Compliance looks to energize coal

Develop metallurgical coal mines, get a “dual-fuel” power plant up and running, and continue to operate a thermal coal mine — sounds like a big to-do list for a junior company. But Compliance Energy (CEC-V) thinks it can pull it all off.

The Vancouver-based mining — and potential energy producing company, sees a unique opportunity in B.C.’s coal and lumber assets.

“With the market the way it is for metallurgical and thermal coal, and the need for new energy supplies and resources, the three-pronged approach seems appropriate,” says Compliance’s president and chief executive John Tapics.

Compliance’s Basin coal mine is already in operation, but is currently only producing at roughly one third of its 150,000 tonnes per year target. Part of the reason for the reduced output is the difficulty in securing thermal coal contracts in the Pacific Northwest region.

But if the company can convince the B.C. government of the merits of its proposed power plant, it will be able to create a market for the coal at Basin and at the same time, help the province deal with its growing mountain pine beetle problem.

That’s because the plant would not only burn coal from Basin, but it would also burn infested lumber from the surrounding area.

With some 8.7 million ha. of forest being infested by the beetles last year in B.C. and Alberta, the B.C. government has been left to scramble for ways to deal with a massive lumber surplus.

Compliance thinks its plan is to build a 49 megawatt (MW) plant would be the right fit.

The plant has projected capital costs of $200 million and the company says it can generate revenue in the neighborhood of $42 million annually.

The company will learn if its proposal is accepted by the government in the first week of August of this year.

On the other side of the coin are the company’s metallurgical coal assets.

Metallurgical coal is coal that has a higher value due to its use in making steel. It sells in the US$98-100 range. Thermal coal is only used for generating heat and thus is sold at a discount. It sells for roughly US$50 a tonne.

Compliance has Metallurgical coal assets on Vancouver Island by way of its Raven and Bear deposits.

Raven currently has a 38.5 million tonne resource at roughly 14,000 btu per lb.

Compliance expects to have a feasibility study done by 2008 and it plans to be producing 1 million tonnes of coal per year by 2009. Ideally, Tapics says, it would form a joint venture with a steel company thus securing contracts for the coal.

While the Bear project is just 10 km away from Raven, and could be developed in conjunction with it, the project is on hold until more work is done at Raven. Bear’s estimated resource of 8.5 million tonnes at roughly 13,000 btu per lb is not NI 43 101 compliant.

What does the future hold?

If its power plant proposal is not accepted by the government, the company will have to work hard to secure contracts for the thermal coal mine coming out of Basin.

With a 400,000 tonne per year wash plant already in place the motivation to find such contracts will be strong.

The resource estimate at Basin is currently at 19 million tonnes of raw coal, but the B.C. government has published the estimated global coal resource potential for the basin to be 240 million tonnes of “in-situ” coal.

While such a large resource represents opportunity for the company it also represents its biggest risk. Because of a lower selling price than metallurgical coal, transportation costs are a significant factor in securing contracts. The company must find buyers in its own Pacific Northwest region to be able to offer competitive pricing.

Compliance says demand will drive the coal production levels at Basin, and that it is working on finding the most cost-effective modes of transportation.

While some investors will always be wary of companies without a specific focus, Tapics says while Compliance is primarily a coal play, he sees a forward integration into energy as a natural fit.

That progression would mirror Tapics own development. A mining engineer by training, Tapics spent four years as president and chief executive of the Alberta Electric System Operator and 11 years as an officer at TransAlta (TA-T).