Fording aims to boost production and sales (February 14, 2005)

Strong demand and prices for coal have Fording Canadian Coal Trust (FDG.UN-T) projecting sales of more than 27 million tonnes this year, a 2-million-tonne increase over sales in calendar 2004.

The Calgary-based trust owns 100% of Fording Coal, which in turn holds a 60% interest in the Elk Valley Coal Partnership, the world’s second-largest exporter of metallurgical coal.

The company’s mines in Alberta and British Columbia are already operating near their production capacity, but with demand and prices on the rise, efforts are under way to boost output at several operations, and to match plant capacity to increased mine production. Expansions are already under way at Cardinal River’s Cheviot Creek pit, and at Fording River and Elkview.

The expansion effort is spurred by expectations that two major steel companies will make a 5% equity investment in the Elkview mine, thereby providing even more capital to expand operations. The proposed transaction, which includes a 10-year sales contract, is expected to close during the first quarter of this year.

By the end of 2005, Elk Valley’s production capacity is projected to have climbed by 3 million tonnes to about 28 million tonnes on an annualized basis.

Fording’s profits are also likely to grow in tandem now that Elk Valley Coal has completed almost all its annual price and sales volume negotiations with customers. Almost all sales of metallurgical and other coal after April 1 of this year are priced at an average of US$122 per tonne, on an f.o.b. west-coast-port equivalent basis. Some sales in 2005 are still based on 2004 prices, but even after taking this and other factors into account, sales for the 2005 coal year are expected to average more than U$100 per tonne — nearly double the average price of US$52 per tonne achieved in 2004.

The expected jump in prices and production in 2005 will no doubt help Fording improve on its already impressive 2004 operating and financial results. The company reported net income of $85 million for the last quarter of 2004, nearly triple net income of $31 million for the comparable quarter in 2003. Fourth-quarter revenues climbed 5% to $324 million, year-over-year.

On an annual basis, income from operations increased 38% to $170 million from $123 million a year earlier. However, net income of $150 million was down from $241 million in 2003, owing to unusual items such as the reduced interest in Elk Valley Coal (from 65%), a different mix of assets, and various accounting changes.

James Popowich, president, noted that transportation and other costs jumped 17% from the previous year, mostly reflecting ocean freight and higher rail and port charges. Energy and steel costs climbed last year too, and mining equipment was more expensive, and often difficult to source, owing to booming resource industries in the west and elsewhere.

“We expect these cost-pressure burdens to continue into 2005,” Popowich said during a conference call with analysts and shareholders.

The company and Canadian Pacific Railway are involved in non-binding arbitration to resolve a dispute over rail rates. Accordingly, Fording cautions that reaching its expansion targets will depend on the ability of rail and port service providers to handle the extra volumes.

Fording Canadian Coal Trust is also the world’s largest producer of the industrial mineral wollastonite.