There have been two major phases of export mine closures over the past few years. The first phase occurred in 2000 when three export coal mines closed: Smoky River, Gregg River and Quintette.
The combined 1999 production of these three mines was 6 Mt, almost all of which was coking coal for the export market. The mine closures in 2000 were precipitated by increased competition from Australia, where a string of new hard coking coal mines were commissioned in the late 1990’s, leading to the price crash of 1999 and 2000.
Worse still, Canada’s competitive position weakened considerably around the end of last decade when production costs in Australia plummeted as bloated mine workforces were slashed, rail and port costs tumbled due to microeconomic reform, and the value of the Australian dollar fell to record lows.
The ability of Canadian coal exporters to respond to the Australian cost cuts was limited. All bar one of the Canadian export coal mines are strung out along the flanks of the Rocky Mountains, with huge rail transport distances, typically 1,000 km or more, to west coast ports. Mining conditions are also less than ideal as complex geological structure rules out the use of low cost dragline stripping costs in most cases, and winter conditions are extreme. The mines and the rail systems are already run at close to best practice, with little room for substantial cost reductions in most cases.
The industry is now in the midst of a second round of export mine closures. The 1.9 Mtpy Bullmoose coking coal mine closed in April and production from Luscar’s 1.5 Mtpy Obed Mountain steam coal mine was suspended indefinitely in May. The 2.8 Mtpy Luscar coking coal mine in Alberta is also slated for closure in early 2004. The closures of the two coking coal mines, Bullmoose and Luscar, is primarily due to exhaustion of economic coal reserves, whereas the idling of Obed Mountain was the result of weak export thermal coal markets earlier this year and the loss of some important sales contracts.
Southeast British Columbia
Despite the gloomy picture painted by the closure of so many mines it appears likely that Canadian metallurgical coal exports will recover steadily over the medium term, albeit somewhat unspectacularly. The closure of higher cost operations has left the Canadian coal export sector in much better shape now, with its future based around a core of five coking coal operations located in close proximity to each other in southeastern British Colombia.
With the formation of the Elk Valley Coal Partnership earlier this year all of these five mines are now combined under a single operator, and operational synergies should see some reduction in costs over the next couple of years. These five mines have huge combined coal reserves, competitive cost structures, and the ability in some cases to reduce costs further by mining lower strip ratio reserves.
The Elk Valley Coal Partnership was formed on 28 February 2003, combining the metallurgical coal mines of Fording, Luscar and Teck Cominco (excluding the Bullmoose mine, which will be transferred to the partnership when reclamation is complete). Elk Valley Coal is owned 65% by the Fording Canadian Coal Trust and 35% by Teck Cominco.
Teck Cominco also holds a 9.1% interest in the Fording Canadian Coal Trust so its total direct and indirect interest in Elk Valley Coal is 41%. Elk Valley Coal’s production of 5.8 Mt in the second quarter was in line with expectations. Coal sales of 5.8 million tonnes were lower than planned due to congestion at the port caused by damaged loading equipment. Sales are forecast to exceed production levels in the second half of the year with inventory reduction expected to occur mostly in the third quarter.
Alberta
Further to the north, the decline in coal exports from Alberta will continue over the short term at least. Following the closures of Smoky River and Gregg River mines and the idling of Obed Mountain there are now only two export coalmines operating in the province, Luscar and Coal Valley. The closure of Luscar next year will see the end of coking coal exports from Alberta, leaving only Coal Valley supplying steam coal to domestic and export markets.
The Cheviot coking coal project, located adjacent to the Luscar mine, remains on ice and looks likely to remain so for some time given that Elk Valley Coal has substantial spare capacity at its five mines in southeast British Columbia. Grand Cache Coal continues to plan the resumption of mining at Smoky River but has yet to obtain financing for the project.
We have pushed out the development of Cheviot in our forecasts until post 2008, but have not included Smoky River pending completion of its financing and marketing agreements.
Northeast British Columbia
Further north again, the closure of Bullmoose and Quintette has seen the cessation of coal production from northeast British Columbia. There are plenty of active coal projects in the area, including Willow Creek (PCI coal) and Wolverine/Perry Creek (hard coking coal), but little certainty at this stage that any will get off the ground. Of the multitude of potential mining projects in NE BC, some ideally need to be initiated over the next year or so to prevent the atrophy of rail and port infrastructure servicing the area. So this will be a critical period for the reactivation of coal mining in the north.
At this stage we have included two promising projects in our forecasts, namely Pine Valley’s Willow Creek PCI project and Western Canadian Coal Corporation’s Wolverine/Perry Creek project. Both are located right next to existing rail infrastructure and have sufficiently attractive mining parameters to suggest that on site costs may be sufficiently low to counterbalance the 1,000 km rail hauls.
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