1

TECHNICAL MEMORANDUM

Incorporating Market Volatility Into Financial Assurance Trust Fund
Initial Balance Estimates to Adequately Protect Taxpayers From the
Long-Term Operations & Maintenance Costs of
PolyMet's NorthMet Project SDEIS Wastewater Treatment Systems

Prepared By: Matthew Tyler
Professional Consulting Forester
PO BOX 511 Finland, MN, 55603.
March 12, 2014

1.0 Introduction

My name is Matthew Tyler. I am a professional Consulting Forester and a resident of Finland,
Minnesota in Lake County. I am also homeowner and taxpayer in the State of Minnesota.
Permitting decisions made in the State of Minnesota will impact the State's future financial
liabilities and the health of the state budget, and consequently effect tax rates and the quantity
and quality of services available to myself and the rest of the public.

1.1 Qualifications

I have significant training and professional experience in mathematics, statistical modeling, and
natural resources economics. I earned my bachelor's degree in Ecological Forestry with a minor
in Conservation Biology from Prescott College in 2010. My undergraduate work included
advanced courses in statistics, forest and population modeling, and natural resource
economics, and as part of my studies I presented a poster at the Ecological Society of America
scientific meeting in 2008.

I have 8 years of field forestry, consulting forestry, and forest management experience. My
duties as a consultant to private landowners include appraising timber values and conducting
financial analysis of timber management decisions.

Additionally, I have been a contract Firewise Coordinator for Lake County since June of 2011. In
that capacity, I have assisted in estimating, budgeting, and managing more than $600,000
worth of hazardous fuel reduction project grants. I was also the primary author of a major
revision to Lake County's Community Wildfire Protection Plan (CWPP). The CWPP revision
included statistical and spatial analysis of historical wildfire events and fire weather conditions
in the county, as well as creating a county-wide map of hazardous fuel conditions using the US
Forest Service's Wild Fire Decision Support System (WFDSS) and associated software tools.
Most recently, I conducted a detailed economic cost-benefit analysis on behalf of Lake County
in support of a $3,000,000 metal-roof retrofit program grant proposal to the Federal Emergency
Management Agency (FEMA).
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2.0 Need for a Long-Term Treatment Fund
In the NorthMet Project SDEIS, PolyMet Mining Inc. proposes to meet water quality standards
post-closure by actively capturing and treating groundwater seepage from waste rock piles and
tailings basins. Water quality modeling in the SDEIS suggests that active, mechanical collection
and treatment systems are likely be needed for at least 500 years at the plant site and 200
years at mine site, although the SDEIS claims that it is uncertain how long mechanical treatment
will be required. In any rate, "it is expected to be long term." (SDEIS December 2013, p. ES-11,
ES-24, 5-7).
This raises the question of how to pay for long-term active, mechanical treatment. Commodity
metal prices are volatile, and mining companies often go bankrupt. To protect taxpayers from
bearing the cost of long term treatment, a portion of the financial assurance required by the
State of Minnesota should be set aside to create a non-refundable trust fund dedicated solely
to paying for the operations and maintenance of long term treatment. Such a trust fund is
referred to in the remainder of this document as the Long-Term Treatment Fund (LTTF), or
simply the Fund, to differentiate it from other aspects of financial assurance used to fund mine
site and plant closure or contingencies for catastrophic natural disasters or engineering failures,
or other accidents. Although we do not examine these other aspect of financial assurance here,
it is our belief that those aspects are also vitally important to properly protecting the taxpayer,
and must also be examined in depth.
The value of trust in any given year are subject to considerable variation in rates of return due
to market volatility. Similarly, the annual costs of operations and maintenance in any given year
are subject to considerable variation in annual cost inflation. In some industries, annual
inflation is considerably more volatile than the consumer price index.
While many studies have shown that investment funds can be modeled by their average rate of
return over the long-term, this modeling assumption only holds when the portfolio is subject to
a buy and hold strategy. When the portfolio must make regular pay-outs, investment strategy
usually becomes more conservative, because the fund is much more sensitive to short-term
market fluctuations.
It is the purpose of this document to calculate the initial size of the Long-Term Treatment Fund
that will be large enough to withstand market and cost variation over 500 of years. However,
we also acknowledge that this approach is based on underlying assumptions that may not be
tenable:

"Similarly, the assumption that financial assurance instruments can be developed
to ensure that funds will be available centuries from now is not logical. The State
of Minnesota has existed for 155 years. The United States of America has existed
for 237 years. The notion that a mining company and financial assurance
instruments will be available to work on a mine site 500 years from now is not
believable." (Tribal Cooperating Agencies Cumulative Effects Analysis, PolyMet
SDEIS Appendix C, pg. 152)
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3.0 Basic Fund Model

The value of the Long-Term Treatment Fund at the end of any given year can be described as
the value of the fund from the year before plus investment returns during the year, minus
operations and maintenance (O&M) costs during the year. Furthermore, operations and
maintenance costs are equal to the O&M costs from the prior year plus the O&M costs from
the prior times the rate of cost inflation over the year.

Mathematically, this can be represented as:

F
(t)
= F
(t-l)
+ [F
(t-l)
* R
(t)
] - [C
(t-l)
+ I
(t)
*C
(t-l)
] = F
(t-l)
* (1 + R
(t)
) - C
(t-l)
* (1+ I
(t)
) (EQ 1)

Where F
(t)
is the value of the fund at the end of year t
F
(t-l)


is the value of the fund at the end of year t - 1
C
(t)
is the annual cost of PolyMet's post-closure O&M at the end of year t
C
(t-1)
is the annual cost of PolyMet's post-closure O&M at the end of year t-1
R
(t)
is the rate of return of the fund during year t expressed as a percentage (e.g. 7%)
I
(t)
is the rate of cost inflation during year t expressed as a percentage (e.g. 2%)

For example, if the initial balance of the fund (F
0
) is $100 million, the initial O&M cost (C
0
) is $5
million, cost inflation (I
1
) over the year is 2%, and fund return (R
1
) over the year is 7%, then the
value of the Fund (in millions) at the end of the first year is:

F
1
= F
(0)
* (1 + R
(1)
) - C
(0)
* (1+ I
(1)
) = $100 * (1 + 0.07) - $5 * (1 + 0.02) = $101.9

And the balance of the fund at the end of year 2, assuming stable returns and inflation rates
would be:

F
2
= F
(l)
* (1 + R
(2)
) - C
(1)
* (1+ I
(2)
) = $101.9 * (1 + 0.07) - $5.1 * (1 + 0.02) = $103.83

Note that this is a simulation representation of the Fund balance at year t. For constant
inflation and return rates, a closed-form equation for the fund balance at year t is available by
solving a corresponding differential equation. However, for real world rates of inflation and
investment return that vary randomly over time, a closed form equation is not available using
conventional calculus, but instead requires solving a difficult stochastic differential equation.
Due to this difficulty, I opted to use a simulation approach.

3.1 Fund Simulation with Variable Rates of Inflation and Return

The Variable Inflation and Return Rate Fund model was designed to simulate 500 years of waste
water capture and treatment, as that is the maximum length of time simulated in the SDEIS.
The objective of the model was to estimate the probability of the fund being solvent after 500
years for varying combinations of initial fund balances and annual O&M costs. Solvency was
defined as the fund balance being greater than that year's annual O&M cost.
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For a given combination of initial fund balance and annual O&M cost, the fund solvency
probability was calculated by running the model 50,000 times. Each model run consisted of
starting with the initial fund balance and annual O&M cost, and then iterating Equation 1 500
times, each time with a different randomly chosen rate of return and inflation rate. The rates
were randomly chosen using normal probability distributions derived from the empirical data in
sections 4 and 5. fund balance was recorded at the end of that run, and then the simulation
was run again. The solvency probability was then calculated by dividing the number of solvent
runs by 100,000 - the total number of runs.

The simulation was conducted using the R project for statistical computing (R Core Team 2013)
using the source code in Appendix C.

4.0 Empirical Estimates of Trust Fund Rates of Return

It was assumed that the Long-Term Treatment Fund
would be managed by the Minnesota State Board of
Investment (MSBI). The MSBI handles many different
pension and trust funds for the State of Minnesota. Of
these funds, the two most similar in purpose to the
Long-Term Treatment Fund are the Permanent School
Fund and the Environmental Trust Fund. Both of these
funds are managed with the intent of making yearly
payments (MSBI 2013). However, of the two, the
Permanent School Trust Fund is more conservative and
aimed at long-term growth. The law requires that the
Permanent School Trust Fund’s principal remain
inviolate, and the fund is managed somewhat more
conservatively, with about 50% of the assets allocated
to bonds. (MSBI 2013). In this regard, the Permanent
School Fund is probably the best analogue for the Long-
Term Treatment Fund, which needs to remain solvent
for a very long time while making yearly payments.

Annual rates of return for the Permanent School
Fund between 1987 and 2013 were compiled using
public reports by the State of Minnesota that were
available online. The MSBI has published annual
reports online on the performance of all its funds
between 1998-2013 (MSBI 2013). Permanent
School Fund returns between 1987-1997 were
estimated from a graph in Nobles and Brooks
(1998).


Table 1: Minnesota Permanent School
Fund Returns 1987-2013
Year Return Year Return
1987 6.9% 2001 -2.6%
1988 7.2% 2002 -6.2%
1989 16.1% 2003 6.3%
1990 6.3% 2004 10.2%
1991 10.3% 2005 6.5%
1992 15.1% 2006 4.8%
1993 6.1% 2007 13.4%
1994 -3.1% 2008 -3.6%
1995 14% 2009 -9.3%
1996 5.5% 2010 12.3%
1997 8.2% 2011 17%
1998 17.8% 2012 6.4%
1999 14% 2013 10.8%
2000 6.1%
Mean 7.278%
Standard Deviation 7.136%
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These rates of return can be seen in Table 1 and Figure 1, along with their mean and standard
deviation. Although the long-term arithmetic annual rate of return is 7.3%, it is also clear that
returns were quite volatile from year to year.

5.0 Empirical Estimates of Cost Inflation Rates

The most common way to model inflation for financial
analysis is derive annual inflation from the Consumer
Price Index (CPI), published by the US Bureau of Labor
Statistics. However, specific industries sometimes have
cost inflation patterns that differ from the CPI. It is
therefore more appropriate to model industry-specific
inflation using an industry-specific Producer Price Index
(PPI) series published by the US Bureau of Labor
Statistics. The PPI "measures the average change over
time in the selling prices received by domestic
producers for their output" but also includes some
services. (US BLS, 2014).

A search of the available PPI series did not reveal any
series specific to water treatment services. However, a
PPI series for "Support activities for metal mining"
(Series ID PCU213114213114) from 1985-2013 was
found. Annual percent inflation was calculated by
dividing the Annual index value by the preceding year's
annual index value. The resulting inflation rates can be
seen in Table 2 and Figure 2, along with their mean and
standard deviation.

The arithmetic average annual rate of mining
service cost inflation was 1.75%. Interestingly,
this sequence was more than twice as volatile
relative to the mean than the investment returns
in Table 1, with a standard deviation of 3.929.
The sequence is characterized by periods of
inflation near zero punctuated by periods of
rapid inflation and deflation.
6.0 Fitting Probability Distributions to Return and Inflation Rates
In financial modeling, the stock return distributions are commonly modeled using a normal (e.g.
Gaussian or bell curve) distribution. This practice dates back to at least the early 1900s, but was
widely adopted in financial analysis after the publication of seminal works by Black-Scholes
(1973) and Merton (1973). The use of the normal distribution to represent financial returns in
Table 2: Support Activities for Metal
Mining Producer Price Index Inflation
1986-2013
Year Inflation Year Inflation
1986 0.10% 2000 -9.32%
1987 0.50% 2001 7.89%
1988 1.89% 2002 -1.45%
1989 4.59% 2003 0.17%
1990 1.31% 2004 0.78%
1991 0.09% 2005 11.03%
1992 0.09% 2006 4.31%
1993 2.21% 2007 2.14%
1994 0.09% 2008 6.86%
1995 0.09% 2009 1.89%
1996 0.99% 2010 0%
1997 3.82% 2011 4.38%
1998 4.62% 2012 6.48%
1999 -1.64% 2013 -4.84%
Mean 1.753%
Standard Deviation 3.929%
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financial analysis has since been institutionalized in derivative pricing, risk management, and
other financial fields.
A kernel density plot (e.g. smoothed
histogram) of the investment return
data was graphed and then overlaid
with a plot of the fitted normal
distribution (Figure 3). A similar plot
was made for mining service inflation
rates (Figure 4). The fits are relatively
good given the small sample size.
However, it is worth noting that the
tails (i.e. high and low extremes) of
the normal distribution are
considerably smaller than the
observed data, except for the right
tail in Figure 3. This means that an
extremely low or high rate will occur
less frequently in the simulation than
in the real world.
This is not unexpected. There is
considerable literature critiquing the
over-reliance of financial models on
normal distributions dating back to
the 1960s (Mandelbrot 1962, 1963,
1967). In the wake of the 2008
financial collapse, this literature has
regained popularity, and alternate
techniques have been rapidly
evolving (e.g. Frain 2009, Haas &
Pigorsch. 2009).
In light of these developments, we attempted to fit the data to an alternate distribution (the
alpha-stable distribution) recommended by Mandelbrot (1967) and Frain (2009). Unfortunately,
the sample sizes of the return and inflation data were too small to obtain a satisfactory fit. The
normal distribution was therefore used for modeling purposes in this document.
Consequently, this model likely tended to under-estimate the effects of volatility on the
solvency of the fund. Put another way, the real world financial markets are considerably more
risky than a well behaved computer model. Therefore, the results from this model should be
viewed as a bare minimum estimate of the required initial balance of the long-term treatment
fund. Actual requirements will likely need to be higher.
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7.0 Long-Term Treatment Annual Operations & Maintenance Costs
Although the NorthMet SDEIS gives estimates of $3.5-$6 million annually for post-closure
operations and maintenance (O&M) (SDEIS, pg. 3-138), the source of these estimates is not
documented. The purpose of this section is to use NorthMet project specifications,
independent cost estimates, and standard scaling methods to make an independent estimate of
annual NorthMet post-closure O&M costs.
7.1 NorthMet SDEIS Waste Water Treatment Plant Capacities
PolyMet proposes to meet water quality standards post-closure by treating collected waste
water at two reverse osmosis plants: one at the plant site, and one at the mine site. Although
the main SDEIS document does not include specifications for these plants, treatment capacities
can be found in the Water Modeling Data Packages.
Mine Site
"The total capacity of the long-term closure WWTF is assumed to be 600 gpm.
The actual flow sent to the WWTF is typically half of the capacity or 300 gpm."
(PolyMet 2013i pg 168).
Plant Site
"The treatment capacity of the WWTP used in the model is 2000 gpm during the
first eight years, and 3500 gpm after that." (PolyMet 2013j, pg. 112)

While reverse osmosis is not planned to be installed at the mine site until year 40, we assume it
has been installed for the purposes of calculating long-term treatment funding. Similarly, we
assume that the full capacity of the plant site reverse osmosis plant has been installed.
Although some have questioned the accuracy of the modeling used to size these plants, it is not
the purpose of this document to raise those questions. Rather, the purpose here is to estimate
annual operations and maintenance costs assuming the specifications given in the SDEIS.
Nonetheless, the results of the financial model presented here will certainly be sensitive to the
accurate sizing of the reverse osmosis plants. Future long-term treatment fund calculations
should be based on more detailed reverse osmosis plant specifications and cost estimates.
7.2 Published Reverse Osmosis Reference Cost Estimates
Two preliminary cost estimates for reverse osmosis facilities for other projects in the region
were identified to use as reference estimates. Coincidentally, both are also on the former LTV
Steel property.
The first reference cost estimate is for a 4000 gpm plant to treat water pumped from the Area 1
Pit and discharged to Second Creek. It was developed by Barr Engineering on behalf of Mesabi
Mining in pursuit of a NPDES permit for the Mesabi Nugget Phase II project (Barr 2011). This
estimate features three fairly similar alternatives based on an ultra-filtration to reverse osmosis
8
to evaporator to crystallization system. Although the cost-estimate worksheets feature a more
detailed breakdown, the worksheets have significant mathematical errors, are based on fairly
general cost estimates, and are largely conceptual in nature.
The second reference cost estimate is for a smaller 600 gpm plant to treat water in Cell 1E of
the LTV Tailings Basin that is believed to travel through the basin and discharge into Second
Creek (Barr 2013). This estimate was developed by Barr Engineering on behalf of Cliffs Erie and
PolyMet pursuant to a 2010 consent decree between the MPCA and Cliffs Erie. Although on the
same site, this estimate is not part of the NorthMet project. This estimate features greensand
pretreatment and reverse osmosis with three post treatment alternatives: (1) evaporation and
crystallization, (2) vibratory enhanced sheer processing (VSOP), or (3) intermediate concentrate
chemical precipitation (ICCP) and secondary reverse osmosis. This estimate was based on
extensive pilot and bench testing and detailed equipment costing from manufactures. As such,
it is probably the more accurate of the two reference cost estimates.
Table 3 summarizes the capitol and annual O&M costs of the three alternatives for both
reference reverse osmosis systems. Corrections were made to the annual O&M costs from Barr
(2011). In the original tables, O&M cost totals were added incorrectly, and somehow managed
not to include the estimates for ultra-filtration and reverse osmosis. The original cost estimate
tables from Barr (2011) and Barr (2013) are in Appendices A & B.
Table 3 includes breakdowns of the reference cost estimates to facilitate cost scaling. Annual
O&M costs were broken down into fixed and variable components (AWWA 2007). Fixed costs
are those that generally vary little from month to month or with monthly treatment volume,
such as membrane and filter changes, routine equipment maintenance, and staffing. Variable
costs are those expected to vary predictably with treatment volume, such as treatment
chemicals, sludge hauling and disposal, and electricity to power pumps.
Table 3: Published Reference Cost Estimates for Two Reverse Osmosis Treatment Systems
Each with Three Alternatives.
Reference Treatment Size Total O & M Fixed O&M
Variable
O&M
Estimate Option gpm Capital Cost Cost ($) % Cap Cost ($) % Cap Cost ($)
Barr 2013
Evap +
Crystallization 600 $19,729,392 $1,492,573 7.57% $1,435,636 7.28% $56,939
Barr 2013
VSEP +
Crystallization 600 $23,969,992 $1,579,447 6.59% $1,509,698 6.30% $69,750
Barr 2013
ICCP + SRO
+Crystallization 600 $14,817,750 $1,901,833 12.83% $1,346,820 9.09% $555,014
Mean $1,657,951
Barr 2011 Alternative #1 4000 $40,462,964 $5,383,000 13.30% $4,592,000 11.35% $791,000
Barr 2011 Alternative #2 4000 $39,802,164 $4,613,000 11.59% $3,920,000 9.85% $693,000
Barr 2011 Alternative #3 4000 $40,628,164 $5,215,000 12.84% $4,466,000 10.99% $749,000
Mean $5,070,333
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No attempt was made to evaluate whether the reference reverse osmosis systems were
adequate to remove the pollutant concentrations predicted in the NorthMet SDEIS. The
inclusion of these reference systems in this document does not constitute an endorsement of
their adequacy for the NorthMet project. Rather, the reference systems were included to
establish third-party cost baselines for financial assurance modeling.
7.3 Adjusting Reference Cost Estimates to PolyMet SDEIS Plant Specifications
The design capacity of the Barr(2011) reference estimate is just slightly larger than the design
capacity of the NorthMet tailings basin (plant site) reverse osmosis facility, while the capacity of
the Barr (2013) reference estimate is exactly the same as the design capacity of the NorthMet
mine site reverse osmosis facility. Therefore, the simplest estimate of total annual NorthMet
post-closure O&M treatment costs is the mean O&M cost from Barr (2011) plus the mean O&M
cost from Barr (2013).
Alternatively, the annual O&M cost of the NorthMet Plant Site (tailings basin) reverse osmosis
facility can be estimated by adjusting the more current and accurate Barr (2013) reference
costs using a scaling factor based on relative capacity.
Given the capital cost and capacity of a known treatment plant, AWWA (2007) state that the
capital cost of a new plant can be estimated by:
C
b
= C
a
* (S
b
/ S
a
)
0.80
(EQ 2)

Where: C
b
= capital cost of new size plant
C
a
= capital cost of known size plant
S
b
= capacity of new plant, in gpm
S
a
= capacity of known plant in gpm

The exponent reflects economies of scale where per unit costs decrease as plant capacity
grows.

Total O&M costs for the new plant can then be estimated using:

T
o
= C
b
* R
f

+ (S
b
/ S
a
) * C
vo
(EQ 3)

Where T
o
= total O&M cost of new plant
R
f
= ratio of fixed O&M costs to capital costs for known plant
C
vo
= variable O&M costs of known plant.
and C
b
, S
b,
, S
a
are as above

This is formula assumes that fixed O&M costs increase at roughly the same rate as capital costs,
which is a common practice for estimating building maintenance costs (i.e. keeping
depreciation at bay). In contrast, the formula assumes that variable O&M costs increase at the
same rate as plant capacity. In other words, there is little economy of scale effect for
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consumables; a 1000 gpm plant should use about twice as much treatment chemical and
electricity as a 500 gpm plant.

Using these formulas, we developed alternative capacity adjusted cost estimates for the 3,500
gpm NorthMet Plant Site (tailings basin) reverse osmosis facility based on the Barr (2013)
reference costs. The results can be seen in Table 4. Although the Table 4 estimates are
considerably higher than the reference costs in Barr (2011), they likely reflect Barr's
advancements in process research and cost escalation since 2011.

Table 4: Capacity Adjusted Cost Estimates Based on Barr (2013) for Three Alternative
Systems for the 3500 gpm NorthMet Tailings Basin (Plant Site) Reverse Osmosis Facility
Alternative Capital Cost
Fixed
O&M Cost
Variable
O&M Cost
Total
O&M Cost
Evap + Crystalization $80,881,116 $5,885,422.21 $332,142 $6,217,565
VSEP + Crystallization $98,265,558 $6,189,042.39 $406,876 $6,595,919
ICCP+SRO+Crystalization $60,745,722 $5,521,318.89 $3,237,583 $8,758,902

7.4 Lowest, Highest, and Mean Estimates for Post-Closure Total Annual O&M Costs

Combining all available estimates from Tables 3 and 4, the lowest, highest, and mean post-
closure annual O&M costs were calculated and are shown in Table 5. These estimates are
considerably higher than those found in the PolyMet SDEIS. Note that the lowest total annual
O&M cost in table 5 is higher than the highest cost estimate in the SDEIS.

Table 5: High, Mean, and Low Estimates for NorthMet Post-Closure Total Annual O&M Costs
Mine Site RO Facility Plant Site RO Facility

Reference
Cost Alternative Cost
Reference
Cost Alternative Cost
Total O&M
Cost
Low Barr 2013 Evap+Crystal $1,492,573 Barr2011 Altern. #2 $4,613,000 $6,105,573
Mean -- --
1
$1,657,951 -- --
2
$6,130,564 $7,788,515
High Barr 2013 ICCP+SRO $1,901,833 Table 4 ICCP+SRO $8,758,902 $10,660,735
1
Mean of three cost estimates from Barr (2013).
2
Mean of three cost estimates from Barr (2011) and three cost estimates in Table 4.

7.5 Third Party Adjustment of O&M Cost Estimates

According to Tribal Natural Resources Agencies and the EPA, financial assurances are typically
adjusted to reflect the cost of the government hiring a third party contractor should the mining
company go bankrupt. Generally, it costs about twice as much for the government to hire a
contractor for cleanup than it does for the mining company to conduct cleanup. (Margaret
Watkins, Grand Portage Natural Resources Dept., pers. Communication).

However, these cost estimates already contain considerable contingencies (30-40%) for cost
overruns. We therefore applied a more conservative third-party multiplier of 1.75 to the total
O&M cost estimates. The third-party adjusted values can be seen in Table 6.
11
8.0 Long Term Treatment Fund Simulation Results

Having obtained reasonable high and low estimates for post-closure NorthMet O&M annual
costs and statistical distributions for trust fund returns and mining service inflation, we
conducted the simulations outlined in Section 3. The input parameters and simulation results
are displayed in Table 6. Figures 5 displays the probability of fund solvency after 500 years as a
function of initial fund balance for each estimate of annual O&M costs in Table 6.

Table 6: Evaluation of Minimum Initial Balance Requirements for Solvency of
NorthMet Long Term Treatment Fund After 500 Years Using Stochastic
Investment Returns & Inflation Rates for Various Annual Costs
O&M Cost Third-Party Simulation Minimum LTTF Set Aside
Type Estimate O&M Length p > 0.95* p > 0.99*
Low $6,105,573 $10,684,753 500 $333,000,000 $404,000,000
Mean $7,788,515 $13,629,901 500 $423,000,000 $513,000,000
High $10,660,735 $18,656,286 500 $579,000,000 $694,000,000
* Probability of fund solvency is greater than p-value, (e.g. 95% or 99%)

12
9.0 Conclusions

The annual long-term operating and maintenance post-closure cost estimates in the PolyMet
SDEIS are significantly lower than the lowest estimates calculated from published estimates for
similar reverse osmosis plants on the LTV property. This is a significant problem. Independent
estimates of long-term annual O&M post-closure costs range from $6.1 to $10.6 million.

Lacking specific, detailed treatment water treatment plant plans specific to the NorthMet
Project, there is still considerable uncertainty about annual long-term treatment costs.

Stochastic simulation of volatile investment returns and inflation rates show that the minimum
beginning balance for the Long Term Treatment Fund required to ensure water treatment for
500 years after closure is $333 million, and quite possibly $500 million or more.

The Long Term Treatment Fund set aside is above and beyond the estimated $50-$200 million
mine closure and reclamation cost estimates in the SDEIS (SDEIS, pg. 3-138). The SDEIS also fails
to include an estimate of a financial assurance funds for accidents, natural disasters, and other
unforeseen events.

Not including additional contingency funds, the total financial assurance package should be at
least $383-$700 million.

10.0 Recommendations
• The annual post-closure operations and maintenance costs presented in the SDEIS
should be rejected, as they are inconsistent with independent estimates of reverse
osmosis operating and maintenance costs.
• Because the accuracy of long-term treatment trust fund requirements depends
considerably on the accuracy of annual post-closure costs, the NorthMet FEIS must
include detailed specifications and cost estimates for the post-closure treatment
operations and maintenance.
• The NorthMet FEIS and permit applications should include financial assurance trust
funds requirements for long-term treatment based on probabilistic analysis of
investment return and inflation volatility similar to that presented here.
• Deterministic estimates of long-term treatment trust fund requirements are typically
40-60% lower than those presented here, and should not be used in the FEIS or permits
because the fund is much more likely to go bankrupt over time.
• Future probabilistic financial analyses should ideally use alpha-stable or other non-
normal distributions.
• Future probabilistic financial analyses should use longer investment return and inflation
rate time series to improve the fit of statistical distributions.
13
References
American Water Works Association (AWWA), 2007. Reverse Osmosis and Nanofiltration, 2nd
ed., Manual of Water Supply Practices M46.
Barr Engineering Co. 2011. Area 1 Pit Water Treatment Evaluation in Support of the
Nondegradation Analysis. Mesabi Nugget Phase II Project. Prepared for Steel Dynamics, Inc.,
Mesabi Mining, LLC. June 2011.
Barr Engineering Co. 2013. Reverse Osmosis Pilot Test Report. SD026 Active Treatment
Evaluation. Prepared for Cliffs Erie LLC, and PolyMet Mining Inc. June 2013.
Black, Fischer and Myron Scholes. 1973. The Pricing of Options and Corporate Liabilities. The
Journal of Political Economy. 81(3):637-654.
Frain, John C. 2009. Studies on the Application of the a-stable Distribution in Economics. Ph.D.
Thesis. University of Dublin: Ireland.
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Appendix A: Reprints of Tables 23-25 from Barr (2013)
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Appendix B: Reprints of Tables 3.1-3.3 from Barr (2011)

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Appendix C: R Source Code for Probabilistic Long-Term Treatment
Trust Fund Model

library(MASS)
# Initiate Variables
reps <- 50000 # Number of Model Runs
lowfa <- 100 # Low Bound of Initial Trust Fund Balance
highfa <- 800 # High Bound of Initial Trust Fund Balance
startannualcost <- 18.656286 # Annual O&M Cost in 2013 dollars

# Initiate normal distribution parameters
# Inflation
infl.mu <- 1.753
infl.sd <- 3.929
# Returns
return.mu <- 7.278
return.sd <- 7.136
# Initiate model parameters
AssureVals <- seq(from=lowfa, to=highfa, by=1)
pvals <- rep(0,length(AssureVals))

# Main loop
for(fa in AssureVals ) {
AnnualCost <- rep(startannualcost,reps)
Fund <- rep(fa,reps)
for(yr in c(1:500)) {
# Begin loop code
Fund <- Fund - AnnualCost
ann.inflat <- (1 + 0.01 * rnorm(reps, mean = infl.mu, sd = infl.sd))
# Fail safe for out of bounds probability densities
ann.inflat[ ann.inflat <=0] <- 1
AnnualCost <- AnnualCost * ann.inflat
ann.return <- (1 + 0.01 * rnorm(reps, mean = return.mu, sd = return.sd))
ann.return [ ann.return <= 0] <- 1
Fund <- Fund * ann.return
}
pvals[ AssureVals == fa ] <- (sum(Fund > 0) / reps)
}

# Graph the Results
dev.new(width=6.5, height=6.5)
par(mgp=c(2, 0.75, 0))
plot(pvals ~ AssureVals, col="white",
xlab= "Financial Assurance Value (in $ Millions)",
ylab="Probability Fund > Cost at yr. 500" , ylim=c(0,1.1),
main="Figure 6: Probability of Long Term Treatment Fund\nSolvency at Year 500",
cex.main=1, cex.lab = 1, cex.axis = 1)
abline(h=c(0.95), lwd = 2, col="gray")
lines(pvals ~ AssureVals, lwd = 4, lty="dashed" )
title(sub = "Gray horizontal line is at 95% probability level", line = 3.5, cex.sub
=0.75)
# Find the minimum amount of money needed for a given probability of solvency
min(AssureVals[pvals>0.95])
min(AssureVals[pvals>0.99])