State keeps clean sheet at Illinois Creek

The story of Illinois Creek gold mine has a moral (or two) and a happy ending. So for Bob Loeffler it was the perfect note on which to end his employment at Alaska's Department of Natural Resources, where he was director of the Division of Mining, Land and Water from 1999 until early November this year. Loeffler resigned with DNR Commissioner Tom Irwin and other officials because of a disagreement over Gov. Frank Murkowski's gas pipeline plans.

Earlier this fall Loeffler visited Illinois Creek mine, on state land 50 miles southwest of Galena, and gave it a stamp of approval: a tangible one, in the form of a reclamation award for the team who took over the project after a lengthy saga. Alaskans Harry Noah and Ken Pohle formed American Reclamation Group with a $26 million investment and worked with the state to complete the project, going above and beyond the initial reclamation plan.

The problems of Illinois Creek landed on Loeffler's desk just at the time when he was promoted to director of the division, so it was somewhat appropriate that they should conclude when he left the job. "There was a bankrupt mining company, an under-bonded mine. Today the mine is fully reclaimed with no public funds," Loeffler told the Alaska Miners Association convention in Anchorage Nov. 3. "There's a monitoring fund large enough to monitor for 30 years with a reserve, in case something unexpected happens."

Mine originally owned by USMX

The cyanide heap leach mine was originally owned by a Denver-based junior, USMX. It contained 340,000 ounces of gold and was expected to have a six- to eight-year mine life, employing 110 people. "It began innocently enough with fast and efficient permitting," Loeffler said. "It took about one year (and) five months from the first discussion until the time the permits were issued in May of 1996. The mine was owned by USMX, but D.H. Blattner was the contract miner, that is, they owned all the equipment that actually did the mining and their employees did much of the actual dirt-moving work. It was financed by Rothschild and Sons for approximately $10 million."

Construction began in summer 1996, but USMX's cash flow system depended on the first gold being poured in the fall.

The initial reclamation bond was $1.6 million, which was to increase as the disturbance increased.

"So here we are at the beginning point, June 1996, construction begins and immediately the plot thickens," Loeffler said.

"Immediately USMX was behind schedule on their construction.

So when we sent inspectors out, they all came back saying, I don't know what's going on, these guys aren't going to make it by fall.

By about June 15th or June 20th we were hearing that from the folks at Fish and Game, DNR and DEC (the Department of Environmental Conservation), they were all going, these guys don't have it together with respect to constructing in Alaska."

Dakota Mining takes over

With no gold to finance their business, USMX started to go bankrupt and was taken over by another junior, Dakota Mining Corp., which owned some producing mines in South Dakota. They finished the heap leach and poured gold by the end of the summer of 1997, and established good relations with DNR. Despite this, they were behind in their payments to Rothschild and declared Chapter 11 bankruptcy in May 1998.

The bankruptcy proceedings gave Dakota Mining four months to reorganize, but now the project was plagued by the plummeting price of gold. When the mine was permitted the gold price was around $380 an ounce; when Dakota Mining went bankrupt it was down to $300, something that no one had foreseen. The money from the gold produced at Illinois Creek began going into an escrow account, and Dakota was only allowed to take what it needed to operate the mine. No more cyanide was added to the heap. Blattner and Rothschild fought over which creditor should get the rest of the money in the escrow.

Agencies ask for larger bond

"So then the crisis occurred," Loeffler said. "Now, the crisis occurred when the agencies said, look, you can't just let this mine sit here accumulating water - remember, there was no outlet, so if you're not picking up that water with ore, which absorbs water, the water's rising in the heap. The agencies asked for a larger bond… our bond we asked to go to $2.6 million… The cash flow was also beginning to go negative, remember, they hadn't been adding cyanide, and gold was at $285 an ounce."

It was time for a rescue attempt. The state had a series of long negotiations with Rothschild, in which the bank agreed to provide working capital to start the mine up and to increase the bond to $2.7 million. Rothschild persuaded the state that their liability should be capped at that amount. "But Rothschild wanted to buy mining equipment from Blattner and they had another contract miner coming in to do it," Loeffler said. "The contract miner finally said, I can't do it at the price you're quoting, and Blattner said, I'm not selling you equipment for that price. So it failed, and Rothschild walked."

The state was left to deal with an under-bonded mine, an insolvent mining company that didn't own the equipment at the mine, 60 million gallons of water and some diluted cyanide in the heap. The water had to be evaporated, so it wasn't possible just to close the mine down, and there was still some gold coming off. The plan to reclaim the heap wasn't finalized. Rothschild was owed about $9.2 million and Blattner was owed $1.9 million.

Twelve employees were needed to run the evaporation and keep the mine in compliance with environmental permits. The caterer agreed to take on these employees administratively, and shortly afterwards Loeffler took a phone call from the mine supervisor, asking if he really had to take orders from the cook. Loeffler assured him that was not the case.

State looks for company

If the state found a company to mine at Illinois Creek and it failed, the reclamation bond would be wasted. Instead the state considered immediately using the bond to reclaim the mine. "This is a problem for the mining community, and the mining community did step up, the AMA helped us with a contractor, and we also had that $2.5 million (in the escrow), which was very alluring at that point," Loeffler said.

The state promised not to go after the money in the escrow account if Rothschild agreed not to execute their liens, which they did. The state then demanded the reclamation bond and received the check for $1.6 million three days later, surprisingly easily. Alaska's statutes weren't set up for the state to lease out the mine again, so an emergency regulation had to be put in place. The state advertised an RFP to mine the property if possible, or if not, to reclaim it.

In another failed rescue attempt, the winner of the bid, Canadian junior Viceroy Resources, agreed to operate the mine with the proceeds that were coming out of the heap. Their idea was to spend $250,000 of their own money testing and developing the heap and developing a reclamation plan. But in spring 2000 they withdrew from the project, in accordance with an option in their contract. The smelter where the ore had been sent went bankrupt with $50,000 of the state's and Viceroy's money going with it.

American Reclamation takes over

This was the point where American Reclamation Group took over. "Gold was at $250 an ounce and people weren't necessarily predicting a rebound," Loeffler said. "They were taking a significant risk. ARG were Alaskans and they could find capital. They worked with Blattner to lower their price, and Blattner did. Local people working with locals were able to put together a mining package. Rothschild had looked at it like a bank, not taking any risks."

American Reclamation began mining that same year, 2000, employing 45 people in mining and 25 in processing. Five years later, the state achieved its primary objective - fully reclaiming the mine - without a dime of public money. There is $638,000 in an interest-bearing trust fund for monitoring Illinois Creek, managed by the Department of Revenue, and American Reclamation must pay another $200,000 into the fund. The fund also includes $100,000 from the sale of equipment to NovaGold Resources, which acquired some claims around Illinois Creek now known as the Khotol project.

"There are a couple of morals," Loeffler said. "One is that the reclamation bond amount matters. The state, we've learned a lot, and we are more careful about how we structure the bonds now. And we should be. The second is that the reclamation bond isn't the only thing… individuals and community matter… But government also must be light on its feet. This didn't fit into a mold."

AMA President Tom Bundtzen echoed Loeffler's sentiments. "I think Alaska can be proud of what it's done with reclamation," he told the convention. "It's one of the few Western states that really hasn't had yet a problem… It's really a tribute to the state government and the private industry working together on this."