Red Dog shifts to production sharing: profits go to shareholders of all land-holding regional native corporations.

• Author: Liles, Patricia
• Position: Nana Regional Corporation Inc. and Red Dog Films Inc. - Financial report

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After nearly 18 years of producing zinc, lead and silver, the Red Dog mine in Northwest Alaska has finally recovered about a billion dollars in initial and ongoing capital costs and its operator will begin paying its Native landowner a net profits percentage of its open-pit mine business.

The timing couldn't be better for the Red Dog landowner NANA Regional Corp., as the remote mine is on track to produce another record year of billion-dollar profits. In 2006, thanks to dramatic increases in zinc prices, Red Dog earned a record $1.08 billion in profits, compared to $325 million in 2005, according to the mine's operator, Teck Cominco.

The trend of profitability should continue this year. For the first six months of 2007, Red Dog's profits have been consistently higher than those reported during the same period in 2006, setting the stage for another potential record-setting profitability rate this year. Revenues were up to $422 million for the first six months of 2007, compared to $362 million in 2006. Operating profit for the same period was $265 million, compared to $240 million in 2006.

Given a steady production rate comparable to 2006 and the continued strong market prices for zinc, the greatest contributor of the mine's revenues, mine managers expect Red Dog will likely produce similar profits in 2007.

"Red Dog has sort of matured and reached right now a steady state," said James Kulas, environmental superintendent at Red Dog. "What we're loving right now are the metal prices."

The recent substantial gain in profits will help to shift the distribution of mine earnings from royalties based on production to profit-sharing under the financial and operating agreement between NANA and Teck Cominco.

Since production began in late 1989, NANA has received an advance net smelter royalty of 4.5 percent each year, while the mine's operator, initially Cominco American Inc. and now Teck Cominco, retained the remaining profits.

In some years, as recently as 2002 when zinc prices averaged 35 cents per pound, Teck Cominco posted a loss at Red Dog of $28 million.

Despite some lean years, annual royalty payments to NANA have grown, hand-in-hand with the increased rate of metal production at the remote mine operation. In the fiscal year 2006, NANA received $29.6 million in net smelter royalties from Teck Cominco, an increase of nearly $13.7 million over the prior year, according to the Native corporation's annual report.

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