Westray disaster threatens company’s future — Curragh on

Although Curragh Resources (TSE) will likely survive the Westray coal mine disaster in Nova Scotia, it will emerge from the wreckage with a severely damaged reputation in the eyes of investors and creditors alike, some analysts say.

Even if the lead-zinc producer’s name is cleared after what is expected to be a lengthy inquiry into the accident, Curragh officials will have a hard time explaining why they got involved in a project that was thought to be both hazardous and politically motivated.

“Where Curragh is really going to come unstuck is when it tries to defend its role in a mine that was built for purely political reasons,” said Geoff Carter of consulting firm Broad Oak Associates.

In the early hours of May 9, a gas explosion that left behind lethal concentrations of methane ripped through the coal mine. At presstime, 15 miners had been found dead and 11 were still missing.

In the wake of the disaster, investors expressed their concern for Curragh’s future by shaving $1.30 off the company’s share price by the end of business May 13. The stock closed at $3.10 in a 52-week range of $2.75-$7. But with the recent improvement in the zinc price and a $50 million cash windfall from the sale of its 20% interest in Spanish smelting firm Asturiana de Zinc, Curragh should be able to avoid bankruptcy in the troubled months ahead, said Julian Baldry, an analyst with Nesbitt Thomson.

“With the insurance they carry for that operation, Curragh has a future even if the mine does close down.”

In 1990, when Curragh decided to diversify its operations by developing the $125-million coal mine, the lead-zinc producer managed to secure a $12-million loan from the Nova Scotia government and a $100-million loan from the Bank of Nova Scotia.

The location of the new mine in Pictou East — the same riding as the former provincial industry minister and current Premier Donald Cameron — immediately sparked a political controversy that still surrounds the mine today.

But since the provincial loan is secured by the Westray assets and the federal government has guaranteed 85% of the bank loan, Curragh will be on the hook for only $25 million if Westray closes.

At an annual meeting held just one week before the disaster, Chairman Clifford Frame told shareholders he expects an improved performance in 1992 as zinc holds steady at about US62 cents per lb. In the first quarter, when zinc traded at an average of US53 cents, the company lost $5.7 million (18 cents per share) compared with a loss of $8.3 million (26 cents per share) in 1990.

In its annual report, Curragh said it will generate enough cash from existing operations and current metal prices to meet operating costs and interest payment obligations.

But, following the Westray tragedy, attempts to secure a $40-million loan guarantee from the federal government for development of new ore at Faro lead-zinc mine in central Yukon may be now be in jeopardy.

“We are reviewing the situation, trying to determine how the Westray situation will affect Curragh as a whole,” said Joseph Lazarovich, director of mining and infrastructure for the Department of Indian and Northern Affairs Canada.

Curragh, which has traditionally relied on government loans to help finance its projects, may now find the door to both provincial and federal loan offices closed, one analyst suggested.

A decision on whether to reopen the mine will depend on both the results of the provincial inquiry and Curragh’s wishes, said David MacNeil, press secretary for Premier Donald Cameron.

“A lot of the decision will depend on the company itself,” he said. “But everything’s up in the air at the moment.”

While Curragh executives could not be reached for comment on the future of the mine, Broad Oak’s Carter said cost would not be an obstacle to reopening Westray since damage to the mine workings should not be extensive. On the other hand, the mine is not as important to Nova Scotia Power’s nearby Trenton generating plant as has been suggested. Although designed to handle the low-sulphur Westray coal, the plant also burns coal from a mine in Westville, N.S., and can easily secure coal supplies from Cape Breton and New Brunswick, says Gerald Lethbridge, vice-president of engineering and production for Nova Scotia Power (NSP).

“We are very fortunate that this most unfortunate incident will not have an adverse affect on Nova Scotia Power.”

Curragh has a contract to supply the Trenton plant with 700,000 tonnes of coal per year for 15 years. By securing the low-sulphur Westray coal, NSP avoided the cost of installing scrubbers at the plant.

But Lethbridge says NSP will be able to stay below its maximum allowable sulphur emission levels with or without the Westray coal, particularly after it starts up its circulating fluidized bed plant in Cape Breton next year. Some analysts are attributing the Westray explosion to a sudden release of methane gas and dust from the coal face. But Carter says these so-called “outbursts,” like rockbursts, usually occur at much greater depth. Meanwhile, the United Mine Workers of America says that Curragh ignored earlier warnings from miners about high methane levels in the mine. Concerns about inadequate equipment have also been raised.

Still others are questioning the initial decision to mine the 18-km Frood coal seam, which has a history of methane-related problems.

These questions and many more will be answered in the months ahead as the inquiry into the disaster proceeds. But whatever the outcome of the investigation, analysts say Curragh will find it difficult to garner support from either investors or governments in the near future.