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Snell & Wilmer L.L.P. Mr. Mike Long May 4, 2001 Page 4 As applied to Powderhom, Rule 3 of the DMG regulations concerning Performance Bonds only requires that the Frontier Bond remain effective. The status of the surety bond is significant under very limited conditions, and none of those circumstances applies here. In fact, the regulation requires that the Frontier Bond remain effective even in the event payments are no[ made by the principal. Thus, the status of Frontier's listing by the U.S. Department of Treasury and the State of Colorado is irrelevant. The Bond is effective and remains in full force and effect. II. THE FRONTIER BOND WHEN ISSUED ~i'AS IN COMPLIANCE ~'~'ITH STATE AND FEDERAL LAW AND THE INCAPACITY OF THE SURETY MUST FIRST BE DETERMINED BEFORE THE PERMITTEE CAN BE IN VIOLATION Powderhor respectfully submits that the DMG erred by equating the federal government's revocation of Frontier's certificate of authority with a determination that Frontier does not have the capacity to satisfy its financial obligations under the Bond. Quaker acquired Powderhom and the mine in June 1997. As part of qualifying to operate the mine under Colorado law, it obtained the Bond from Frontier, which was then an approved surety under Colorado and federal law. The Bond was deemed acceptable by the State. In June 1998, the State required that the Bond amount be increased, and Powderhor complied with that requirement. Thus, Powderhor had fully complied with Colorado regulations conceming the posting of a reclamation bond. Frontier's subsequent loss of its certificate of authority does not create a violation. The relevant regulation states that "[u]pon the incapacity of a surety ..., the permittee shall be deemed to be without bond coverage in violation of 3.02.1(2)." 2 CCR, 3.04.1(2)(b)(v)(C). To establish a surety's incapacity, the State must demonstrate that the surety does not have the capacity to satisfy the financial obligation required by the bond. There has been no such determination here. State regulation provides that incapacity of a surety can result from bankruptcy, insolvency and license suspension or revocation. The mere existence of one of these conditions alone does not constitute "incapacity." While license revocation or suspension may prevent a surety from marketing its products in the State, suspension does not, in and of itself, constitute a finding of financial incapacity to satisfy the surety's obligations. Although the Commissioner suspended Frontier's Certificate of Authority to conduct surety business in Colorado, it made no findings as to any incapacity on [he part of Frontier. Absent a demonstration of incapacity by the surety, the permit[ee must be considered to have Bond 10913.1