Allete CEO: Mining’s downturn challenges bottom line

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Despite an unprecedented drop in demand from Allete’s largest customer — the mining industry — Don Shippar, CEO and chairman, put a brave face on his company’s future at an annual shareholders’ meeting Tuesday at the Duluth Entertainment Convention Center.

“This is one of the sharpest drops in the economy that our nation has ever witnessed,” Shippar said.

And mining has been hit hard by slumping demand for cars, appliances and other durable goods that have kept steel mills humming in the past.

That downturn has hurt the bottom line of Allete, parent company of Minnesota Power.

Shippar said the electrical demands of Iron Range taconite processors are off about 40 percent from the previous year. Mines typically consume about 40 percent of the electricity Minnesota Power produces. But demand fell off sharply during the final six weeks of 2008.

“On the customer side, I don’t think we’ve ever seen a decision to curtail production as quickly,” Shippar said.

He pointed out that there has been considerable consolidation in the steel and mining industries, and he noted, consequently: “Owners have been able to react more quickly to drops in worldwide demand for steel.”

Other large customers also have cut back their electrical use, Shippar said. In all, industrial customers account for about 60 percent of Minnesota Power’s electricity sales.

Nevertheless, Minnesota Power has managed to continue to operate profitably by selling excess capacity into the electrical wholesale market.

Shippar said these sales have enabled the company to recoup 85 percent of the revenue it would have expected from industrial customers in a typical year.

Because Minnesota Power’s generation costs remain competitive, he said: “We can continue to sell whatever we generate 24 hours a day, seven days a week.”

“We’ve successfully navigated our way through a rapidly changing economic environment,” Shippar said, noting that during the past year, Allete increased its dividend payments by 5 percent and still provided earnings of $2.82 per share — well within the company’s guidance of $2.70 to $2.90 per share.

Allete entered the current year with a strong balance sheet, and Shippar expressed confidence the company will successfully weather the ongoing economic storm.

The big question is how long the recession will last. Shippar predicted it could be anywhere from eight months to two years before mines begin to recover.

He remains bullish on the long-range outlook for Minnesota mines, however.

“I think that fundamentally, the Iron Range will continue to be a low-cost taconite producer, and when demand for steel comes back, these mines will be in a good position to meet that demand,” he said.

The market for Iron Range taconite could even grow with the development of operations such as Mesabi Nugget, an emerging producer of pig iron near Hoyt Lakes, and Essar Steel Minnesota, a proposed steel slab producer near Nashwauk.

Shippar also is encouraged by efforts to develop nonferrous mines in northern Minnesota, such as PolyMet, a proposed copper-nickel-precious metals mine near Hoyt Lakes.

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