Xstrata, Erdene Set To Open Donkin Coal Mine

VANCOUVER — Underground coal mining is making a comeback in Nova Scotia. After several years of development, Xstrata’s (XTA-L, XSRAF-O) Canadian coal subsidiary and partner Erdene Resource Development (ERD-T) have announced definitive plans for the Donkin coal mine. The Cape Breton project will see 2.75 millions tonnes of coking coal mined annually and sold on the open market, a shift from earlier plans to mine a larger volume of thermal coal to sell domestically.

The decision came after Nova Scotia Power announced in late 2009 that it would not buy thermal coal from Donkin because environmental regulations do not allow the power company to burn coal with the high mercury and sulphur levels found in Donkin’s coalbed. Erdene also cited increasing demand for steel by China and India as a reason for switching to metallurgical coal.

Xstrata and Erdene, who own 75% and 25% of the project respectively, acquired a special licence to explore and dewater the property in 2006. The mine, however, goes back to the late 1970s when the Cape Breton Development Corp. drove two access tunnels 3.6 km under the Atlantic at a cost of $80 million. They then suspended the project in 1989 due to a collapse in coal prices without having recovered any coal. The tunnels were sealed and flooded in 1992 to await future development, which is now happening.

Initial exploration work identified 11 coal seams in an area spanning 8 km east-to-west and 4.5 km north-to-south. Three of those seams, known as Lloyd Cove, Hub and Harbour, were included in a 2007 resource estimate. The economic success of the project will rest largely on the Harbour seam, which contains 101 million indicated tonnes and 15 million inferred tonnes of high volatile bituminous coal with a high sulphur and medium ash content. The total resource estimate, with the three seams included, stands at 227 million indicated tonnes and 254 million inferred tonnes.

The Harbour seam is 2 km off shore and 130 metres below the Atlantic Ocean. The location of the mine, with a portal in Nova Scotia but the deposits off shore, led to some jurisdictional issues between the provincial and federal governments. Those have since been resolved, with Nova Scotia to receive royalties from the project.

The Donkin mine is 20 km east of Sydney, which puts it close to a coal-fired power plant, a deep-water coal terminal facility and rail access.

Production is slated to begin in 2011, assuming permitting and feasibility studies go as planned. The mine is expected to cost roughly $350 million, of which Erdene is to contribute $80 million. A $50 million coal-washing facility will be built on-site.

News of the planned opening was welcomed by many locals, who were pleased to hear that the project should create some 200 jobs, once running at planned capacity. The last underground coal mine in Cape Breton, the Prince mine in Point Aconi, closed in 2001. That closure ended 280 years of commercial coal mining in Cape Breton, which is also home to the first commercial coal mine in North America.

Local politicians have been working to bring the mine to life. Alfie MacLeod, who represents Cape Breton West in the Nova Scotia assembly, went so far as to table a bill called the Donkin Coal Act in late 2009. The act would have exempted Nova Scotia Power from emissions and environmental standards for four years to spur the mining of thermal coal, but the bill did not get past first reading. The decision to mine coking coal instead reduced the scope of the project, meaning the operation will create about 100 fewer jobs in the area than originally thought.

As well as owning a controlling stake in the Xstrata-Erdene Donkin project, Xstrata has a 5% stake in Nova Scotia-based Erdene itself.

The two companies have an arrangement whereby Xstrata has the option of buying a 75% stake in any coal opportunity identified by Erdene by funding all work through completion of a feasibility study. Erdene is also exploring several coal projects in Mongolia.

Erdene’s share price fell 4¢ on the news to close at 31¢. The company has a 52-week trading range of 15¢-40¢ and 89 million shares outstanding.