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March|April 2005
Insult to Injury By Reynolds Holding
Right On By Richard W. Garnett
Wrong, But Not Too Right By Kermit Roosevelt
The Mine Line By Geoffrey Gagnon
How the West Was Lost By Daniel Brook
Saving the Race By Daniel J. Sharfstein
A Crime With a Name By Nicholas Thompson

The Mine Line

Divvying up diamonds in the Canadian Arctic.

By Geoffrey Gagnon

THE PARCEL OF LAND THAT MINERAL-HUNGRY PROSPECTORS in Canada rushed to last November was a frigid tract of sidewalk outside a federal building in the outpost town of Yellowknife, 300 miles south of the Arctic Circle. No one drills here for diamonds or any of the other treasures that lie underneath the vast Northwest Territories. But by lining up along a central downtown street, the miners get a chance to pocket the exploration permits that Canada awards on a first-come-first-served basis during the month of December—and so to stake a claim to an increasingly coveted piece of the Canadian Arctic.

Last fall, the enticement of an exploration permit was strong enough to draw a half-dozen miners to the sidewalk before the first snows of October. They pulled on their long johns, dragged out their lawn chairs, and hunkered down against the federal building's brown walls. By the end of November, dusk was setting in before 3:30 p.m. When the federal employees filed out for the night, Vic, a 49-year-old who was thick in the neck and spoke in a syrupy jumble of Irish and Canadian accents, crept out of the wind and into the building's entryway. "I don't know what they did out here last year. But this year we're prepared," he said, kicking the heater under his seat and nodding to the thick cord that snaked down the sidewalk and around the building to a gas generator.

Outside Vic's small oasis of warmth, the chill was teeth-rattling—and dangerous, according to the Royal Canadian Mounted Police, who came around at night to make sure that everyone who'd fallen sleep in line was breathing. Still, at the front of the line reclined Dave, a lanky chain smoker who, like other secretive line-sitters, wouldn't give his last name and was cagey about where he was from. Dave went defiantly hatless, his giant parka unzipped even though the temperature dipped 30 degrees below zero Fahrenheit. He claimed that 20 years of Arctic prospecting rendered him immune to the cold. "We're the last of the old-school prospectors," he said.

At first glance, the Yellowknife permit line hearkens back to the rush to open the frontier in the 19th century, when homesteaders and gold diggers raced to be first to strike a claim. In theory, everyone is free to wait—and freeze—for the chance to strike it rich. "This is a system that tells the little guy that he can have a share and that he can compete," said Malcolm Robb, Canada's head of mineral development for the Northwest Territories, peering through the glass of his office window toward the compact line that waited below his sixth-floor office.

But down on the sidewalk, the line looked neither romantic nor egalitarian. Big companies with deep pockets were holding the top two spots by rotating hired line-sitters who, it was rumored, were paid $200 a day. Dave, it turned out, belonged to a group of six who swapped in and out of the line in shifts, shuttling back and forth to a nearby hotel in a rented SUV. Dave wasn't in line so that he could make his fortune. He was there so that the big company that was footing his hotel bill could get a leg up in staking a prized Arctic claim. Like his partners, Dave said he was bound by contract to keep a lot of things secret, including the identity of his employer.

Behind Dave, Vic was doing the same. His crew was paid by DeBeers, the South African diamond giant. The third spot in line was held by Trevor Teed, a longtime Yellowknifer with roots that go back to the first European explorers who trudged the far north trading fur. For 15 years, Teed has operated a one-man mining exploration company, making his living by trekking into the tundra on snowshoes and snowmobiles. Teed's brand of small-time prospecting takes know-how, painstaking effort, and experience. The best local prospectors like him are fast and nimble, keep costs low, and know the terrain with the greatest potential. Yet Teed wasn't holding a spot in line to stake a claim of his own. To the 48-year-old miner, a spot on the sidewalk had become a commodity too valuable to hold onto. With the help of his 18-year-old daughter, Jessie-Lea, he was keeping a place warm for Dunsmuir Ventures, a Vancouver mining company to which he had sold his spot in line. A little guy like Teed can make more money holding a spot in line than by trying to develop a spot in the ground.

A FEW YEARS AGO, NOBODY GUESSED THAT COMPANIES would be pouring this kind of money into the Northwest Territories. Though diamonds were discovered for the first time in the region a decade and a half ago, interest quieted after an initial rush. As cheaper mining took hold in Latin America during the 1990s and global mineral prices slid, high-risk investors with venture capital turned to better-known prospects like the Silicon Valley tech boom.

Looking for ways to jump-start the mining industry, the Canadian government revived a decades-old tax credit plan. Flow-through financing—a system of government-sponsored tax incentives designed to help mining companies raise money—was temporarily reintroduced in 2000. At the same time, improved geoscience and satellite technology made it easier to find minerals in lands that had been poorly studied during the earlier diamond rush, and emerging Asian markets fueled a growing demand for the mineral resources that the prospectors turned up.

Last year, exploration companies that sift for minerals doubled the amount they'd spent a year earlier and poured $234 million into exploring the Canadian Arctic. It's the most money for exploration that the region has seen in one year, and a sizable chunk came from DeBeers. The diamond juggernaut, which had $5.5 billion in global sales last year, pumped $40 million—almost half of its worldwide exploration budget for 2004—into furthering 30 Canadian projects. "Even when diamonds were first discovered here a decade ago, we weren't seeing exploration numbers quite like this," Robb said.

As mining fever spreads across the Arctic, it's in Yellowknife where hopes and miners gather. Police lunching at the diner near the federal building, clerks at the post office on 50th Avenue, the guy making repairs at the Igloo Inn—everybody talks mining. Located on the north shore of Great Slave Lake, the town is home to about 17,000. That's close to half the people in the Northwest Territories, an expanse above the plains of Alberta that reaches north like a crooked finger over 452,000 square miles, nearly twice the size of Texas. The roads and rails that connect southern Canada with the Northwest Territories sputter into the town and then die. To all points north, the supplies and labor needed to man mining complexes and exploration sites are carted by a relay of helicopters, planes, and snowmobiles.

Two hundred miles or so to the northeast of Yellowknife, the tree line turns to tundra and untapped mineral deposits lie buried in a region called the Slave Province. Fanning throughout this area is a patchwork of proven mines, staked claims, and sites that are now being plumbed by explorers. This is where geologists predict the next big mineral score will happen. Mike Vaydik, who heads the Northwest Territories Chamber of Mines, a regional mining industry association, says he can't believe the variety of metals, minerals, and fuels that prospectors are searching for—including uranium to fuel nuclear power and steel for construction in Asia. The fall of the American dollar has also prompted countries looking for another asset to renew their interest in gold, the old favorite that put Yellowknife on the map in the 1930s.

The biggest profits, however, continue to come from diamonds. Canada's first diamond mine, the Ekati, opened in 1998 in Slave Province. It promptly began churning out nearly a million dollars' worth of gems a day. Five years later, Diavik Diamonds opened a second mine nearby. The two operations have already made Canada the world's third-largest producer of diamonds, behind Botswana and Russia. DeBeers is now planning a third site, a project called Snap Lake that, when it opens next year, will be the company's first outside Africa. The company's determined effort to nab a prime spot in the Yellowknife line last fall suggests that it has designs on more sites as well.

When Canada began awarding exploration permits on a first-come-first-served basis 40 years ago, the idea was to encourage miners to develop unmapped areas of the north by giving them easy and cheap access—and that's still the goal. There are two ways to get the government's go-ahead to explore Canadian land: You can trudge the perimeter of the property you want and drive stakes into the snow to mark your claim, or you can visit the Mining Recorder's office in Yellowknife during the permitting month of December and file the requisite papers for the land you want. Given the high cost of transportation and labor in the Arctic, the office route appeals to most prospectors, small-time and big-time. December was chosen years ago because that was when miners came to town for the "freeze-up," a term that described both the wintry weather and the outdoor work slowdown during the darkest month of the year.

These days, however, mining is a year-round occupation in the north. Satellite phones, global positioning systems, and helicopters are the tools of the modern miner, along with miles of industrial trucking roads built on iced-over lakes. To Trevor Teed, those are reasons for the government to scrap the December permitting season and accept permit applications year-round. The fevered run-up to December serves no purpose, he argues, and it handicaps small-timers like him, who, Teed estimates, number a few dozen. The system favors companies that can pay people to stand in line for weeks; without the line, independent operators could more easily claim prized parcels. "Paying people to sit in line, even for a few days, costs way more than guys like me can ever spend," said Teed. "The rules probably didn't anticipate these lines. That's fine. But now something has to change to make things fair."

The fairness that a change in rules can achieve is at best limited. The astronomical costs of turning a claim into a functioning mine—the Diavik mine cost $1 billion to build—mean that guys like Teed operate as discoverers, hunting down prospective land, demonstrating its value, and selling to major companies. But the disadvantage to small-timers in the current system matters because getting a permit is the only way to access the dwindling number of sites in the Canadian Arctic with known or probable mineral deposits. By buying the top spots in line, companies can snap up the terrain with the best potential: the areas around Slave Province and 700 miles north near the Beaufort Sea.

The problem with the line system that Teed wants solved stems from a basic law of economics. Systems that hand out things for free, including spots in permit lines, favor those with money as the spots gain value, points out Richard Epstein, who heads the law and economics program at the University of Chicago Law School. When spots in the Yellowknife line became a valuable commodity, the gap widened between those who could afford to buy a spot (with money or time) and those who couldn't. While the permit system was designed to widely distribute a public good, it's having the opposite effect. "This case shows the fragility of first-come-first-served systems," Epstein said. "They work well when there are only small players."

What's the fix? There may not be an easy one. Epstein argues that if the Canadian government scraps the line and sets up an auction for permits in its place, guys like Teed still won't be able to compete: the high bidders will price them out. And the sudden change in policy might even leave the small-timers feeling more shortchanged than they did before. Short of government intervention in the market—a low-cost raffle for the potential top sites, for example—the big players will elbow out the small-time prospectors Canada's mining law was designed to encourage.

In other parts of Canada, mining authorities have tried various systems for handing out permits. In Quebec, for example, mining claims are staked using maps on the Internet, a system Teed favors. If nobody has staked a claim in a spot you're after, it's yours. There's no need to visit a government office and no need to wait in line.

But fearful of hackers and unconvinced of a need for change, Malcolm Robb isn't planning to give up the line on the sidewalk. "Every plan ultimately comes down to deciding who comes first, even if it's on a computer, so for now this is as good a way to do it as any," he said. If there's going to be an exploration rush, Robb wants it happening outside his window.

DAWN DOESN'T BREAK IN YELLOWKNIFE IN WINTER; it spreads out in a fuzzy wash of gray. In the small hours of December 1, an occasional truck lumbered through the snow-whitened, rutted streets while crows the size of snow shovels picked their way through dumpsters. The line-sitters were usually as quiet at this hour as the air was cold. But this morning the line was on its feet, stomping boots and giddy with conversation. After about 5 a.m., a gaggle of men wearing less winter gear began joining the line, swelling its numbers to about two dozen by the time the federal employees began entering the building through a backdoor three hours later.

Out front, Dave was closing out his final hour in line with his gloved hands wrapped on the handle of the building's locked door. A year earlier, the group holding the first place in line on behalf of DeBeers claimed that they lost their spot in a pushing match with another line-sitting crew on a Friday, three days before D-Day. Determined to muscle their way back to the front, the group sent a representative to hole up inside the federal building for the weekend. She camped out in the bathroom and raced to the Mining Recorder's office moments before it opened on the following Monday. But the ploy failed; the DeBeers rep was turned away because she hadn't signed in at the first-floor security desk. This year, her story was line legend, and Dave was convinced that Mounties would be dispatched to put down any last minute fisticuffs.

There was no drama, however. A few minutes before 9 a.m., the locked door was opened and the line hulked three big paces forward and into the building's entrance. The tiny lobby was warm and bright with fluorescent lighting. A uniformed security guard instructed the men to sign in as visitors. Inside the Mining Recorder's office, a mix of miners with real mining intentions and company executives who had come to replace the line-sitters completed their paperwork in less than 20 minutes. Most of the men didn't take off their giant jackets in the time it took the government to accept their permit application and 10-cents-per-acre deposit. Postmarked applications would come into the office throughout the rest of December, but the Arctic spots that had generated real excitement were gone within the first hours.

After six weeks on the sidewalk, Dave had been up all night and his red eyes showed it. Now he was waiting in the lobby while the executive he had been sitting in for took care of business in the Mining Recorder's office—the business of filing the permit that could open Canada's next multimillion-dollar mine.

Geoffrey Gagnon is the managing editor of Legal Affairs.

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