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Crow Wing Power CEO, board members clash over mining agreement

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A file photo from 2011 shows an above-ground installation at the site of a large manganese deposit near Emily. Steve Kohls / Brainerd Dispatch2 / 5
Bruce Kraemer, Crow Wing Power CEO, talks Thursday, Dec. 13, about the manganese mine near Emily at the Crow Wing Power building north of Brainerd. Steve Kohls / Brainerd Dispatch Video3 / 5
In 2008, Crow Wing Power -- with about 38,000 customer-members -- bought land near Emily owned by Steve Carlton's family for decades. The land sits on a rich vein of manganese, but getting it out of the ground has proven challenging. Steve Kohls / Brainerd Dispatch4 / 5
Steve Carlton talks in his office at his home in Emily. Kelly Humphrey / Brainerd Dispatch5 / 5

As of today, a proposed manganese mine in Emily is at a standstill.

Controversy, however, surrounds the mine, specifically when it comes to the millions in potential profits that could be reaped from it.

Crow Wing Power purchased the Emily manganese deposit property in 2008.

The CEO of Crow Wing Power said he doesn't have an agreement to profit off the Emily manganese mine. Two members of the board of directors are clashing with him on that count.

The point of contention is a royalty agreement signed Nov. 20, 2008, that stipulates three executives from Crow Wing Power, a public co-op electric company, retain royalty interests to a manganese deposit that, if developed, has the potential to garner executives millions over the course of the mine's lifespan.

That year, Crow Wing Power agreed to a joint venture with the owner of the manganese deposit, Steve Carlton and his associates—the Carlton Group—to develop the mine using money from the sale of a for-profit subsidiary, Hunt Technologies.

In addition to a consulting agreement, Bruce Kraemer, Crow Wing Power CEO, and the other executives signed the royalty agreement.

The royalty agreement stipulates 38.75 percent of the mine's profits would go to the members of the Carlton Group, while a further 5 percent would be allocated to interest holders under the banner of Hunt Enterprises—Kraemer, former Chief Operating Officer Doug Harren and former Chief Financial Officer Don Nelson retaining 1 percent each, with the remaining 2 percent left "unspecified" for Hunt Enterprises.

Hunt Enterprises is a for-profit subsidiary under the management of Crow Wing Power executives.

For context—based on reports and figures Crow Wing Power has cited in the past—a 1 percent stake could bring in $350,000 per year on the low end, or as high as $3.5 million a year if the mine operates at full production, depending on how facilities are outfitted to process the manganese.

The royalty agreement—and its allocations for the Hunt recipients—didn't become known to the wider public until the Star Tribune published an article on the subject Aug. 31. For his part, Kraemer has said—to the Tribune, the Dispatch and concerned members—he probably didn't communicate the royalty agreement's stipulations, or announce its existence, to members. He said it's standard business practice to withhold that kind of information from members—especially during negotiations with third parties—but contract details are always shared with the Crow Wing Power Board of Directors.

"The board was apprised of that continually and constantly," Kraemer said Dec. 13. "They represent the membership. We were totally candid with all of the members if they wanted to know."

As for the 5 percent stake retained by Hunt recipients, Kraemer said those provisions became defunct with the failure of the project—namely, tests for borehole mining operations—in 2011. He described the royalty interest stakes as a "non-issue," and "something that we never asked for, never wanted, never needed and never desired, and signed off on it."

"It was hypothetical," Kraemer said—who added he hasn't profited a penny, and won't in the future. "If borehole mining works, Mr. Carlton gave us 5 percent as an incentive. That was hypothetical—if borehole worked. Well, it didn't. There is no royalties, there won't be any royalties and there won't be any incentives for anyone, as far as this things goes."

Board members speak out

Members of the board contradicted Kraemer's assertions that royalty interest provisions in the agreement became defunct in 2011 after the failed borehole mining test—namely, Bryan McCulloch, the at-large representative for District 1, and Paul Koering, the at-large representative for District 3.

"I can't believe he'd be so bold as to say that. It's absolutely wrong," said McCulloch, who noted to the Dispatch he was only coming forward after five years of trying to address the issue through the board of directors, the executive staff and other internal channels in Crow Wing Power—all to no avail.

"I've never heard that statement," Koering said. "It's not my understanding, as a board member, that that royalty agreement ended if the borehole mining agreement didn't work."

Instead—sometime in November or December, Koering estimated—Kraemer communicated to him he had relinquished his 1 percent stake in the royalty agreement "just in the last couple of months."

"I've only been on the board 2 1/2 years. This (2008 royalty agreement) happened years ago," Koering added. "With the little bit I know now, I would not have been in favor or sanctioned or endorsed any management getting any royalty agreement. We've always got to remember that this is a co-op. It's owned by the members."

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."

"That is in perpetuity. It cannot be changed. It's pretty ironclad—(Kraemer's) going to get paid," said Stephen Gouze of the royalty agreement, who noted this is a standard and run-of-the-mill clause—based on his experiences in property acquisitions and as former CEO and former board chairman of DiaSorin Inc. and Cogenix Medical Corp. respectively. Gouze owns five cabins on Washburn Lake and is a member with Crow Wing Power.

Relinquished, or not?

Crow Wing Power spokeswoman Char Kinzer said Kraemer notified directors he intended to relinquish his 1 percent royalty interest stake during the March 2018 board meeting and followed through since then.

Carlton said he and other signers of the Carlton Group have not received any notification—written or verbal—of a revision to Hunt royalty interests. However, in a Sept. 24, 2018, email from Kraemer to Carlton during ongoing negotiations, Kraemer stated:

"Hunt Enterprises intends to relinquish our 5 percent royalty interest, depending on what action you take."

"I think that was our intent at the time," Kraemer said of the email during a conference call including Crow Wing Power Attorney Paul Johnson, Friday, Jan. 11. "Just to hold (the Hunt interests) in reserve, to see if we could come to an agreement."

Kraemer described the royalty agreement as "theoretically" inactive—essentially, he contends the deal would have to be renegotiated with a third party to establish the mine and, thus, the original 2008 agreement wouldn't be relevant when the mine eventually operates and profits.

"It has to be renegotiated with the future operator, investor or partner in the mine," Kraemer said. "There's no mine that will go into business and produce product and give 38 percent of the product away."

However, if the royalty agreement were submitted to a court of law, Kraemer said the royalty agreement is currently active and still in effect. Kraemer and Johnson said while Hunt retains these interests in reserve, Kraemer and other executives have relinquished their stakes to Hunt Enterprises.

Kraemer said he is the CEO of Hunt Enterprises. He added the board of directors has to sign off on how this 5 percent royalty stake is allocated.

According to a resolution titled "Affirming Delegation to Chief Executive Officer," dated May 21, 2015, by the board of directors of Hunt Enterprises—the same governing body that oversees Crow Wing Power—the third item states:

• "WHEREAS, the Board has delegated to its Chief Executive Officer, Bruce Kraemer, and his management staff, the development of the Company's manganese mine at Emily, including, but not limited to, the negotiation or renegotiation of all necessary or appropriate contracts or agreements with parties involved with the manganese mine."

In addition, the sixth item states:

• "BE IT FURTHER RESOLVED, that in particular, Bruce Kraemer, as CEO, is authorized to enter discussions and negotiations with the Carlton Group to revise and modify the Royalty Agreement with the Carlton Group as needed or appropriate."

Johnson noted, once negotiations are concluded, any modified or revised agreements will be at that time presented by the CEO to the board for final approval. Carlton said it was a cited reason, by board members at the time, why they wouldn't communicate with Carlton Group members.

Concerns raised over handling, conflicts of interest

After the initial revelation by the Star Tribune Aug. 31, Gouze said he contacted Kraemer to discuss his concerns.

When confronted, Kraemer "glad handed with a bunch of mumbo-jumbo" and "skirted the issues," Gouze said.

In a letter addressed to Kraemer and dated Oct. 11, 2018, Gouze took issue with Kraemer and Crow Wing Power's handling of the project, stating—irrespective of its success or failure in business terms—it represents a failure to disclose relevant information to co-op members, who are essentially stakeholders, and to avoid conflicts of interest.

In terms of conflicts of interest, Gouze pointed to the executive staff managing a public co-op and private for-profit subsidiaries simultaneously. Two of these for-profit subsidiaries are Cooperative Mineral Resources, which oversees the mine, and Hunt Enterprises, which has the 2 percent "unspecified" stake in the mine's royalty agreement.

"That revelation came from the (Star Tribune's) disclosure, not the Company as you stated. ... 'Co-op members were probably not told about the incentives, but compensation matters are usually not disclosed,'" Gouze states in the letter. "Usually not disclosed? Under what circumstances would they be unusually disclosed if not for a kickback agreement offered to you and members of your staff?"

When he spoke with the Dispatch Friday, Kraemer said he doesn't see a conflict of interest in being CEO for Crow Wing Power and its private for-profit subsidiaries. In terms of the royalty agreement—which he described as a gift—Kraemer said he does not see any conflict of interest in negotiating as the CEO of a public co-op or one of its subsidiaries while retaining a 1 percent royalty stake in his name.

"Absolutely not," said Kraemer, who noted he negotiated as the CEO of one of Crow Wing Power's subsidiaries, not Crow Wing Power itself. "I've always got the best interests of our 38,000 members at heart."

When asked if he regarded the 1 percent royalty allocation in his name as a separate deal, between the Carlton Group and a private citizen, Kraemer said, "Pretty much, yeah."

The sale of Hunt Technologies in 2006 footed the $23 million so far spent on the Emily deposit development, Kraemer said. When asked where the funds used to buy Hunt Technologies in 2000 came from, Kraemer responded, "There were no funds involved. It was a sidebar agreement."

Gouze noted to the Dispatch he is in favor of a forensic audit of Crow Wing Power, as well as the resignation of Kraemer.

Bob Kangas—the representative for District 1A and president of the Crow Wing Power Board—said they would deal with the matter internally if any concerns came to light.

"We're counting on our CEO Bruce Kraemer. We hired him for that reason," said Kangas. "If (Kinzer or Kraemer) say anything negative or falsified, well, we'll deal with them later."

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 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—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.

In particular, Carlton pointed to the car industry—of which Tesla is only a part—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. It was a hefty price in the last days of John F. Kennedy.

When the torch was passed to the third generation in the early '90s—and, around this 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.

Crow Wing Power steps in

Initially, Carlton put the mine up for sale on the internet in 2006—drawing potential buyers from India, Ukraine (or, as they were called by members of the Carlton Group, the "Russians"), Japan, China, Australia and other areas. Crow Wing Power's involvement stemmed from a chance conversation at a birthday party, Carlton said. 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 the Russians 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, it sported success with the sale of a for-profit subsidiary the co-op bought in 2000 and turned around for a tidy profit in 2006— Hunt Technologies.

Armed with a sizable return on that investment, and reportedly a $50 million line of credit, Carlton said, Crow Wing Power executives negotiated 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 he could ever expect in a deal with an international corporation.

In all, 43.75 percent (and then, of that, 5 percent for Hunt interest holders) of the mine's profits would be set aside for interest holders, Carlton said—noting it's rare to see a deal assign royalty stakes anywhere near that percentage.

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.

Around this time, Crow Wing Power established another for-profit subsidiary—Cooperative Mineral Resources—to oversee the mine's development and management.

In 2011, tests began to determine if the deposit could be extracted via 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. However, largely because of its volcanic origins, 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.

In the decade since November 2008, Crow Wing Power spent roughly $23 million on the mine—cash and credit, not asset values—while development of the deposit progressed little beyond drilling tests, the construction of inactive surface facilities for ore processing and transportation, as well as a number of negotiations with third-party groups that haven't produced tangible results so far.

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.

"Bottom line is that we'd rather do it right than do it fast," Kraemer said of mine developments. "You know, the deposit's been there for millions of years. It's not going anywhere."

"That's the excuse today," said Carlton, who added he lent Crow Wing Power $2 million early in the process with the explicit, verbal understanding the mine should be permitted and operating in three to four years. "It doesn't have to take that long. They've been at it longer than it took to fight World War II. You could have had this mine in operation and—assuming it's permit-able—you could have it permitted within three to four years. It could have been mining in this mine three years ago."