Fording bullish about coal’s prospects

Vancouver — Despite recent production cuts by several major steel companies, metallurgical coal producers expect supplies to remain tight and prices high, at least into 2006. Among those bullish about coal’s prospects is Fording Canadian Coal Trust (FDG.UN-T), which continues to invest in expansion programs at the Elk Valley coal operations in southeastern British Columbia.

The Trust holds a 61% interest in the Elk Valley Coal Partnership (down from 65% in early 2004), the world’s second-largest exporter of metallurgical coal. Managing partner Teck Cominco (TEK-T) holds the balance. The partnership expects to supply about 27 million tonnes of high-quality coking coal to the steel industry this year, or about 21% of the global market.

Elk Valley Coal has six operating mines, five in B.C.’s Elk Valley and one — the Cardinal River mine — in west-central Alberta. The partnership holds other assets, including the past-producing Quintette coal mine in northwestern British Columbia, and a subsidiary that is the world’s largest producer of wollastonite, a mineral used to improve many products including plastics, coatings and sealants.

The Elk Valley coal mines are churning out hefty profits for both Teck Cominco and Fording. The Trust reported net income of $123 million in the latest quarter ended June 30, up from $13 million a year earlier. Revenues were $469 million, up 51% from 2004, mostly on the strength of higher coal prices.

While coal production was relatively steady in the recent quarter from a year earlier, metallurgical coal prices rose to $119 (US$94) per tonne from $72 (US$51) in the second quarter of 2004.

“We expect to continue to see momentum in our earnings in the second half of the year,” President James Popowich told analysts during a recent conference call.

Offsetting higher prices are higher unit costs, which have increased dramatically, mostly owing to surging prices for diesel, tires and other mining equipment, labour, and transportation.

Diesel costs alone increased 33% year-over-year. Transportation costs climbed 20% over the same period, reflecting higher rail rates from a new contract with Canadian Pacific Railway (CP-T) and higher port rates. Tires, another key item, are now costlier and harder to source than ever.

“The [tire] situation hasn’t improved,” Popowich said, “but we’re working hard to improve tire life by better haul-road maintenance and various other means.”

Overall, the unit cost of sold product rose 18% in 2005 over 2004 levels. In addition to higher transport and diesel costs, costs were affected by higher-than-expected mining costs at Cardinal River, owing to higher than planned strip ratios and difficult mining conditions in the early stages of the Cheviot pit. Heavy rains in Alberta only added to the woes.

Expansion programs are under way to boost Elk Valley’s capacity to 28 million tonnes by the end of this year, and to 30 million tonnes before the end of 2007. The Trust invested about $28 million for capital projects in the latest quarter, mostly for the Cheviot pit at the Cardinal River operations and ongoing expansion at the Fording River and Elkview operations.

Fording says higher coal prices are attracting new supply to the market from both Canada and Australia, but notes that the infrastructure supporting transportation of metallurgical coal from mines is at, or near, capacity in most parts of the world. Mining equipment is increasingly difficult and costly to source, as well.

Fording says these constraints make it unlikely that significant new supply will come on stream before at least 2007.

Meanwhile, in northwestern B.C., drilling is under way to evaluate the extent of coal resources at properties near the former Quintette mine. The program is expected to be completed by year-end. A decision to revive the mine rests on exploration results and on long-term market conditions. If the green light is given, it would take about two years to bring the mine back into production.

The Fording Trust also holds a subsidiary that operates wollastonite mining operations in New York state and Mexico.

The Trust had about 49 million units outstanding at the end of the second quarter. Unit-holders approved a three-for-one split at the Trust’s annual meeting in early May, though a date has not yet been set for the subdivision of the units.

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