Western Canadian Cuts Coal Production

VANCOUVER — Another miner is cutting back on production in the face of falling prices, this time a coal producer. Western Canadian Coal (WTN-T, WXJXF-O) is almost halving output at its Brule mine and has warned employees at its Wolverine operation that operations may be curtailed in the spring.

Western Canadian produces more than 3 million tonnes of high-quality metallurgical coal from three mines in northeastern British Columbia, specifically near the town of Chetwynd.

The Perry Creek mine, which is on the Wolverine property, currently produces 1.45 million tonnes of hard coking coal each year.

Western Canadian is also looking to develop two other mines on the Wolverine property — the EB Hermann mines — and to that end was recently granted approval to increase production at the property to as much as 3.5 million tonnes annually.

Now, however, the company has given notice to employees that it may curtail operations in May. The company also gave notice to the mining contractor at Wolverine that it will terminate the mining contract at that time; when operations resume, Western Canadian will conduct its own mining.

At the Brule mine, production had been sitting at 1.3 million tonnes of ultra-low volatile pulverized coal injection (ULV-PCI) coal. Western Canadian is slashing that almost in half, to 750,000 tonnes per year. ULV-PCI coal can replace some 30% of the coke feed in blast furnaces and Western Canadian sells most of its Brule production to Korea.

The decisions stem from rising inventory levels due to customers deferring shipments. Coal prices are set by negotiation in March each year; as such, there is much uncertainty about the coal market beyond April, which has led both customers and producers to exercise prudence.

For its part, Western Canadian expects to operate at these reduced rates until the economy improves and the demand for coal becomes clearer. The company says that when markets do improve, it has the flexibility to quickly increase operating rates and pursue its now-deferred growth plans.

Investors didn’t like the cutback plans and pushed Western Canadian’s share price down 27¢ or 25% to 80¢, on 11.3 million shares traded. The company has a 52-week trading range of 43¢-$10.99, and 210 million shares outstanding.

Western Canadian also announced a US$36-million loan to Cambrian Investment Holdings, a wholly owned subsidiary of Cambrian Mining (CGIIF-O, CBM-L), money that subsidiary needs to repay a finance facility. Cambrian Mining holds 34% of Western Canadian, as well as $34 million in convertible debt and loans.

On Christmas Eve, Western Canadian and Cambrian Mining announced merger plans to create “a financially strong company with a diversified base of coal assets.” Cambrian brings to the new company two coal mines in West Virginia, which produced 400,000 tons of metallurgical coal and 600,000 tons of thermal coal in the year that ended June 2008. The combined entity has coal production potential of up to 10 million tonnes per year, from existing assets.

The merger would exchange each Cambrian share for 0.75 of a share in Western Canadian. The deal values Cambrian at 28.8 million, which represents a 48% premium over Cambrian’s share price prior to the deal.