A stocking full of coal

Trent Ernst, Editor

Donald Lindsay was recently talking Teck with the Globe and Mail, and hinted that the company is at least starting to consider plans for restarting Quintette.

It’s not something that Tumbler Ridge will see in the short turn, says Lindsay, but, after two very tight years, the company is at least considering it.

“We wouldn’t rush to put Quintette into production,” he said to the Globe and Mail. “We don’t want to bring tonnes on the market that causes the price to go down for the other 27 million or 28 million tonnes that we’re already producing. One thing that we’ve learned in this business over many cycles is that you make more money on price than volume.”

That’s the same message that Larry Davey delivered to Council on December 5.

Davey is Vice President in Planning & Development, Coal for Teck. 2016, he says has been a quiet year for Quintette, and a matter of making sure to keep up to date with their water management and effluent permits. “That represents the majority of our work,” he says, although, he points out, there was some work in reclaiming the old overland conveyor.

Davey says the company only has four people on the property. “Nobody was expecting the sudden price increase, but that’s been driven by supply shortage, because so many mines have shut down around the world,” he says. “We also saw China reduce its mining. There’s been some supply issues from other mines, some weather driven, some supply driven. It’s a windfall for anyone producing coal right now. But nobody knows what’s going to happen. Because the price spiked so quickly, chances are it will go down just as quickly.”

So, while Quintette is definitely on the company’s long term plans, he says, “right now, we are not considering reopening Quintette.”

Still, he says, the company is still committed to the area. “We just designated $60,000 for investments in the area. We are committed to the mine and to the assets.”

For them to seriously consider reopening Quintette, says Davey, two things need to happen. The first is more stable prices. “We need the price to stabilize. We will continue to monitor and wait for a normalization of the coal prices. We’d like to see a year, maybe two, of stable prices.”

The second, he says, is an increase in demand. “If the coal price settles in at a higher price that will be good,” he says. “But we don’t want to be in a position where we are contributing to the oversupply of coal. We need to take a longer-term view on the process. We will take advantage of the price and maximize production through our existing properties.”

With Australia already announcing a dozen or so planned re-openings of met coal mines, there’s a good chance that the prices will drop in the next few months.

The approach Teck is taking is to focus on their six operating mines rather than moving to re-open Teck.

That number will soon drop to five, as operations at Coal Mountain will be winding down sometime next year. While the company had plans in place for Coal Mountain Phase 2, those were withdrawn last year. The company, says Davey, will be able to make up the shortfall by adding in production at their current properties, which will take a smaller capital investment than getting Quintette up and running.

A second Teck property, Cardinal River near Hinton, Alberta, has a current life expectancy of three more years, but has reserves that should keep it in operation for at least a decade.

Cardinal River has a life expectancy of 2019. It is more cost effective to use current properties than add new ones. Coal Mountain is shutting down next year, but they can, says Davey, pick up the slack through the other properties. A significant amount of capital is required to get Quintette back up and running.

Their other properties have coal reserves to keep them going for years to come. In the case of Fording River, coal reserves for another half century.

There’s lots of things happening around Met coal right now, says Davey, with coal prices rising to more than $300/tonne, getting close to the record high they hit in 2011.

The decision to move Quintette into care and maintenance happened in April of 2014. Met coal prices surged to $330/tonne in 2011 as rains devastated the Australian Coal industry and companies around the world began dramatically ramping up production to meet the demand for volume.

But when the Australian industry came back on stream, it meant the market was over-saturated. Rather than scaling down production, large companies like BHP Billiton kept their production high, forcing the price down to below $100/tonne and driving smaller mining companies off the market. Teck made the decision to put the restart on hold as prices tumbled past $130/tonne on their way to nearly $80/tonne at their lowest.

The sudden drop in prices caught Walter Energy flat footed, and the American company, which had bought three mines in the Tumbler Ridge area for $3.3 billion, was forced out of business, declaring bankruptcy last year. The separately-owned Canadian Subsidiary followed in December of 2015.

Conuma Coal, who purchased Walter Canada’s assets, is taking exactly the opposite approach from Quintette. When the mines were mothballed, says Company President Mark Bartkoski, Walter was expecting to reopen in a few months, so everything was sitting there ready to go.

They were able to jumpstart their operations at the Brule mine by basically mining under Walter Canada’s permits until the permits were officially transferred.

That transfer was completed on December 12, and they plan to have people out working at Wolverine by next week.

“We weren’t planning on starting out at Wolverine until mid-2017, but the market has gone ballistic and has stayed ballistic,” says Bartkoski. “The benchmark out of Australia got set today at $285/tonne. The market has gone crazy. And as always, there are two piles of analyst. One group says the price should average out at $240 for next year, while the other group think it’ll drop to under $200 by second quarter. There’s no question the market is inflated, but how fast is it going to fall?”

With contracts being signed at $285/tonne and spot prices pushing up over $300, it was an opportunity the company couldn’t pass up. “We can’t miss this market,” he says. “I don’t know how long it is going to stay here, and we have to take advantage of the opportunity when it’s there.”

So, the company plans to start hauling coal out of the ground by January 2. “By the time we get to the first week in January, we should have 50 employees out there, running the prep plant and starting mining. By the first of February, there should be 100 employees, 150 by march, and our full 220 by April. By that time, we should have 450 employees between the two mines.”

Right now, the company has 208 people working at Brule.

Of course, there’s still the issue of getting the coal to market. The company was in negotiations with CN to have the line open by September of next year, which was when they originally planning on opening.

With prices so high, the company wants to start selling coal as soon as it can. But CN isn’t able to fix the rail line until next summer. So what to do?

The answer, says Bartkoski, is not the one he was hoping for, but it’s the one he’s got. “The price is high enough that we can justify trucking for seven months until the rail line is fixed.”

That means, he says, running trucks to rail load out near Chetwynd. It puts mining trucks on the roads for the next half a year, but it also puts more than 200 people to work.

But that’s not the only plan that’s had to change to take advantage of the high coal prices. The company is planning on bringing Willow Creek into production by June of next year. “By the time we hit Sept 1, we’ll be at 660 employees.”

Willow Creek was a question mark for the company. While the quality of coal there was top grade, it is more expensive to get out of the ground. Still the company has been working hard at coming up with a viable model to have the mine up and running, and Bartkoski thinks they’ve figured it out.

“Do I anticipate the price coming down?” He asks. “Yes. So we need to position ourselves to be efficient and low debt now. We need to get started early.”

And when the prices do go down? Bartkoski says they offer something that most mines don’t. High quality product. “The biggest thing protecting us from a price drop is the quality of coal. If you go to China or Australia and look at the quality of coal, there’s not a lot of competition. Weaker met will fight amongst themselves but won’t fight against these properties.”

Which leaves one more mine in the Tumbler Ridge area. While Anglo American has issued no official statement, representatives of the company have told the Tumbler Ridge News the same thing as Teck: prices need to stabilize at a profitable level for an extended period of time.

Anglo American has restructured their business, and is planning on getting out of met coal as it moves forward. With prices rising, the company will be looking to sell the property rather than reopen. Still, many mining companies have taken a “once bitten, twice shy” approach, and are looking at maximizing their current assets rather than expanding into new ones, so it’s going to be a hard sell.