Western Canadian Coal and NEMI on growth-by-merger track

Vancouver — Driven by Asia’s booming economies, the international coal trade has expanded faster in the past decade than any other commodity. Western Canadian Coal (WTN-T, WXJXF-O, WTN-L) and NEMI Northern Energy & Mining (NNE.A-T, NNEMF-O), which both got their start developing coal projects to meet Asian demand, are now hoping to expand through a merger transaction that would create a new entity with annual production of 3 million tonnes of hard coking coal by the end of this year, rising to 5 million tonnes by the end of 2007.

Western and NEMI signed a definitive merger agreement in mid-May, after announcing initial plans in early April. Institutional investors and the directors of both companies have given their blessing to the proposed transaction. Barring unforeseen events, NEMI is poised to become a wholly owned subsidiary of Western, pending the approval of its remaining shareholders at a special meeting on June 26, and various regulatory and court approvals.

The merger plan calls for Western to issue one common share for every 1.8 common shares of NEMI. Once executed, Western would have about 115 million shares outstanding, with the ownership split of the combined entity being 73% Western and 27% NEMI.

Several directors of Western are also directors of Coal International (COIIF-O), which holds about 18.3% of NEMI; the merger is therefore viewed as a “related party transaction” by the AIM market of the London Stock Exchange, on which Western is quoted.

NEMI is a new coal producer that began operations late last year at the Trend Small mine, part of its wholly owned Trend property near the coal-mining town of Tumbler Ridge, B.C. The company announced the loading of its first cargo in mid-April, when 32,000 tonnes of coking coal were shipped from Ridley Terminals in Prince Rupert, B.C., to a Japanese steel mill at an average price of US$113.50 per tonne. The sale proceeds were estimated at US$3.5 million.

Contracts or letters of intent are in place for most of NEMI’s 2006 production and the company is negotiating coal purchase agreements for the balance.

The Trend Small mine produces low-sulphur, medium volatile coking coal and was developed to exploit a salable reserve of 1.68 million tonnes, at an annual rate of about 240,000 tonnes. Coal production will be mined this year at an average monthly rate of 60,000 tonnes.

NEMI’s other main asset is a 50% interest in the Belcourt Saxon Limited Partnership, which holds more than 500 sq. km of prospective coal-bearing ground in northeastern B.C. Western holds the balance, having also contributed ground and financial resources to the joint venture. The combined land package hosts historical resources in four main surface minable areas, and is viewed as having potential for a significant mining operation. The project is situated about 85 km southeast of Tumbler Ridge, and would require some transportation improvements before operations could begin.

Western Canadian Coal made the transition from junior explorer to producer by bringing the Dillon mine, also in northwestern British Columbia, into commercial production in late 2004. The company loaded its first coal shipment at Ridley Terminals in early 2005, with that shipment destined for South Korea. This milestone was followed by 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 has applied to boost production at the small Dillon mine, part of its Burnt River property, to an accelerated rate of about 800,000 tonnes in fiscal 2006. Construction at the Wolverine mine, in northeastern British Columbia, is under way. The open-pit mine, with capital costs estimated at about $242 million, is poised to become the company’s largest mining operation.

Western had applied to increase production at Wolverine to 2.4 million tonnes per year from the initially approved rate of 1.6 million tonnes, and is constructing a coal preparation plant capable of handling 3 million tonnes of hard coking coal per year. Initial production is expected this summer, with the mine projected to produce 1.5 million tonnes of hard coking coal during the company’s fiscal year ended March 31, 2007.

The post-merger Western would have more than 85 million tonnes of proven and probable coal reserves and 98 million tonnes of measured and indicated resources in deposits accessible to its coal-processing facilities, as well as exploration projects (including at Belcourt Saxon) with potential for additional resources in the years ahead.