Two-way coal merger derailed in favour of three-way deal

Vancouver — The proposed merger between Western Canadian Coal (WTN-T, WXJXF-O, WTN-L) and NEMI Northern Energy & Mining (NNE-T, NNEMF-O) has been derailed, with NEMI opting instead to join a three-way consolidation of assets with Anglo Coal Canada, a unit of Anglo American (AAUK-Q, AAL-L), and Hillsborough Resources (HLB-T, HLSRF-O).

Western and NEMI signed a “definitive” merger agreement in mid-May to create a new entity with annual production of 3 million tonnes of hard coking coal from Western Canada by year-end, rising to 5 million tonnes by 2007. Institutional investors and directors of both companies endorsed the proposed transaction, in which NEMI was to become a wholly owned unit of Western, pending the approval of remaining shareholders at a special meeting scheduled for June 26. That meeting was adjourned to July 5, but was postponed again just one day before the meeting was to be held.

Western Canadian Coal believes it still has a binding merger arrangement with NEMI, and is reviewing its options in light of NEMI’s withdrawal in favour of a preliminary agreement with Anglo Coal and Hillsborough. The three parties signed a non-binding letter of intent to consolidate their respective northeastern British Columbia coal assets into a company to be formed for the purpose.

Based on a market evaluation of each company’s assets, Anglo Coal Canada would have a 60% interest in, and management control of, the new company, with NEMI and Hillsborough each holding a 20% interest.

The three partners aim to finalize the transaction within the next three months, subject to due diligence and completion of a final binding agreement. In addition, Anglo Coal Canada will provide funding to NEMI over the next few months to help the fledgling coal producer meet its current obligations.

NEMI began operations in late 2005 at the Trend Small mine, part of its Trend property near Tumbler Ridge, B.C. The company shipped its first coal (an estimated 32,000 tonnes) to Japan in April. Proceeds were estimated at US$3.5 million.

The Trend Small mine produces low-sulphur, medium-volatile coking coal and was developed to exploit a reserve of 1.68 million tonnes, an at annual rate of about 240,000 tonnes. NEMI has contracts or letters of intent for most of its 2006 production, and is negotiating purchase agreements for the balance.

NEMI’s other core asset is a 50% interest in the Belcourt Saxon Limited Partnership, which holds more than 500 sq. km of coal-bearing ground (including historical resources in four surface-minable areas) in northeastern B.C. Western holds the balance, having also contributed ground and financial resources to the joint venture.

Anglo Coal’s assets include operations in South Africa, Australia, Venezuela and Colombia, which collectively produce more than 100 million tonnes of coal per year.

Hillsborough operates the Quinsam thermal coal mine on Vancouver Island and the Crossville underground thermal coal mine in Tennessee. The company is also developing a portfolio of metallurgical coal properties near Tumbler Ridge, and the Bingay Creek metallurgical coal project in the Elk Valley region of southeastern B.C.

For its part, Western Canadian Coal refutes allegations that it had advised NEMI that it was not prepared to complete the proposed transaction without an adjustment to the initially proposed share-exchange ratio. Western takes the position that both companies had agreed to review the exchange ratio, and that “such actions did not invalidate the binding nature of the arrangement agreement.”

Western also maintains that it did not terminate the agreement, and that NEMI had “no legal right to terminate the agreement, which remains in force.” The company expects to make further announcements once it has determined a course of action. In the interim, Western believes that the original merger proposal with NEMI “would be a better transaction” for the shareholders of both companies.

Western Canadian Coal brought the Dillon mine, also in northwestern British Columbia, into commercial production in late 2004. The company shipped its first coal in early 2005, and has since secured a 6-year, 3-million-tonne purchase agreement with one of South Korea’s largest steel companies for low-volatile pulverized coal injection (PCI) and hard coking coal.

Western plans to boost production at the Dillon mine, part of its Burnt River property, to an accelerated rate of about 800,000 tonnes in fiscal 2006. The company is also constructing the Wolverine open-pit mine, poised to become its largest mining operation, in northeastern British Columbia. Capital costs are estimated at about $242 million. Initial production is expected to be achieved shortly, with the mine projected to produce 1.5 million tonnes of hard coking coal during the company’s fiscal year ended March 31, 2007.