Course:ECON371/UBCO2011WT1/GROUP3/Article2

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• Econ 371 Winter 2011 Main Page

Summary

As of August 31, 2011, after investing nearly $180 million by 2007 in discovery and exploration, and millions more to date in studies, engineering and permitting preparations, Northern Dynasty Minerals Ltd. is looking to sell its share, and sever all ties to the Pebble Mine project, stating that the project requires a "mega-mining company." The company began seeking a buyer in the Spring of 2011, and would like to avoid a hostile take over by a major mining company, but has yet to receive a bid. The mine will be located at the head waters of the largest sustainable salmon fishery in the world. Alaska Fish and Game estimate that the Bristol Bay fishery generated $141 million during the 2011 fishing season, this value does not include subsistence, and is based on $1.00 per pound. The salmon fishery employs about 10,000 season workers, the mine is indicating that it will be able to generate about 2000 full-time jobs. Conversely, Lisa Reimers, of the Iliamna Development Corp, argues that cost of entering the fishing industry is immense for businessmen when compared to the various businesses/jobs created by the mine, ranging from "housekeepers to shuttle drivers." While advocates for the mine believe that "the fish can co-exist with the mine," opponents remain apprehensive. Opponents have also become increasingly worried with the possible sale of the mining project, as, with the introduction of a new company, "promises that were made are not going to be there anymore."

Analysis

When compared to the previous article, these recent changes in events give great insight into the mining project. While Northern Dynasty was intent on moving moving forward with the mine before, it has since decided to sell its share and sever its ties. This could be the result of various research providing a more accurate idea of the costs involved with the mining project. This decision could also be a result of a better understanding of the true economic costs of the project. That is to say, while Northern Dynasty may have been capable of paying the costs associated with starting up the mine, it may not be prepared to pay the various social costs, such as legal fees and damage costs. Regardless of the reason, the concrete fact is that Northern Dynasty is no longer viewing the mine as a profitable venture, although wether or not another company will find it beneficial remains a mystery.

Overall, until a decision is made on the property rights of the contended areas, one is limited to CBA, which tends to hold the fisheries as the more beneficial industry over time, as can be seen below.

True Benefits of the Salmon Fishery

This article references the annual report made available by Alaska Fish and Game, this report estimates that 141 million pounds of fish where caught during the 2011 season. The report also roughly estimates the value of fish at $1.00 per pound. This gives us the 141 million dollars in total benefits created during the 2011 fishery. This value is approximately equal to an average value of the fishery. But does $1.00 per pound truly capture the entire benefit created by the processed fish? I don't believe so, $1.00 per pound is the amount at which most fisherman were paid for their catch over the last year. Once the fish is processed it is then shipped around the world and sold at restaurants and markets. What is the market value of this fish, I am suggesting that the fish may be approximately equal to $10.00 per pound depending on the market and quality of the fish. The low quality product is sold in cans for much less then $10 per pound, while the highest quality product is sold at the finest restaurants around the world for values greater then $20 per pound. With the revised value of the fish, the total benefits created would equal approximately $1.41 billion per year.

Comparing the Benefits

The total value of the mine is estimated at $300 billion over its lifetime of approximately 50 years. While the salmon industry is estimated to be worth about $1.41 billion per year. This is one of the last sustainable salmon industries in the world, with a little luck and a lot of work this industry has the potential of lasting forever. In order to make a comparison of the true value of the two resources, we will need them in Present Values generated on an annual basis. Assuming the fishery sustains its self for 250 years, the benefits are received on 50 year intervals, fish stock remains constant for 250 years, and fish values remain fixed we can then apply a few more assumptions from Cost Benefit Analysis to compare the benefits of the two resources. Assuming the best method of discounting is a time declining discount rate ( year 1 - 50: 3.5%, year 51-100: 2.5%, 101-200:1.5%, and 201-250: 0.5%) and utilizing an equivalent annual net benefits method to compare resources with different life spans.

Net Present Value of Mine is equal to $53.716 million based on a discount rate of 3.5% over a 50 year life span.

Net Present Value of Fishery is equal to $3,228.9 million based on a time declining discount rate as described above over a 250 year life span.

Now using a annuity factor (amortization) to put both resources in the value per year so that we can properly compare the benefits.

Net Present Value of Mine per year is equal to $2.29 million per year.

Net Present Value of the Fishery per year is equal to $32.95 million per year.

From the above results, the benefits of the fishery far exceed the benefits of the mine. This mathematical exercise is based upon many assumptions and should be taken with a grain of salt. But many of the assumptions are based on the current best practices found in CBA, as for the estimation of the true benefit of the fishery further investigation would be needed to prove this number. If we were to use a value of $1.00 per pound, the benefits of the mine would be much greater then that of the fishery.

Prof's Comments

Nice analysis. You've done some reading outside of this class.

Another angle would have been to consider Coase theorem. If the fishery is worth more than the mine, maybe the fishers should buy out the mining interest and shut it down. Why isn't this happening?

10/10