A bad deal for the CNMI

Hafa Adai yan Saludo.

I am pleased to present you with the Azmar-MPLA Financial Calculator—a tool that can be used to easily calculate profit margins for both Azmar and the CNMI based on the royalty terms proposed in Azmar International’s permit request currently under consideration with the Marianas Public Lands Authority. The permit would give Azmar International exclusive control of all pozzolan mineral deposits on the Northern Marianas island of Pagan for the next 20 years.

The calculator is available online at http://www.chamorro.com/community/pagan/calculator.html

The Azmar-MPLA Financial Calculator clearly demonstrates that the proposed deal is a bad one for the CNMI. The deal is dangerously flawed because the CNMI’s share is always the same, 7 percent, no matter what the cost of production; after covering the cost of production, Azmar always gets 93 percent.

The calculator demonstrates that the flat 7 percent of gross sales deal is extremely one-sided in favor of Azmar and becomes worse as the price goes up and costs of production goes down. For example:

When the price is $40 and the cost is $30:

– CNMI gets 632 million

– Azmar gets 1.368 billion

When price is $70 and cost is $30

– CNMI gets 1.331 billion

– Azmar gets 6.669 billion
When the price is $70 and the cost is $10:

– CNMI gets 1.531 billion

– Azmar gets 10.469 billion

When the price is $200 and the cost is $10:

– CNMI gets 4.560 billion

– Azmar gets 33.440 billion

No wonder Azmar president Ken Moore says he can get investors if he can get the permit under those terms. Who couldn’t? It’s an unbelievable windfall for Azmar. At a price of $70, it would take a production cost of about $59.65 for profit sharing to be a 50/50 proposition!

A conservative guess as to the cost of production is $30 or less. This guess is based on the fact that when Azmar had a customer willing to pay $46 per ton, they felt it was profitable.

A conservative long-term price range for pozzolan is $40-200 per ton. This is based on the fact that Pagan’s pozzolan is high-quality pozzolan. The low-grade pozzolan known as “fly ash” currently sells for $30-40 per ton. High-grade pozzolan products like Metastar sell for up to $800 per ton. Current supplies of fly-ash are projected to be increasingly insufficient to meet worldwide demand. Over the course of the next 40-50 years, the price of pozzolan is going to go up. A realistic current market price for Pagan’s high-quality pozzolan is about $70 per ton.

There are an estimated 200 million tons of pozzolan on Pagan.

A fair deal would involve either a fixed percentage split after costs, or a sliding scale based on prices/cost ratios. Further, it is not necessary to give the operator such an incentive that his profits are in the billions of dollars. How may businesses make that kind of profit? Very, very few. Just to make many millions of dollars in profit is adequate for most business plans. Therefore, a split wherein the CNMI gets the vast majority of revenues will work provided that the operator has enough to make a handsome profit. For example, if the price is $70 and the cost of production is $30, then let the CNMI keep $7.8 billion and the operator $1.2 billion. That represents a 100 percent profit over costs to the operator for as long as they are in operation.

Please use your influence as a CNMI leader to ensure that any mining permits are financially responsible and do not squander the resources of the people of the CNMI. Please use your influence to ensure that any mining deals provide for protections to the environment and involve the local citizens in discussions and decisions that affect them.

Why shouldn’t the CNMI people be included in an equity position and sharing profits equally with the operator? True, the operator is putting up capital, but the CNMI is putting up an even more valuable asset—the product itself. Deals like this in other parts of the world are usually structured with the local population having representation on the governing body of the developer, i.e., input, control, and oversight.

To allow strip-mining of the beautiful and pristine island of Pagan is a very serious matter. Improperly managed, it has the potential for tremendous damage to the land and surrounding waters. Azmar International has no mining experience, no detailed operation plan and no environmental impact study has been made. Further, they have a record of dishonestly and callously disgregarding the interests and opinions of the families who call Pagan home. Azmar is the wrong company for the job.

For more information on the Azmar deal and the Pagan mining issue, please visit the PaganWatch web site at: http://www.chamorro.com/pagan

Peter J. Pangelinan Perez
for PaganWatch
paganwatch@chamorro.com