Westar seeks debt relief, along with higher prices

Calling himself an “eternal optimist,” Westar Mining President Peter Dolezal is confident the coal company’s problems will be turned around.

The problems, he says, are threefold. Coal prices are too low, the recent increase in the value of the Canadian dollar is hurting, and repayment of Westar’s $400-million debt needs to be restructured.

Last year Westar lost $17.8 million on sales of $405.2 million, compared to a 1986 loss of $21.7 million (before writedowns) on sales of $370.7 million.

“If there is no debt-restructuring, the company would have a very serious cash flow situation and at some point in time the lenders would have a serious problem,” Dolezal points out.

Discussions with the Bank of Montreal, the main lender, are continuing, he says. Westar’s parent British Columbia Resources Investment Corp. (owning 67%) last year renegotiated its $350-million debt, arranging a 4-year period with principal payments of $5 million a year, plus a portion of the cash flow. Westar is hoping for a similar credit arrangement.

Dolezal is encouraged about the prospect of getting significant price increases from the Japanese steel mills for the coal year beginning April 1. Westar, along with other coal miners agreed to a $4.50(us) price cut in 1987 when the Japanese steel mills were anticipating a sluggish year. (In fact, 1987 Japanese steel production will exceed 100 million tonnes, about 10 million tonnes more than predicted). Prices are now at a 14-year low, having fallen 36% to $49(us).

The increase in value of the Canadian dollar has lost another $3 per tonne for coal producers, and Dolezal points out that coal producers desperately need to make up this price gap if they are to stay healthy.

One positive outcome of the soft markets of late has been a streamlining of mining operations. Like its competitors, Westar has been forced to make significant gains in productivity, operating efficiency and cost reductions.

Production from the Balmer and Greenhills mines was a record 8.2 million tonnes in 1987, and Dolezal says this will likely increase to 8.5 million tonnes in 1988.

A $3-million coal conveyor was installed at Balmer in December which is expected to significantly reduce hauling costs. The conveyor is about 4 km long and runs from the pit to the breaker station.

“Head office is now lean and mean”, Dolezal says, explaining that the company has decentralized operations. Relocation of administrative functions from Vancouver to the mine sites and significant staff reductions has helped achieve the lowest possible unit costs, he says.

Another positive move has been diversification of markets. Japan now accounts for only 35% of Westar’s business. Other major customers are Korea, Taiwan, Brazil and Europe.

With demand strengthening and supply tightening, indications for future growth look good. But, for Westar, it all depends on the bankers agreeing to a restructured debt and current pricing negotiations reimbursing producers a fair price for their coal.

For a run-down on Westar’s 1987 coal operations, see the 1987 Coal Review in this month’s issue of The Northern Miner Magazine.