Mining muddle: Crow Wing Power board grapples with controversial royalty agreement
Executives' handling of the Emily manganese deposit took center stage during a Crow Wing Power Board of Directors meeting the morning of Thursday, Jan. 17—largely a tense back-and-forth exchange dominated by co-op attorney Paul Johnson and board member Bryan McCulloch.
"There's lots of inconsistencies here," McCulloch told Johnson, citing an unusual atmosphere of confidentiality and a lack of documentation for board business. "I don't quite understand. You're our attorney, yet there are all these inconsistencies in so much of this, and has been since I've been on this board for eight years."
"Year after year, I've addressed this and got nowhere with it. I'm totally puzzled with it," McCulloch said later. "I hope you're representing us, Paul. I hope you're representing us, but I don't think that you are."
During a presentation, Johnson assured board members the co-op's executives were operating within legal and ethical boundaries, and that they remained committed to the co-op's roughly 38,000 members.
"I certainly am representing the cooperative and have the best interests of the cooperative at heart and have given advice to the cooperative," Johnson said.
The manganese deposit has the potential to garner its stakeholders billions of dollars. Manganese—while historically used to toughen steel—is crucial in the manufacturing of products from medical implements and plow equipment, to burgeoning markets for batteries and electric cars.
The primary electricity provider for rural residents in Crow Wing, Cass and Morrison counties, Crow Wing Power signed a joint venture with manganese deposit property owner Steve Carlton and his associates—the Carlton Group—in 2008. So far, the company has spent $23 million—cash and credit, not asset values—on the mine's development. Aside from a few drill tests and the construction of surface facilities, there hasn't been any active mining at the site. Attempts to extract the manganese have been unsuccessful.
Crow Wing Power CEO Bruce Kraemer is also the CEO of Hunt Enterprises, a for-profit subsidiary with a 5 percent royalty stake in the manganese deposit, and Cooperative Mineral Resources, a for-profit subsidiary managing the deposit. Both are owned by Crow Wing Power.
The Dispatch was granted access to the tense meeting where topics, including the 2008 royalty agreement, negotiations with third-party investors and non-disclosure agreements, were hashed out and debated—but, predominantly, concerns that Kraemer and Johnson have not been transparent or honest with the board dogged proceedings.
Later, the board convened in a closed meeting for an executive session.
After the meeting, the Dispatch contacted board members to determine—in general terms—what the executive session was about. Director Gordon Martin declined to comment. Board President Bob Kangas said directors spoke with a potential third-party partner in the Emily mine project. McCulloch said he was barred from participating in these discussions and had no knowledge of the negotiations.
None of the other board member responded to requests for comment by deadline.
The Dispatch obtained a copy of the 2008 royalty agreement, which indicates the royalty interests can only be relinquished by interest holders themselves—not voided with the termination of a seperate consulting agreement, nor voided with a borehole mining test that isn't mentioned or specified in the royalty agreement.
"The Five Percent (5 percent) Royalty to Hunt provided in this section shall be divided up into a permanent and irrevocable assignment to Bruce Kraemer, Don Nelson of 1 (percent) each," the royalty agreement states, "and the remaining 2 (percent) shall be assigned to such additional purposes, in such percentages, and for such periods as Hunt, in its sole discretion, may choose to direct in writing. Hunt may retain any unassigned and undirected share of its 5 (percent) Royalty."
Johnson said Kraemer relinquished his 1 percent stake in November and Chief Financial Officer Don Nelson and former Chief Operating Officer Doug Harren relinquished their 1 percent stakes back to Hunt in December. Kangas said it was his understanding Kraemer relinquished his royalty stake in March.
Johnson has noted the original royalty agreement is still legally binding—though, it's effectively defunct, he said, because a new agreement would have to be negotiated with a third party in order to move the mine forward.
Koering and McCulloch
Board member Paul Koering questioned Johnson on the issue of potential conflicts of interest.
"Any time I got to these meetings that we go to, it's 'co-op, co-op, co-op, it's about the members, it's about the people—and it's their co-op,'" Koering said. "Any incentives—like if any executives or any board members or anyone, I don't know who—but if a large amount of money was given to them, is that really the co-op way? Or should it all have been distributed back to the co-op members?"
"I think the board recognized at the time the immensity of the challenge of getting a mining operation going," Johnson said. "And if that 1 percent could come out of the Carlton side, that seemed like a win-win from the co-op's standpoint, that there would be an incentive for the management team to make the mine successful."
"Given the immensity of the challenge, I think that was appropriate thinking," Johnson added.
McCulloch questioned Johnson on his participation in the process that led to the finalized royalty agreement signed Nov. 20, 2008.
"We've had this disagreement before ... (the royalty agreement) went to your office and these three individuals got their names (added) on this document," McCulloch said. "So it wasn't Steve Carlton who said, 'I'm going to give you 1 percent, Bruce (Kraemer), I'm going to give Doug (Harren) 1 percent and Don (Nelson) 1 percent.'"
In addition, McCulloch contended he was barred from board discussions on the Emily mine for several months because he would not sign a non-disclosure agreement—until, he said, the Star Tribune published an article revealing the Hunt stakes on Aug. 31. Then, he noted, he was inexplicably allowed back into discussions.
Johnson said McCulloch's exclusion and admittance back into board meetings was based on the topic—namely, negotiations with a potential third-party investor who requested the non-disclosure agreement. When negotiations fell through, McCulloch was brought back, he said.
Beyond stating how many groups the company was in discussions with, Kraemer didn't reveal which groups these were for board members to vet, McCulloch added—to say nothing of the negotiations with these potential partners, which he said were disclosed in an incomplete and perplexing manner to board members.
A similar lack of communication was evident in dealings with the Carlton Group, their partner that has to sign off on any third-party partnership, McCulloch noted.
McCulloch expressed regret for signing a resolution dated May 21, 2015, that effectively delegates authority to Kraemer to conduct business, management and negotiations involving the Emily deposit.
"I got on board with everybody because we had a plan of attack," McCulloch said. "In the back of my mind, I said, 'I hope this doesn't come back to bite us,' because what's happened is that it's taken all of the control from all of the authority here."
Johnson noted any final deal with an investor would have to get final approval by the Crow Wing Power Board of Directors.
Johnson contended the 5 percent royalty stake retained by Hunt Enterprises—with 2 percent "unspecified," and the remaining interests originally allocated evenly between Kraemer, Harren and Nelson—was a standard, legitimate agreement for executives of a for-profit subsidiary to undertake in a mining venture.
His arguments fell in four primary areas:
• The royalty agreement—while still legally binding—is essentially a non-factor because the contract would have to be renegotiated with a third-party partner for the mine to progress into profitability. During the meeting, however, Johnson noted it may well have been the original intention of Hunt Enterprises executives to profit from these royalty stakes, up until the failure of a borehole mining test in 2011.
• It should be noted the interest stake is derived from net revenue—or, essentially when the mine starts to ship enough product to account for development and operation costs and, thus, become profitable.
• The royalty agreement was negotiated and signed by executives of a private for-profit company—namely, Hunt Enterprises, a subsidiary of Crow Wing Power—and the 5 percent Hunt stake was a portion set aside from the Carlton Group's 43.75 percent stake.
Kraemer has stated he does not consider his simultaneous roles as the CEO of Crow Wing Power, a public co-op, and CEO of its private for-profit subsidiaries as a conflict of interest. He has also denied that a 1 percent stake in his name, or a 5 percent stake under control of a company he heads, could influence his position as the prime negotiator for a public co-op responsible to roughly 38,000 members.
• It was understood and written into the document that executives like Kraemer would be instrumental in seeing the Emily manganese mine project to fruition. Thus, these stakes allocated in Kraemer, Nelson and Harren's names were intended to be an incentive to develop a difficult venture, such as the Emily mine, into a profitable venture.
Kraemer described his royalty stake as originally intended to be an incentive and a gift from the Carlton Group, while further categorizing the royalty agreement as a deal with a private citizen, not the CEO of a public co-op.
Emily manganese deposit
According to the most current reports available, the Emily lode represents an intriguing opportunity—possibly the largest manganese deposit in all of North America and specifically in the U.S., which imports 100 percent of its manganese from Africa, Asia and South America.
It's a deposit featuring a rare combination of size, accessibility and high-grade manganese—estimated at 4 billion to 10 billion pounds—potentially worth $3.48 billion to $8.7 billion, dependent on market factors and size of the deposit. In addition, there's a further $250 million to $350 million worth of iron ore that could be harvested.
Manganese could factor significantly in markets for batteries and electric cars in coming decades.
In particular, Carlton pointed to the car industry shifting into a focus for electric vehicles. He said by 2023 the industry could be producing 1.4 million electric cars a year and drivers could be steering 30 million electric vehicles on the road by 2030. These electric vehicles require batteries. Batteries of this caliber require manganese.
The Carlton family has a long and active history with the Emily manganese deposit, which is situated on a parcel near the edge of the city of Emily. Steve Carlton's grandfather was among the first prospectors of mining company Pickands-Mathers to discover the manganese deposit during flyovers in the '40s. Later, Carlton's father bought it outright in 1963—surface and mineral rights, with lakeshore property, on 180 acres for $3,000.
When the torch was passed to the third generation in the early '90s—and, around that time, when the now defunct U.S. Bureau of Mines expressed interest in exploring the deposit—Steve Carlton set out to develop the deposit into a viable mining operation.
It should be noted that as owners of a 38.75 percent stake in the deposit, Carlton and his associates stand to make hundreds of millions if mine operations become profitable.
Crow Wing Power steps in
Initially, Carlton put the mine up for sale on the internet in 2006—drawing potential buyers from across the globe. Once Crow Wing Power executives' interest was piqued, a meeting was arranged with the Carlton Group.
"That set up an invitation to go meet with Bruce (Kraemer) and we went and sat down with him. When he learned (Ukrainians) were looking to buy it, he said, 'Well, maybe we should buy it for the community and keep it here,'" Carlton said. "I told him that would be the absolute dream for us."
Crow Wing Power—an electricity company with little to no proven mining acumen, as well as a public co-op to boot—didn't seem a likely candidate. However, backed by funds gained with the sale of Hunt Technologies in 2006—as well as a purported $50 million line of credit—Crow Wing Power executives were able to negotiate a deal with Carlton and his associates that allocated an exponentially higher portion of the mine's profits in royalties to the Carlton Group than an international corporation could expect.
That—coupled with the opportunity to work with a local company and give back to central Minnesota, Carlton said—prompted Carlton and his associates to go through with the deal, despite Crow Wing Power's relative lack of capital compared to international competitors.
Carlton said he gave a $2 million loan to expedite the deposit's development.
Around this time, Crow Wing Power established another for-profit subsidiary—Cooperative Mineral Resources—to oversee the mine's development and management.
Borehole mining—or, essentially, a hydraulic method during which water is blasted into a vein to produce a slurry that is transported to the surface and processed—was tested for its effectiveness in 2011. But the Emily manganese deposit proved too compacted and dense. Borehole mining operations at that time stalled.
Shortly thereafter, Crow Wing Power executives formally terminated their consulting agreement with the Carlton Group on Dec. 1, 2012, and negotiations between the two parties deteriorated quickly over the following years.
Carlton said communications between Crow Wing Power and the Carlton Group are virtually silent—both informally and formally—while Kraemer described Carlton as a "disgruntled business partner" motivated by frustration with the mine's progress.
Carlton said Crow Wing Power executives have largely failed to uphold their end of the joint venture deal—citing the 2008 royalty agreement, a verbal understanding the mine should be operational by 2011 or 2012.
In discussions with the Dispatch, Kraemer dismissed criticisms Crow Wing Power isn't doing its part to develop the mine into a viable operation. He said mining operations—like many business ventures—take years to develop, especially when invested parties are committed to maximize the mine's profitability.