Future of Quintette Coal in hands of its partners

The huge Quintette coal project in northeastern B.C. “can be scuttled by all partners in it, but mainly by the Japanese steel industry and the banks,” Stephen B. Roman, chairman of Denison Mines Ltd. told shareholders at the annual meeting.

With a 50% equity interest, Denison is the manager of this northeastern B.C. metallurgical coal producer. Other equity partners are the Japanese steel companies, which own a combined 10% equity interest, Mitsui Mining with 12.5%, Charbonnages de France International with 12.01% and Sumitomo Corp. which has a 5% interest.

As emphasized by President J. D. Fowler, Denison no longer has any further financial obligation to the project following its $241- million write off in fiscal 1985. However, the mine itself still must wrestle with a long-term debt of approximately $750 million.

To that end, Denison has recently proposed a restructuring concept to the consortium of 56 banks responsible for project financing. Though details of the proposal were not given at the meeting, Mr Roman did say it involves extending the repayment period to 15 years — to match the long-term sales contracts with the Japanese steel industry — from the current 10 years.

“It is now up to the banks to decide whether they are willing to go along or whether they will take the difficult course and scuttle the project,” says Mr Roman.

Taking up the thread of Mr Roman’s statement, Quintette President Paul Kostuik explained the plan provides a means by which the original participants that were vital to the initiation of the project remain together to work through the down market period in coal.

“It is a means by which the Quintette company remains viable,” he says.

Though Mr Kostuik did not reveal when a decision from the banks is expected, he stresses “the time is now, but we expect to have ongoing discussions.”

The crux of the issue is do the lenders want to make a short-term decision or a long-term one extending the period to 15 years, he says. “If they choose the short term, they may as well do nothing and watch everything wither away,” says Mr Kostuik.

At the same time the discussions are going on with the banks, Quintette is also in the process of renegotiating coal prices with the Japanese steel mills. The company’s 15-year contract calls for delivery of five million tonnes of metallurgical coal at a current inflation adjusted price of about $104 per tonne. But as world markets have dried up during the five years since the contract was signed, the Japanese will now only pay Quintette $94 compared with a world price of about $70.

The difference between receiving $104 and $94 per tonne costs Quintette in the order of about $170 million in lost cash flow, says Mr Kostuik.

In recent media reports the Japanese steel industry is suggesting that prices are no longer under any long-term contracts and the coal should be bought and sold under a London Metal Exchange price concept, he says.

“But as far as Quintette is concerned, these contracts were never intended to be at world price. Whatever they say, they do not mean that,” Mr Kostuik says.

And as far as Mr Roman is concerned Denison entered into agreements with the Japanese in a spirit of co-operation and friendship and that spirit must be maintained.

Despite the debt and the contract negotiations, the operating news coming out of Quintette is good. All production and cost reduction goals were met or exceeded last year, including reaching the designed annual rate of 6.3 million tonnes through the second quarter.

Unit mining costs were reduced by 19% and unit processing costs were reduced by 11% in 1986. These gains were partially offset by a 12% increase in the quantity of overburden removal per unit of coal produced. As a result, the over-all cost of producing a unit of clean coal fell by 8% following the 25% reduction achieved in 1985.

Quintette’s net earnings for the year amounted to $1.5 million, a $59.2 million improvement over the net loss of $57.7 million in 1985. Cash provided from operating activities increased over 1985 by $69.8 million.