Twin Lakes Mining Company and Tamarack, Minnesota negotiation positions

Prenegotiation Memorandum (pm)

Negotiation Team

Re: Tamarack, MN and Twin Lakes Mining Company

Position Structure

Twin Lakes Mining Company

The Twin Lakes Mining Company (hereafter known as 'company') makes significant contribution to Tamarack, Minnesota - employing 21% of the residents, providing 33% of the total real estate tax base - and is considered an integral entity to the town's longevity. The city needs Twin Lakes to maintain the current standard of living the residents enjoy.

The City of Tamarack

The city operates on a zero deficit per annum decree. Twin Lakes Mining Company has directly caused some of the need for improvements concerning water quality, air quality, and effluvia and pollution management. The city also relies upon the heavy property taxation to provide economic, culture, and recreation services to the community. Twin Lakes Mining Company does not need the City of Tamarack (hereafter known as 'city') to continue operations in other locations and as a corporate entity.

Negotiation Issues and Objectives

The company recognizes the urgency from the city to deal with water, air quality, and road issues, the escalating demands from the EPA to align production with current laws and standards, and the overall climate of the industry accompanied by the financial limitations placed by the corporate office. Based on this knowledge, the following lists embody the issues and objectives to be addressed during this negotiation period.

Issues

Water treatment plant - the city has projected growth over the next few years will require an additional water source and must address this need with or without the company's presence, company must address clean up issues for EPA requirements and co-existence with city

Air and roads - although the company has already agreed to invest $8 million to improve air quality, plant improvements will not address city's needs; city must also accept partial ownership responsibility for maintenance as company owns half the roads and permits free access to citizens and tourists

Bond issue - assuming $20 million bond would 'tie' company to city for 25 years, company cannot solely float the bond, approval would require highly unpredictable elector vote

Taxes - company is paying too much in taxes, considers them unfair in structure and amount, and is unwilling to assume improvements, building, and upgrades while under current tax base

Objectives

Water treatment plant - negotiate way to build plant with updated technology for ore-effluvia recovery and eliminate need for sediment recovery ponds

Air and roads - negotiate agreement not to repave current roads but implement dust management protocols; demonstrate city's responsibility in partnership to manage road costs

Bond - negotiate agreement with city to vote the bond into project planning and accept 50% of annual interest payment

Taxes - negotiate a moratorium on taxes until building and improvements are completed (approximately 10 years with bond approval (($4 million expendable income vs. $44 million costs)) and 15 years without bond approval); reduce entire tax base (property and right-of-way assessments) by 50%

Negotiation Priorities and Potential Tradeoffs

The following list orders negotiation priorities - with maximum, minimum, and target positions - in descending order of importance.

Negotiation Priorities

Protect company's ROI (return on investment) maximum position - spend capital on investments which will build ROI directly minimum position - spend capital on investments which will maintain currently invested ROI target position - negotiate capital expenditures which meet EPA, company, and city goals without creating ROI deficits

Keep company profitable maximum position - increase company revenue on a steady basis minimum position - use only allocated funds and request no additional funding for building, repairs, or upgrades target position - negotiate balance with the city which enables both entities to cooperate in joint expenditures and remain profitable

Reduce tax base maximum position - declare moratorium on all property and right-of-way assessments until project agreements and plans are completed (10 years with bond package, 15 years without); reduce tax structure by 50% following completion of moratorium minimum position - reduce tax structure by 50% on all real estate and right-of-way assessments target position - considering all upgrades and building requirements the company is facing, tax reduction is mandatory and non-negotiable

Accept that there are mutual interests between company and city and there will be issues upon which both can agree; there will inevitably be conflict, but the company is able and willing to leave the city if all negotiations break down or fail.

Potential Trade-offs

The company may need to assume full cost for water treatment plant in exchange for acquiescence on road repaving issues (city preference). When pushing for tax abatements and reductions (non-negotiable), the company may be required to assume a higher percentage of the bond interest payment structure.

Cost Synopsis

The company has a ceiling on expendable funds for this location; $16 million (of which $8 million is already committed) and a $2.6 million annual return to the city.

Table 1.1 demonstrates the financial forecast without city cooperation, abatements, or bond packages. It is important to note that the data currently does not reflect day-to-day operating costs (e.g., equipment maintenance, salaries, utilities, and so on) and there are no performance demands or limitations from headquarters calculated here.

Note: normal cost of doing business will add additional overhead to this table.

Time frame

Discretionary funds

Balance

First year funds

18.2 million

Day 1

18.2 million minus $8 million previously agreed to improve roads and air quality

10.2 million

Road paving $5.1 million

5.1 million

Real estate taxes $800,000

4.3 million

Right-of-way assessments ($400,000)

3.9 million

Water treatment plant development and construction (assessed over 10-year cost period)

$20 million / 10 years = $2 million per year)

1.9 million

Increase in ore recovery revenue through use of new water collection technology (~ $40,000)

2.3 million

Table 1.1 Company expenditures without city assistance or bond package

Table 1.2 demonstrates company expenditures with city acquiescence to tax abatements, sharing project costs, and bond packages. Please note that these figures do not include normal costs of doing business and will add additional overhead to this table.

Time frame

Discretionary funds

Balance

First year funds

18.2 million

Day 1

18.2 million minus $8 million previously agreed to improve roads and air quality

10.2 million

Road maintenance (not repaving) $600,000

9.6 million

Real estate taxes ($0 for 10 years, $400,000 beginning year 11)

9.6 million

Right-of-way assessments ($0 for 10 years, $200,000 beginning year 11)

9.6 million

Water treatment plant development and construction (assessed over 10-year cost period)

$20 million / 10 years = $2 million per year)

7.6 million

Bond expenditures ($924,370 = initial payment @ 50% of share) - one time payment

7.5 million

Interest payment on bond package (at 50% of total shared with city = $1 million)

6.5 million

Increase in ore recovery revenue through use of new water collection technology (~ $40,000)

6.6 million

Table 1.1 Company expenditures without city assistance or bond package

Objective

Priority and Ancillary Factors require large amounts of water to wash ore produce a way to wash and collect ore powder without paying full cost for filtration plant cost = $20 million city has considered Beaver Brook a secondary water source = may be willing to enter joint venture with company dust control is mandatory for the city and quality of life manage long-term costs and enjoin the city to shoulder some responsibility initial cost = $8 million company has built half of the city roads at its own expense paving roads = $4.8 million annual maintenance = $600,000 annual oil spraying = $800,000 short-term resolution will not satisfy EPA land taxation is historically excessive reduce property taxation with city-based incentives to keep the company on town rolls company plant is inside city boundaries real estate taxes = $800,000 per year rail right-of-way tax = $400,000 per year city willing to sell land for $2.2 to $2.4 million

EPA requirements meet requirements under budget through partnership with the city closing company will not relieve company of responsibilities to clean up pollutants total compliance will exceed $36 million

Company ROI determine feasibility to staying in city relatively low-grade ore is being mined at this site foreign competition in markets is significantly lowered other newer sites promise higher ROI

Financial Considerations

Gross Annual Funds

City

Company charter does not permit operating on deficit values all additional funding requires increasing property and sundry taxes initial improvement outlay: $16 million annual funds: $2.6 million

Capital Cleanup Costs with bond without bond

Filtration plant

20 million

Plant improvements million milliion

Road paving

4.8 million

Annual Maintenance Costs

Bond interest million

Road maintenance

Assumed Bond Costs

Bond sinking fund one payment of $1,848,740

Principal due once 25 years into future = $20 million

1,848,740 invested in 10% interest bearing fund to be compounded annually

Interest payable yearly = $2 million

Ancillary Issues for Consideration

Issue

Importance Rating

Responsibility keeping plant open company's several Union citizens placing pressure on city council to enter joint agreement with company city's cost of total cleanup will be lower than $36 million

Summary Position

Water city needs additional water source over next several years - with or without company's presence; water filtration plant would address EPA issues and support city growth city council determined techniques to recover ore could increase annual sales by $32,000 - $40,000

Bond issue requires elector approval, state would require guarantee of repayment debt service outlay payments would become legitimate deductions (earlier recommendation of 50%) manager would float corporate bond approval would commit company to city for 25 years million in deductible payments at 50% per year head office will not approve due to financial position of entire company

Air and Roads already agreed to invest $8 million to improve quality (must be deducted from $16 million cap) prefer control techniques over paving and paving maintenance ($5.1 million- see previous cost chart - vs. $600,000) plant improvements will not address city problems with trucks city must be partially responsible as roads laid by company are used by tourism, city functions, and general public access as well as company requirements

Taxes company contributes far more to city than private residents - tax base and abatement should not be rated on same scale reduce annual taxes by 50% ($800,000 to $400,000) on all company land right-of-way assessments reduced by 50% ($400,000 to $200,000) moratorium on all taxes while major improvements are being made to city and company structures city must provide moratorium for time required to improve. build, or upgrade water treatment plant and roads current tax base is excessive and has been allowed too long to continue without sanctions