PolyMet Mining Corp. says it will put up $544 million in financial protections for the first three years of construction and mining at its proposed copper-nickel facility in northern Minnesota to insulate taxpayers from any environmental damage that could result.

The so-called "financial assurance" is the last piece required in PolyMet's application for a permit to construct a $650 million mine and processing plant near Hoyt Lakes, the company said.

The assurance estimate in PolyMet's financial proposal, which is considerably higher than the company predicted a year ago, now goes under state review.

Along with other permit requests covering air quality, water quality and a tailings dam, it is expected to be open for public comment early next year.

PolyMet's is the first of what could be several copper-nickel mines in northeast Minnesota, and would be the first to receive state permits. Many northern Minnesota residents have greeted it as hope for returning the Iron Range to its mining heyday.

But the permitting process has grown lengthy, in part because copper-nickel mining carries far greater environmental risks than the region's taconite industry; its runoff waste can produce heavy metals that can contaminate streams and groundwater.

The proposal unveiled Tuesday sets the floor for one of the most critical decisions facing Minnesota: how to protect taxpayers from the risks inherent in such mining — the possibility of acid mine drainage, catastrophic accidents, failure to properly close the mine and, potentially, hundreds of years of water treatment.

State regulators must walk a tightrope of sorts in setting financial protections for the mine's 25-year life. If they ask too little from PolyMet, state taxpayers and the people downstream from the mine could pay the price years later for environmental damage. If they ask too much, a long-awaited project seen as an economic boon for Iron Range could be stopped in its tracks.

"If we do our job right, there will be no reason for government intervention and no reason for the financial assurance instruments to ever be called," said Jon Cherry, PolyMet's president and CEO. "Whether we execute the plan or the state executes it, the work will get done and the environment and taxpayers will be protected."

Barb Naramore, assistant commissioner for the Department of Natural Resources, said that state regulators, their outside consultants and the company have gone through PolyMet's mining plan "with a fine-toothed comb" to determine potential costs.

"Over the course of those conversations, there was a general upward trend in those cost estimates," she said. Toronto-based PolyMet is required by state law to put up enough money in advance to pay for closure and cleanup of the mine should the company fail or walk away from the project. It would take the form of a bankruptcy-proof financial instrument akin to insurance or a bond.

State law requires regulators to set the amount annually based on the potential costs of closing the mine in each year of operation. That means the initial costs are low, but will peak midway through the mine's life, in about 11 years. They include the costs of treating water that drains from the mine site long after it's closed.

PolyMet's submission did not include long-term predictions of what closing costs would be years down the road — when the mine will be significantly larger and the volume of water requiring treatment much greater. Bruce Richardson, a company spokesman, said the proposal goes beyond what state law requires with a three-year projection.

Mining experts used by Minnesota environmental groups have urged the state to set a high bar to cover what could be considerable future costs: $934 million for mine closing costs and at least 500 years of water treatment. Other states have often underestimated the overall costs and been forced to turn to taxpayers to deal with long-term pollution and cleanups.

As a result, the total amount of financial assurance and the types of instruments to create it are under intense scrutiny from advocates on both sides of the mining debate — one of the most divisive environmental issues that state regulators have tackled in years. Though Gov. Mark Dayton said recently he supports the PolyMet project, he also said it would be one of the most difficult decisions he would make as governor.

PolyMet's proposal includes $75 million in financial assurance for the first two years of construction, about $60 million of which is associated with the former LTV Steel Mining Company site, which PolyMet has taken over to process its ore.

In the third year, the first year of mining, it would bring the total to $544 million. That would cover the costs for the state to close the mine and perform environmental reclamation, including long-term water treatment, if PolyMet is unable to perform the work.

Naramore said the state might impose yet-to-be determined finance conditions on PolyMet as part of the permit. That could include, for example, specific types of financial instruments and the use of underwriting firms that carry high credit ratings. The state has hired financial and mining experts, who have already raised questions about the company's wherewithal to provide the necessary protections.

PolyMet's only asset is the proposed mine site and the old taconite processing facility it owns on the Iron Range — and they hold value only if the company succeeds in getting the requested mining permit, said the state's consultant, Emmons and Olivier Resources Inc. (EOR). That means the financial protections would have to come from a company or partner with much deeper pockets, they said.

That could test the commitment of Glencore, the giant Swiss mining conglomerate that holds a third of PolyMet's stock and which has been its primary lender up to now.

PolyMet officials said that over the life of the project they have proved their ability to raise capital when necessary.

Josephine Marcotty • 612-673-7394