Cheviot mine on hold

Poor markets for metallurgical coal have caused Fording Canadian Coal Trust (fdg.un-t) to suspend development at its Cheviot coal project near Hinton, Alta., until markets improve.

Cheviot, which had been ready for development in the late 1990s but was then delayed by permitting difficulties, received a permit to mine in late 2000. It has a resource of about 70 million tonnes of metallurgical-grade bituminous coal. Under the proposed mine plan, a series of open pits would have produced about 3.5 million tonnes annually.

Another of Fording’s major coking-coal operations, Line Creek, near Sparwood, B.C., is also reducing its annual production, to 2 million tonnes from a planned level of 3.5 million tonnes. About half the mine’s 544 employees will be laid off as a result.

In a takeover battle in late 2002 Sherritt International (s-t) and the Ontario Teachers’ Pension Plan offered to buy out Fording, which had recently been taken public by Canadian Pacific. Teck Cominco (tek-t) and the Westshore Terminals Income Fund (wte.un-t) appeared as white knights with another bid, and the final outcome meant the considerable reshaping of the Canadian coal industry.

Fording traded its thermal-coal assets to Luscar Energy, the thermal-coal miner owned by Sherritt and Ontario Teachers, while Luscar Energy’s metallurgical-coal operations, including Luscar and Cheviot, went to Fording. Fording itself converted to an income trust, with Fording shareholders receiving 39% of the units, Teck and Westshore getting about 9% each, and Sherritt and Ontario Teachers owning or controlling 36%. Pittsburgh-based coal producer Consol Energy (cnx-n) gained a 7% shareholding for its interest in several Luscar operations — including Luscar and Cheviot — but has since sold the shares.

The Fording mines are now operated by the Fording Coal Partnership, in which the Fording trust owns 65% and Teck 35%. If the partnership, which is managed by Teck, meets a series of financial and efficiency tests over the next four years, Teck moves up to a 40% stake.

The slow coal market also means that the closure of the nearby Luscar coking-coal mine, which was facing reserve depletion in any event, will go ahead as scheduled. Luscar has about a year of reserves left.

Fording President James Gardiner says the company had “thoroughly evaluated the Luscar mine and will proceed with the orderly shutdown announced by its previous owners due to the depletion of coal reserves at the mine.”

There will be an initial layoff of about 190 workers in May, with another 100 remaining to complete mining and site reclamation. Site reclamation costs remain with Luscar Energy and Consol, as do the severance costs.

The Luscar mine’s process plant and associated works are being closed to allow for quick development of Cheviot once markets do turn.

Luscar Energy recently announced that production would be suspended at the Obed Mountain mine, west of Hinton, and that the Coal Valley mine, 80 km west of Obed, would shut down for three weeks (T.N.M., March 31/03). Most of Obed’s 110 employees would be laid off.

Luscar said it expected thermal coal sales to improve in the latter half of the year but that the shutdowns would draw down existing inventory.