COAL, URANIUM & OIL SANDS — Coal production costs to come under scrutiny in 1999

Special to The Northern Miner

Nineteen ninety-nine is expected to be “the worst export year in a decade,” says a coal mining industry executive, and companies are going to be cutting, chopping and bargaining on all fronts to keep mines open.

The reason is not only a slumping Japanese Steel Mill (JSM) price on hard coking coal but a need to diversify and expand into international markets.

In 1998, Japan, the dominant international buyer, accounted for about half of all coal shipped out of Canada. The rest went to more than 20 countries scattered throughout the world. The bulk of the export market lies with western Canadian producers. British Columbia and Alberta account for 18 of Canada’s 24 mines. In l998, B.C. produced 24.8 million tonnes of metallurgical/thermal coal; Alberta, 36.4 million. At the same time, B.C. exported 24.4 million tonnes; Alberta, 9.7 million.

Of the 34.1 million tonnes that went overseas, Japan took 16.7 million. Other markets that took more than 1 million tonnes include: Brazil, 1.3 million; South Korea, 6.1 million; Taiwan, 1.1 million; and the United Kingdom, 1.1 million.

Teck

Teck (TEK-T) has a 45% interest in the Quintette mine and a 60.9% stake in the Bullmoose mine, both of which are in northeastern British Columbia. It also owns 100% of the Elkview mine near Sparwood, in the southeastern corner of the province.

In their early years, under a previous operator, the northeast coal mines suffered from a variety of problems that generated skepticism about their long-term future. But since taking over, Teck has done a remarkable job of improving productivity and squeezing profits from operations some had thought might never survive the turbulent 1990s.

While Quintette produces only modest cash flow and earnings, Bullmoose and Elkview have made a solid contribution to Teck’s bottom line. Last year, coal accounted for $57 million, or 29%, of the company’s total operating profits, compared with $50 million, or 25%, in 1997.

Last year, Bullmoose produced 1.8 million tonnes, and Elkview 3.2 million tonnes, of clean coal, compared with 1.9 and 2.8 million tonnes a year earlier.

Stripping ratios at Quintette, where two of the four pits were depleted, improved to 20.1-to-1 in 1998 from 23.2-to-1 in 1997. Plant yield rose to 57% from 54.9% during the same period. The stripping ratio at Bullmoose fell to 16.5-to-1 last year from 19-to-1 in 1997. By 2002, it is expected to be 5.1-to-1.

However, the trickle-down effect of the lower world price for metallurgical coal (and thermal coal, though prices are still under negotiations) is such that Teck is working hard to reduce its mining costs further.

“We will be looking at everything in the system, from suppliers to transportation to the mine site,” says Russ Hallbauer, adding that costs will also be reduced with lower stripping ratios.

Meanwhile, British Columbia’s mines minister, Dan Miller, has traveled to Japan to convince the Japanese not to reduce volumes out of the northeast. The Japanese steel industry is looking to reduce volumes by 30%, not just from the northeast but from all suppliers. Teck doesn’t appear to be holding its breath; the company is expecting both sales and prices to be down significantly this year.

Luscar and Fording

Coal-fired power plants may be impossible to find in British Columbia, but that isn’t the case in Alberta, where producers have been able to find domestic customers for their product. Indeed, the lion’s share of Luscar’s coal goes to the domestic market. Of its 11 mines, five produce some export coal.

Ernest Lalond, who is in charge of investor relations for Luscar, describes 1999 as “the year of the worst export market in a decade”. He also points out that domestic coal consumption in Alberta and Saskatchewan for power generation is losing to natural gas plants, which require lower capitalization.

On the bright side, Luscar has penetrated European, Brazilian and American markets, and the recent acquisition of Manalta Coal has meant entry into higher-paying markets, such as Japan and Korea. “There is a significant bright spot in the integration of the two operations,” Lalond says.

Seeking the best possible deal from suppliers, Luscar has announced agreements for its Line Creek and Gregg River mines, in B.C. and Alberta, respectively, as well as its namesake mine in Alberta.

When Fording Coal was tied to the Japanese market in the 1980s, the company’s management had a saying: “When the Japanese market sneezes, we get pneumonia.” And yet, despite the Asian cutbacks, Fording isn’t even sniffling, as only 26% of its exports go to Japan.

“Last year was difficult, but our return on investment was 13% in a tough year,” says spokesman Mark Ladouceur. “We are expecting 1999 to be tough, but we don’t think the Asian woes will hurt us. We are anticipating similar sales and we may even be increasing sales slightly.”

Fording is not downplaying the Asian market; rather, it has spread the risk. It’s three export mines — Coal Mountain, Greenhill and Fording, all in B.C. — also ship to Korea and Taiwan.

Ladouceur says Fording has several strategies for dealing with slumping demand, ranging from work sharing to holiday shutdowns.