Quintette contract talks threaten production

A bid by the Japanese steel industry to renege on long-term contracts it signed with Quintette Coal Ltd. may force the company to close its controversial coal project in Peace River, B.C.

In the latest of a series of setbacks which have hampered the project since it opened in August, 1984, President Paul Kostuik said the mine will shut down if the Japanese steel industry succeeds in reducing the price it pays for metallurgical coal to $57.85 per tonne.

“This is not a scare tactic, it’s a fact,” said Kostuik who called the Japanese reduction requests “unconscionable.”

“They violate the intent of our agreements and they make a mockery of the assurances the Japanese gave to the Canadian people,” he said.

One of the largest open pit coal operations in North America, the project was built at a cost of around $2.5 billion to supply Japan’s burgeoning steel industry with a new strategic source of high quality metallurgical coal.

The British Columbia government contributed nearly $1.2 billion to build a railway, ocean terminal and other facilities.

Quintette supplies Japan with about five million tonnes annually under long-term contracts that are in effect until March 31, 1998.

Despite a price contract which requires Quintette’s Japanese steel customers to pay $104 per tonne the company had already dropped its price to $95 per tonne to reflect world coal prices.

But in recent pricing discussions, two Japanese buyers with a 15-year contract to take 1.3 million tons annually, have been pushing for a price much closer to the current world price of $60 per tonne.

Following 10 months of discussions involving Quintette and its customers, the talks finally broke down last Friday and at the request of the Japanese, the issue will be settled by a British Columbia arbitration panel.

“It’s terribly bizarre that after agreeing to an escalator mechanism which has brought Quintette’s coal price up to $104 per tonne from a base of $75, the Japanese are making these proposals,” said Kostuik.

“The Japanese knew from the start that northeast British Columbia would never have been developed if the price of coal were $57.85 per tonne. But they encouraged the participants to proceed with the project and promised to pay the price necessary to get a secured source of high-quality coal,” he said.

A combined holding of 38% Quintette shares are held by Mitsui Mining Co., Tokyo Boeki Ltd., the Japanese Steel Industry and Sumitomo Corp.

Kostuik says a revised development plan signed last year requires Quintette to operate over the next twelve years at a production rate of five million tonnes annually while charging a full price of $104.

Since the company dropped its price by $8.50 per tonne and cut production by 650,000 tonnes annually, Quintette will lose approximately $62 million in annual revenues. “At that price we can still meet our loan contract commitments but we don’t have much room to manoevre,” said Kostuik. who was in Toronto this week for talks with Denison Mines.

Since Quintette’s largest shareholder Denison Mines wrote off its entire $240,739,000 investment in Quintette last year, a mine closure would have no financial effect on the Toronto company.

However, Denison officials say they are concerned that if the Japanese are successful in negotiating a substantial price reduction, it could set a dangerous precedent.

“It looks like the beginning of a world horror story,” said a Denison source who preferred to remain anonymous.

However, Coal Association of Canada President Richard Marshall downplayed the effects of the Quintette dispute. “It’s a straight question of an arbitration involving a company and its customers,” he said. “The two sides will have to sit down and look at the situation.”

As reported (N.M. Aug 24/87), the price dispute comes after a major effort to reverse production difficulties which have plagued the Quintette mine since it opened. In August the company opened its new Shikano pit which represents an expected 20% of this year’s 4.7- million-ton production output.