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Situated along Lake Superior, the city of Silver Bay began in the late 1940s as the Beaver Bay Housing Project, a company town housing employees of the Reserve Mining Company.

In 1945, representing the mining company, the Northern Land Company and the Lake Superior Land Company began acquiring land near Beaver Bay, paying for it in cash and concealing the purpose for which it would be used.

For a time, there was a rumor that a large hotel and resort were to be located near Peterson's Store. Around the store and along the shore, in both directions, there were several cabins owned by settlers, fishermen, and summer vacationers. This was the area that would later become known as Silver Bay.

By 1946, the secret was out, as the Reserve Mining Company had made known its intent to establish a taconite processing plant, and its surveyors were laying out its stakes. These stakes were the beginnings of Silver Bay.

Taconite is an iron formation in which the iron is interlayed with quartz, chert, or carbonate. To process taconite, the ore is ground to a fine powder and the iron is extracted through the use of strong magnets. The powdered iron is then combined with binder, such as clay and limestone, then rolled into pellets. The pellets are fired at a high temperature to harden them.

Babbitt and Silver Bay were created to house the thousands of mine workers and their families.

The sites for the plant and town were cleared in 1951. Many of the early residences were barracks-style housing, with dormitories and a cafeteria. A trailer court was also set up in Silver Bay. By 1952, Reserve was building single-family homes for workers, with several different floor plans, with no down payment and house payments as low as $50 a month. Reserve paid for the installation of utilities, landscaping, street paving, and sidewalks. Initially, only Reserve employees were allowed to purchase homes in Silver Bay.

In 1954, one of the first houses in the settlement became the post office, and the new town was named Silver Bay. Campton Elementary School was opened in March of 1956.

The mining operation went into full production that year, and the first shipment of iron ore pellets was shipped in April of 1956.

William Kelley High School opened in 1958, named for Reserve's first president. Also in 1958, Reserve sold its shopping centers (company stores) in Babbitt and Silver Bay to J.W. Galbraith.

Reserve's production was expanded in the 1960s, and m ore houses, stores, and city buildings were constructed, and the Mary MacDonald Elementary School was opened.

However, the distance between Reserve's processing plant and the water's edge grew steadily over the years, and a large delta was created by the accumulation of the fine waste rock that the company was discharging into Lake Superior. As the company extracted the iron from the taconite rocks, the remainder of the crushed rock (tailings) was discharged into the lake. In 1972, the federal government filed charges against Reserve for violating the Rivers and Harbors Act of 1899, which prohibited the dumping of harmful materials into interstate waters. After a five-year trial, Reserve was granted a permit to construct a storage basin for its tailings seven miles inland. Within two years of the completion of its storage project, the demand for steel had declined. Reserve cut its production and workforce, then closed in July of 1986, filing for bankruptcy protection.

The population of Silver Bay dropped dramatically between 1980 and 1990, as people left for work elsewhere.

In 1989, a bankruptcy judge awarded the plant to Cyprus Minerals, which had expressed an interest in reopening the plant as Cyprus North Shore Mining Company. After investing in renovations and repairs, the company began making pellets. In 1994, the company was sold to Cleveland Cliffs, which still has operations there.

The demographics of Silver Bay have always been closely linked to the successes and failures of the taconite mining industry. Its peak population of 3,723 was in 1960, the first year that its population was assessed.

As a planned community, the population centers of the city are clustered in the city core, known as the Buck Valley area, mostly on small lots with modest housing. Portions of the city expanded into the hillside to the west and into the Beaver River Valley.

Residential land makes up only about nine percent of the city. A city-owned public golf course is situated in the southwest, but most of the undeveloped land within the city is owned by the state, the county, or by the mining company, limiting expansion.

Beaver Bay abuts the city to the south, and Beaver Bay Township abuts it on the west and north, while its easter boundary is Lake Superior. The unincorporated towns of Lax Lake and Illgen City are nearby.

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