Western Canadian Coal opens Wolverine

Tumbler Ridge, B.C. — More than 200 guests gathered near this Peace River community in early October to help Western Canadian Coal (WTN-T, WXJXF-O) (WCC) celebrate the official opening of its Wolverine coal mine, the first large-scale metallurgical coal mine built in Canada in more than two decades.

Bill Bennett, B.C.’s mining minister, cut the ribbon between two massive haul trucks to officially open the new mine, which processed its first coal in late July. He used the occasion to champion government initiatives such as reduced corporate taxes and the extended flow-through share program, noting that they helped “generate some of the confidence manifested here today.”

Bennett was joined by company officials, local and federal politicians, and other dignitaries, including representatives of the Japanese companies that had invested in development of the northeastern coal district and related infrastructure more than 20 years ago.

“We would not be here today without the infrastructure built in the 1980s,” said John Byrne, chairman of WCC. “I would like to thank those that came in twenty years too early.”

This infrastructure — valued at more than $1.5 billion — includes the existing town-site of Tumbler Ridge, and road, rail and port facilities built to support the original two coal mines that began operations in the 1980s. Unfortunately, an economic downturn in Asia compounded by a global oversupply of coal soon sent prices tumbling by 30% or more, which almost turned Tumbler Ridge into a ghost town.

Coal prices remained weak for more than a decade, prompting critics to describe development of Northeast Coal as premature, or even as an “expensive boondoggle” — sentiments that almost brought about the sale of Ridley Terminals in the coastal city of Prince Rupert earlier this year.

Jay Hill, member of Parliament for Prince George-Peace River, received a long round of applause after pointing out that one of the first acts of the newly elected Conservative government led by Prime Minister Stephen Harper was to cancel the “fire-sale” privatization of Ridley Terminals.

Local mayors also praised Harper’s swift response to their pleas to keep the port in government hands for the future benefit of all industry users, particularly in light of much improved coal prices.

“The decision to not sell Ridley Terminals was critical to the revival of Northeast Coal and to the development of the Wolverine mine,” Byrne said. “We needed the certainty of port and rail rates.”

Ridley Terminals handled the first shipments of Wolverine coal destined for customers in Asia and Europe in early October, and another 100,000 tonnes have since been shipped to steel mills in Eastern Europe. The distance between the mine site and the port is about 950 km.

Company officials said the first coal shipments were tested before being loaded onto ships, with results indicating that the quality “meets or exceeds the high expectations derived from previous preproduction tests conducted by steel mills worldwide.”

The Wolverine mine comprises the Perry Creek and EB open-pit deposits, and the newly commissioned coal processing and dryer facilities. WCC had invested about $325 million to develop and build the Wolverine mine, which was completed on time and on budget. The bulk of funds were obtained through a $125-million convertible debenture offering and a subsequent $75-million debt financing.

Gary Livingstone, president and CEO, praised the company’s employees for this accomplishment, and thanked suppliers, customers, and local First Nations for their support of the project.

“All levels of government also deserve our thanks for creating a good environment for investment,” Livingstone added. “Since 2004, we’ve raised $400 million, and you can’t do that without the proper environment.”

Livingstone also thanked London-based Cambrian Mining, the company’s largest shareholder, for investing in the company early and keeping faith in the future of the coal industry.

John Byrne, also CEO of Cambrian, told guests that the initial purchases were made at 30 per share, “at a time when coal stocks were friendless,” based on the view that China’s economy was poised for rapid growth that in turn, would trigger strong demand for coal and other commodities.

WCC completed its initial public offering in 1999, when coal prices were in the dumper, and focused its initial efforts on acquiring properties that already had known resources.

The company achieved commercial production in late 2004 at the Dillon open-pit mine, situated on the nearby Burnt River property near Chetwynd, B.C. The operation produces pulverized coal injection (PCI) coal, a low-sulphur, low-ash and low-volatile product used in steel production as a replacement for higher-priced coking coal.

Initial reserves were a modest 1.56 million tonnes, mined at an annual rate of about 240,000 tonnes. Production was subsequently accelerated to more than 800,000 tonnes per year, with the mine generating more than $100 million in revenues from more than 1 million tonnes sold over one 18-month period.

In the latest quarter ended June 30, 2006, the company reported an operating profit of $7.5 million on sales of $30 million, and net income of $2.3 million. Sales consisted of 320,000 tonnes of PCI coal shipped at an average price of $93.76 (US$83.11) per tonne. Cash costs for production were $66.55 per tonne.

The Dillon mine is nearing depletion, but the Burnt River property hosts additional resources in the adjacent Brule deposit, which has been permitted for eventual PCI coal production.

WCC applied for permits to develop Wolverine into a mine in May 2005, at a time when prices for hard coking coal reached a peak of US$125 per tonne, more than double the US$44-per-tonne price average in the 2002 coal year. The permits were granted in April 2006 and construction began shortly thereafter.

The Wolverine mine has the capacity to handle 3 million tonnes of high-quality coking coal per year, although the existing permit only allows for annual production of 2.4 million tonnes. The plant processes roughly 550 tonnes per hour of raw coal, but was designed to be increased to a feed rate of 770 tonnes per hour at minimal cost.

On the map

WCC’s long-term goal is to place the Northeast Coal district on the map as “the premier coking coal area.” The company has established commitments or contracts for about 1.1 million tonnes, representing almost all its planned sales of 1.25 million tonnes from Wolverine for the fiscal year ended March 31, 2007 (based on targeted production of 1.35 million tonnes for the period).

Recent amendments to the mine permit allow the company to increase production to 2.5 million tonnes in the next fiscal year. Mining is handled by contract miners, a joint venture between Ledcor CMI Group and Pelly Construction, but the raw coal-handling, processing and load-out activities are operated by company personnel.

With reserves of 35.8 million tonnes of run-of-mine coal in the Perry Creek pit alone, the Wolverine mine is expected to be the company’s flagship for many years to come. In addition to the smaller EB deposit (7.4 million tonnes) at the Wolverine project, the Hermann property, situated 26 km by road from the Wolverine plant, is at the feasibility stage as a potential producer.

WCC also holds other coal projects in the Northeast Coal district, including the Brazion and Belcourt groups of properties.

Seeing development of a new generation of coal mines in the district was a literal “dream come true” for one special guest attending the mine opening. Shoichiro Yonezawa, president of Mitsui Matsushima, told guests that he first arrived in the Peace River district as a young man in 1972, and was immediately impressed by its potential.

“At the time, I came to see the beautiful Peace River district, which was undeveloped, and together (with the coal companies), we dreamt of developing these coal fields for future generations,” he said,
adding that he was gratified to personally attend the opening of the Quintette mine more than 10 years later, in 1984. “The decision to make the investment was bold and courageous, but had its critics at the time.”

He also noted that more than 30 years after his first visit, Japan closed its last domestic coal mine, which had been mined to depths of hundreds of metres below sea level. The inherent message was that Japan, like its neighbours, Korea and China, would continue to look abroad for top-quality coking and metallurgical coal.

“I sincerely hope that Wolverine will trigger more development in the (Peace) region, and be followed by second, third and many other mines,” Yonezawa said.