiring the borough to negotiate a new payment agreement.

The tax would replace a "payment in lieu of taxes" system set up before the borough, created in 1986, had developed a comprehensive tax code. The tax would substantially increase payments to the borough, from which the company receives no services, according to the company.

"We have tried to communicate our concerns and work with the NAB to achieve a reasonable new payment agreement," said Henri Letient, Teck's general manager for Red Dog operations, in a letter to employees. "This tax could triple Red Dog's average annual payments to the NAB."

Teck's estimates the severance tax, dependent on zinc prices, to be $30 to $40 million. That contrasts to $11.6 million in payments Teck made to the borough in 2014 and 2015.

Teck's tax payment would be $3.67 million if the mine were in the Fairbanks North Star Borough, according to the company, and $3.78 million in Juneau.

The borough and the company instead entered into the first "payment in lieu of taxes agreement" in 1987, before the new borough had set up a comprehensive tax code. Over 25 years, according the lawsuit, the borough encouraged the expectation that hundreds of millions in fixed investments, now impossible to move, would not be leveraged to extract dramatically increased payments.

"That ended in 2015, despite the fact that the Borough had a contractual obligation to negotiate in good faith," the lawsuit said.

The borough in 2009 enacted a tax code, exempting any entity with a PILT agreement.

Officials with Teck Alaska and the borough each say the other side has refused to negotiate in good faith to come up with a fair payment.

Borough officials contend the borough has received less in annual payments than Teck Alaska claims. They say the new tax will amount to about $22 million in annual revenue at current prices, also less than Teck estimates.

Asked if the increase could threaten the mine's longevity, as Teck claimed, Borough Mayor Clement Richards Sr. laughed.

"Very funny," he said. "That is totally inaccurate. They are the world's leader in zinc production right now. Basically, all we're asking for is a fair share.

He said the payment-in-lieu-of-taxes approach was in place only to help the mine get on its feet and become operational. The mine has done that and more, substantially increasing its capital investment and ore production over the years without providing a sufficient return to the borough.

"We're a home-rule borough and this is within our rights," Richards said of the tax. "They can challenge this in court, but I'm disappointed this is the path they're choosing."

Teck Alaska is a subsidiary of Teck Resources Ltd., a Vancouver, British Columbia-based mining company.

Red Dog Mine is an open pit mine in the De Long Mountains of the western Brooks Range. The mine is 82 miles north of Kotzebue, a hub community for Northwest Alaska villages, and 46 miles inland from the Chukchi Sea.

Teck moves zinc concentrate by truck to port and ships minerals to British Columbia, Asia and Europe.

The mine has operated since 1989 on land owned by an Alaska Native regional corporation, NANA, representing the Inupiat people of Northwest Alaska. Teck shares profits with NANA, which shares income with Alaska's other regional Native corporations. Through 2013, Teck paid NANA more than $1 billion in royalties.

In February, according to the lawsuit, the borough approved an ordinance prohibiting an agreement with Teck Alaska that allowed the company to pay less than the amount required by the tax ordinance. In May, the borough increased the tax by 50 percent. The borough's actions prevented good-faith renegotiations, according to the lawsuit.

The tax falls on just one taxpayer for a product sold exclusively in foreign commerce.

"This huge increase has no relationship to any change in services provided by the Borough or the cost of those services," Teck said in the lawsuit.

Red Dog is the largest employer in Northwest Alaska. Teck said 715 jobs in the borough are connected to the mine, paying $75 million in wages.

Alaska Dispatch News reporter Alex deMarban contributed to this report.

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