Xstrata Coal extends reach to Americas

The Donkin coal resource in Nova Scotia could serve as an anchor for other potential projects in the Americas as Xstrata Coal aims to expand beyond its traditional base in Australia and South Africa.

“We have a strategy of geographic diversification, and one of the areas we’ve had our focus on for some time is the Americas — Canada, the U.S. and South America,” says Jeffrey Gerard, chief operating officer for Xstrata Coal Americas Division. Gerard, who recently assumed the post and will be relocating to Halifax from Australia in August, was previously general manager of business strategy for Xstrata Coal.

“We saw the opportunity to pick up a very large resource (at Donkin) and establish a beachhead on the east coast of North America,” he says.

Xstrata Coal (66%), a division of Switzerland-based diversified metals producer Xstrata (XSRAF-O, XTA-L), and its partners Kaoclay Resources (20%) and Atlantic Green Energy Development (14%) won the exclusive right to apply for a special exploration licence from the province to develop Donkin, located in the Sydney coalfield of Cape Breton, in December 2005.

Since then, the province has granted the licence to the trio’s Donkin Mine Development Alliance and Erdene Gold (ERD-T, ERDGF-O), whose focus to date has been base metal and uranium properties in Mongolia, has acquired a 100% interest in Kaoclay.

True to plan, Xstrata followed the Donkin bid with the purchase of a one-third interest in the Cerrejon coal mine in Colombia, the world’s third-largest export open-pit coal mine, for US$1.7 billion. The new asset, shared with BHP Billiton (BHP-N, BLT-L) and Anglo American (AAUK-Q, AAL-L), will give Xstrata access to the growing market for thermal coal in the United States.

U.S. demand for thermal coal imports is expected to increase by 21% this year, according to McCloskey Group, a U.K.-based consultancy. The partners at Cerrejon are expanding production to 33 million tonnes from 26 million tonnes per year to help meet this demand.

By comparison, Donkin is expected to produce 5 million tonnes of coal per year by 2011 if an ongoing feasibility study proves positive.

Donkin was discovered in the late 1970s, when 11 holes were drilled into the undersea resource from a ship. The coal resource block, considered the last remaining undeveloped block of high-quality coal off the coast of Cape Breton, covers an area of about 100 sq. km.

In the mid-1980s, DEVCO drove two 3.5-km tunnels into the deposit to access the rich Harbour Seam, but the tunnels were allowed to fill with water and the portals sealed in the 1990s, when the money-losing Cape Breton Development Corp. (DEVCO) ceased development there. Mining in the Sydney coalfield came to a complete halt in late 2001.

Thermal coal focus

During its tenure, DEVCO identified a total of 12 coal seams at Donkin varying in thickness from 0.9 to 3 metres. The total resource of metallurgical and thermal coal is estimated at 200 million tonnes, though Xstrata’s main focus during the 2-year feasibility study will be thermal coal.

“Our objective is to prove up the economics of this potential mine on the basis of thermal coal,” Gerard says. “If we can identify the quality for producing coking (metallurgical) coal and a local market, that’s just going to add value and improve the security of the long-tem operation. We see the coking coal as upside.”

Prices for metallurgical coal in the U.S. averaged US$93 per tonne in 2005, up from US$68 per tonne in 2004, according to the Paris-based International Energy Agency (IEA). The average price for thermal coal was US$35 per tonne, compared to US$31 per tonne in 2004.

Ideally, the market for the Donkin coal would be local, within the Maritimes, Gerard says, but could stretch as far as the U.S. east coast and Europe, where the company is already an established supplier.

Xstrata Coal currently produces more than 70 million tonnes of mostly thermal coal per year from over 30 mines and sells most of its product to markets in Europe and the Pacific Rim.

The Donkin Mine Development Alliance will spend $15 million to fully evaluate the underground resource over two years before making a production decision. Xstrata, the project operator, officially opened an office in Glace Bay, N.S., in June.

Work is already under way, including an environmental assessment in preparation for dewatering the Donkin tunnels and sampling of the Harbour Seam within the underground workings at Glace Bay’s mining museum to determine the quality of the coal, including the sulphur content. Xstrata is also building geological models of the resource based on previous drilling and 3-D seismic work.

“The two major issues are the high sulphur content of the coal and efficiently managing coal bed methane,” Gerard says.

High-sulphur coal, because it creates more gaseous emissions when burned, has traditionally commanded a lower price than low-sulphur coal, though there are technologies available to control these emissions.

As for mine safety aspects of operating undersea, Gerard says Xstrata operates another offshore coal mine in Australia and is comfortable with the engineering aspects of mining underwater bodies while controlling seepage.

As the feasibility study proceeds, the tunnel dewatering and reclamation will be followed by bulk sampling from within the existing drifts using 2,000-tonne bulk samples. Drilling within the seams will identify geological structures and investigate the mine gas regime.

Donkin’s ownership is still unclear, with both the federal and provincial governments claiming they own and should regulate the coal resource. Gerard says the two levels of government continue to negotiate towards a single set of regulations that will govern labour, safety and the environment, and he is optimistic that the two sides will eventually come to an agreement. In the meantime, the discussions are not affecting the company’s ongoing work there, he says.

Community consultation is also an important part of the process. Gerard says the company has been running community liaison meetings for the past month and has had nothing but support for the project.

In its heyday, the Sydney coalfield had eight operating underground coal mines employing up to 15,000 people.

“The community understands coal mining better than a lot of other communities we deal with,” Gerard says. “The people there are very positive in terms of wanting to see coal mining to come back to Cape Breton.”

— The author is a freelance writer specializing in mining issues, and principal of Toronto-based GeoPen Communications (www.geopen.com).