B.C. budget adds to coal producers’ heavy tax burden

Low coal prices and a relatively high Canadian dollar have helped push British Columbia’s coal industry to the brink.

The various taxes and charges facing the industry are seen as primary targets for cost reductions since costs in the mining and processing end have already been squeezed to the limit. But the recent provincial budget hits the industry with an increase in capital taxes, snatching an additional $7 million from the province’s producers.

The coal industry notes that 87% of the taxes it pays are not income related, and comprise mainly royalties, the B.C. sales tax and property taxes. Concern over the industry’s health prompted the province’s new government to fund an independent study which was released late last year. The study, by consultant Richard Marshall, noted that no government subsidies were required, although a review of the industry’s tax burden should be undertaken. The industry employed 5,608 people in 1991 for a payroll of $329 million. Gross revenue for British Columbia coal producers was $1.6 billion last year. In his study, Marshall also recommended a streamlining of the review process for thermal coal-fired power generating plants to complement existing hydro-electric facilities. Thermal generating plants would certainly be a boon to thermal coal producers and many in the industry see a relatively bright future for thermal coal markets.

Solutions for metallurgical coal producers remain elusive, however. Anne Edwards, minister of energy and mines, is continuing to sponsor forums and studies in a search for a solution to the coal industry’s problems and a strategy the government can implement.

Westar Mining (TSE) and Quintette Coal are prime examples of coal producers in trouble.

Quintette has been under court protection from bankruptcy proceedings since June, 1990, after the contract price for its metallurgical coal was reduced to $82.40 per ton from more than $100 per ton. At the time, the company stated that the price was below their cost of production.

Quintette produces about 4.75 million tons of metallurgical coal from its mine in northwestern British Columbia.

A restructuring of the company’s debts is now at hand with all parties in agreement, except Charbonnages de France International, which has a 12% interest in the mine.

Teck (TSE), which owns a 50% interest in the mine after purchasing it from Denison Mines (TSE), proposed a deal giving Quintette’s bankers $68 million in cash payments as well as annual payments of $25 million plus all unallocated cash flow from the mine.

In return, the bankers lowered the company’s outstanding debt to $200 million from $650 million.

The restructuring also changes the share structure, bringing Teck’s ownership down to 33%, Charbonnages’ down to 8%, the banks up to 33% (from zero) and the Japanese steel mills down to about 25%.

Teck also receives a management fee of $2.5-to-3 million for overseeing the operations at the mine.

Charbonnages takes exception to the deal, noting the mine is unlikely to continue operating after Quintette’s long-term coal contracts expire in 1998, since world prices are well below costs at the operation. As a result, Charbonnages would receive nothing since shareholders are not expected to receive any dividends.

Quintette’s current contract price is $85 per tonne, compared to equivalent world prices of about $60 per tonne (f.o.b. Vancouver). Teck’s 1991 annual report estimates the mine can produce coal at a cash on-site cost of about $46 per tonne. Mike Lipkewich, vice-president of mining for Teck, would not disclose additional rail and handling costs to an f.o.b. equivalent. The restructuring proposal is now before the B.C. Supreme Court which will pass judgment on the fairness of the restructuring within a few weeks. Many industry observers believe Teck’s 61.9% owned Bullmoose operation to the northwest of Quintette will be hard-pressed to stay in operation after its contracts expire March 31, 1999.

Producers are typically secretive about costs and revenues from their operations and Teck is no different. (Quintette costs and prices were revealed because of the restructuring.)

In its most recent annual report, Teck notes that the mine’s operating performance was satisfactory, but no segregated financial statistics were given.

The last published figures for the operation were in the company’s 1989 annual report. In that year, Bullmoose produced about 1.6 million tonnes of metallurgical coal, with Teck’s 60.9% interest providing $8.4 million in net earnings. The contract price for the coal was not revealed at the time but was likely similar to Quintette’s that year (more than $100 per tonne). Teck’s 1990 report noted that its contract price had been lowered to $88.26 per tonne as of Jan. 1, 1991. The price is subject to quarterly adjustments based on a number of Canadian indices as well as to periodic reviews at the request of the buyers or sellers.

Richard Drozd, Teck’s vice-president of coal operations, would not reveal the company’s current contract price, only admitting that it was lower than $88.26 per tonne.

This year’s production from the Bullmoose mine is expected to be similar to the 1.6 million tonnes produced in 1991.

Drozd said metallurgical coal prices would likely continue to come under pressure on world markets although he does see some potential for thermal coal markets.

Westar Mining, which produces about 5.4 million tonnes of coal from two mines in southeastern British Columbia, is in a somewhat worse condition in that it already receives world prices for its coal production. The company’s current price is US$51.30 per tonne f.o.b. Roberts Bank.

As a result of continuing pressure from the low coal price and high value of the Canadian dollar, Westar recently announced it is reviewing a further restructuring of its financial obligations.

The company’s previous restructuring in early 1990 reduced interest payments on $200 million to 50% of prime plus 1.75%; it also rescheduled its debt over a 9-year period. Interest on an additional $95 million is accruing at a reduced rate tied to the price of coal.

Despite the restructuring, Westar’s losses continued in 1991. The company reported an operating loss of $17.6 million, including depreciation of $21 million. After financing costs of $18.6 million, an income tax recovery of $9.7 million, and writedowns of $35.7 million, the company reported a loss of $62.2 million.

The continuing losses didn’t help the company’s financial position. As of Dec. 31, Westar had long term liabilities totaling more than $356 million and a working capital deficit of about $50 million.

It remains to be seen whether Edwards and the British Columbia government can find solutions to the industry’s woes. The stakes are certainly large, with the industry employing 5,608 people in 1991 for a payroll of $329 million. Gross revenue for British columbia coal producers was $1.6 billion last year.