Newmont Mining builds a good-sized, coalfired electric generating station in northeast Nevada and sells all the plant's output to Sierra Pacific Power Co.
Sierra Pacific Power turns around and sells electricity to Newmont to run its gold mines, the biggest in the state.
It looks something like the old joke about folks who sold eggs to one another and couldn't figure out why they never became rich, but both Newmont and Sierra Pacific say the recently inked deal makes sense.
For Sierra Pacific, the benefits of the 203- megawatt plant to be built in Eureka County near Elko are easily apparent.
The utility needs all the generating capacity it can muster to meet the demands of a fastgrowing region.A megawatt of generation can serve anywhere from 500 to 1,000 homes, depending on the time of day.
But Sierra Pacific remains cash-strapped as a result of the Western power crisis at the start of this decade and doesn't want to tie up capital in expensive generating plants.
Better to let companies such as Newmont make the big investments.
Then there's a more subtle benefit for Sierra Pacific's customers, says Kay Grosulak, director of customer strategy and programs for the Reno-based utility.
Much of the electricity sold by Sierra Pacific comes from gas-fired plants, and that leaves the utility's customers at the mercy of a fuel whose price has been volatile.
Because the Newmont plant will be coalfired, it will reduce some of the volatility in Sierra Pacific's prices.
And the plant will generate 25 megawatts more than the amount that Newmont needs for its mining operations 25 megawatts that can be used to support other customers.
Even though Newmont still will buy its power from Sierra Pacific after the plant is on line in the autumn of 2007, the mining company thinks ownership of its own generating station is a good deal.
So good, in fact, that Newmont executives told analysts last month that they believe they can peel $20 an ounce off the cost of producing gold in Nevada once the facility is online.
That's not an insignificant sum.
It's equivalent to more than 7 percent of Newmont's recent average cost of producing an ounce of gold in Nevada.
"Electricity is our second largest operating cost in Nevada, behind labor," says Newmont spokesman Doug Hock."Newmont's Nevada mines now spend about $100 million annually for electrical power.
It is critical to our future success in Nevada that we find ways to control these significant costs."
Once Newmont builds the plant,Grosulak notes that the mining company can hedge the costs it pays for coal and,more significantly, the rail costs of hauling the coal to the plant.
Like any of us, the price Newmont pays for power includes two elements the costs of generating electricity and the cost of transmitting it.
The rate that the mining company will pay for the generation portion of its bill after the new plant is built will be the same as its cost of generating the electricity it sells to Sierra Pacific.
That leaves transmission costs as the only variable in the mining company's power bill, and that historically hasn't been highly volatile.
It's a complicated deal, far more complex than the course taken last year by Barrick Goldstrike Mines, another of the state's big mining companies.
Operating under a state law that allows big users to leave the utility grid and free up power for other users, Barrick won approval to build its own 115-megawatt power plant near an existing Sierra Pacific plant at Tracy, along Interstate 80 east of Sparks.
Barrick will use the power it generates to run its mines without any of the sell-to-you, buy-back-from-you complexities of the Newmont deal.
Newmont and Sierra Pacific have been kicking around ideas for several years, and Newmont at one point considered following a course similar to that taken by Barrick.
But those discussions tripped,Grosulak said, on a requirement that Newmont have backup power available in case its plant goes down.
The backup can't come from Sierra Pacific.
The Barrick plant doesn't face that problem because it's a series of smaller gas turbines.
If one goes down, the next one in line provides backup.
Along with the new plant,Newmont and Sierra Pacific are talking about other options such as maintenance-related slowdowns in mining during summer months when the utility needs all the juice it can get to run air conditioners in homes and offices, says Grosulak.
