Wither Iridium?

by Dale M. Gray

While every new frontier is different from the last, they all share certain hallmark -- not all of which are positive. Because of the unknown factors and the great risks that must be taken, failure and delay are two of the unwanted hallmarks of every frontier. Space is no exception. For the last three years orbital space has been exhibiting the full range of frontier hallmarks. One grand space enterprise is now on the cusp of failure. While the jury is still out on Iridium, it is at the point where present actions determine whether success or failure. To gain an appreciation of the current situation, a look at previous frontier may be enlightening.

In the mining frontier of the American west historians define three main models of mine development: subsistence, speculative and world economy. Because of high thresholds for initial production, few subsistence mines -- equivalent to homesteads -- were developed. The speculative model dominated historic western mine development. Under the speculative model, mines were developed in a series of stepped levels by utilizing the previous successful development as collateral for future expansion and development. The Homestake Mine in South Dakota which created the Hearst fortune is a successful example of this type of development. Historically, the world economy model was utilized only on projects with tremendously high initial development costs. Because of the scale and complexity of these projects they could not be developed utilizing the "bootstrapping" techniques of the speculative model. For example the Butte, Montana, copper mining complex required the simultaneous development of hydroelectric power generation and transmission, the development of local and national rail links, the development of mine ore reserves and the creation of a state-of-the-art copper smelter -- all before the first copper ingot could be poured. The scale was such that Marcus Daily, its promoter, had to tap the fortunes of men such as George Hearst to make the his plans a reality. The result was a mining/transportation/smelting complex the like the world had never seen. In turn, the copper from the Butte mines helped change the world by providing much of the copper used in the electrical revolution.

The current space-based frontier appears to be utilizing two of these models: the speculative and the world economy. Again, high thresholds for entry have eliminated any subsistence enterprises on the new frontier. This high threshold is not just economic in nature. It is also caused by the difficult nature of the technology and restrictive legislative policies that must be surmounted before a space-based enterprise can proceed. While world economy models are dominating space development because of the ultra high threshold, some companies such as Orbcomm who have gained a toehold have been able to utilize the speculative model gradually building on their successes. Other space-based projects just entering the arena such as Iridium, Globalstar and Teledesic have little choice but to follow the world economic model in their race to provide space-based communications services. The world economy model demands that its developers dominate both the resource, the means of production and the market share. Because their development plans are based upon short-term economic predictions, speed in becoming operational becomes the driving force in moving the enterprise forward. Perhaps the biggest flaw with a world economic development is the practice of scheduling the repayment of debt on the same accelerated timeline as technological development. When civilization meets wilderness -- unpredictable delays occur.

While the Butte / Anaconda Copper mining development is one of the best examples of a successful world economy model mining development, the large scale development of mines using this same model also created failures that are almost as dramatic as the successes. A good example is the Elkhorn mine in southwest Montana which was developed by Montana's former Lieutenant Governor William R. Allen. In 1913, Allen used his connections in the mining community to form and finance the Boston-Montana Company which was capitalized at $15 million. Having located suitable ground for his ambitious mining plans, Allen first used the borrowed money to obtain control of all the mining claims in the Elkhorn region. This was to avoid the expensive litigation so common in unconsolidated mining camps. A subsidiary was then formed, the Boston-Montana Milling and Power Company which was to develop the Elkhorn mine. Another subsidiary, the Butte and Pacific Railway Company, was formed in 1914 to create a rail link necessary to haul the heavy mill equipment up the Big Hole River Canyon and up Wise River to the mine site. The railroad was begun in 1917 and completed in 1919 -- reportedly the last narrow gauge railroad built in the United States.

Once the railroad was completed, construction of the mill and a 65,000 volt power line began. The mill was enormous by the standards of the day containing twice the milling equipment normally found in such structures. In an era when large mills processed 300 tons of ore per day, the Elkhorn Mill was rated at 750 tons. Ore was delivered directly to the mill from the mine via an aerial tramway. When it was completed in 1922, the mill was proclaimed the biggest in Montana (not including smelters). At a staggering cost of $5 million, it was in every way the crowning achievement of milling technology of its day. In eight years Allen had successfully implemented a program that resulted in his control of the supply of ore, its processing and its transportation to market.

It does seem strange to talk of Montana silver mills on a page dedicated to the understanding of the current space-based frontier. But when the post 1922 history of the Elkhorn mill is compared to the present Iridium situation, some striking similarities emerge.

Prior to the first mill run in 1922, outside forces began to make themselves felt. A depression in 1920-21 lowered the demand for silver and therefore its price. Because of construction delays due to unanticipated technical problems, several of the company's bond and note issues came due even as the mill was being completed. Because there was no previous lower levels of development, there was no income to stave off creditors. Deals were brokered with the creditors and the mill went into production. However, it was quickly realized that the mine was not sufficiently developed to provide the ore necessary for full mill production. A decision was made to mine low grade ore as well as high grade ore to bring the mill up to capacity. Even so, only one side of the mill was ever used. The mill ran at half speed for only seven months between 1922 and 1924.

Today the Iridium satellite system is in a similar dilemma. The company has had to surmount incredible obstacles of transportation, engineering and manufacturing to get its world-wide telecommunications system operational. Along the way, the Asian crisis severely affected one of the major markets for the system and a major supplier for the satellite phones was significantly late in delivery of quantities of the phones. To create its 66 satellite telecommunications system and to arrange service agreements with 140 nations, Iridium spent about $5 billion dollars gained through a variety of fiscal devices. About $3.02 billion was borrowed. When the debt was created, Iridium was expected to be on-line far sooner than the actual November 1998 start-up date. As a result, the first interest payment on the loans came due earlier this spring when the company had only begun to build a subscriber base. In the first three months of this year, the company reported a loss of $505 million (additional launches and infrastructure), but only $1.45 million in revenue. In April, Iridium only made $195,000 in cash revenues. Because of these unmet expectations, Iridium stock has lost 85 percent of its value in the last year. To stay alive, Iridium appealed to its creditors and a new payment plan arranged. A second payment of interest on loans of $800 million was due on June 30 and another large interest payment on $1.45 billion is due on July 15. To their credit the company recently sold $52 million worth of phones and calling services to the General Services Administration. In addition, the Defense Department Information Systems Agency recently signed up for $219 million in services. The company is expected to announce a third loan extension until August 15.

By 1927, the Elkhorn properties were again operating, but running under a stockholder's receivership. Silver ore was being produced by the mine and the mill began reducing the ore to valuable concentrates. Six railroad cars had been filled with the mill concentrates and were waiting to be hauled by rail to the smelters for final processing when disaster struck. A dam owned by Montana Power broke upstream and washed out 13 miles of railroad track. It left the mill with no economical way to get their product to market. The track was rebuilt and was placed in service just as the Great Depression hit the country -- sending silver prices plummeting. The company was reorganized in 1933, but most of the property was in the hands of the county in lieu of taxes by 1940. The mill building and the antiquated equipment sat awaiting resumption of production until rust and decay slowly reduced the once proud Elkhorn mill to ruin.

There is no indication that Iridium will suffer the same ultimate fate as the Elkhorn. The analogy can only be taken so far. Fortunes of frontier enterprises are notoriously difficult to predict. At $5 billion, Iridium is far too valuable of an asset not to utilize. Some financial arrangement will eventually be made with substantial shifts in who is at the helm. Indeed, the top two officers of the company have already jumped ship. As with Elkhorn of 1927, Iridium is in a precarious financial situation and for some time to come will be susceptible to the tides of fortune. It shall be interesting to see if the force of will that created the remarkable technological achievement can now be bent to marketing the system and bringing fiscal stability.

For more on the remarkable histories of Butte and Elkhorn: http://www.deq.state.mt.us/mtmines2/linkdocs/13tech.htm

http://www.deq.state.mt.us/mtmines2/linkdocs/183tech.htm

The article "How the Chinese helped Idaho become a world power" has been delayed a month to take advantage of unfolding events.