Western Canadian cuts coal production

Vancouver – Another miner is cutting back production levels in the face of falling prices, this time a coal producer. Western Canadian Coal (WTN-T) is almost halving production at its Brule mine and has warned employees at its Wolverine operation that operations may be curtailed in the spring.

Western Canadian produces more than 3 million tonnes of high quality metallurgical coal from three mines in northeast British Columbia, specifically near the town of Chetwynd.

The Perry Creek mine, which is on the Wolverine property, currently produces 1.45 million tonnes of hard coking coal each year. Western Canadian is also looking to develop two other mines on the Wolverine property – the EB and Hermann mines – and to that end was recently granted approval to increase production at the property to as much as 3.5 million tonnes annually.

Now, however, the company has given notice to employees that it may curtail operations in May. The company also gave notice to the mining contractor at Wolverine that it will terminate the mining contract at that time; when operations resume, the company will conduct its own mining.

At the Brule mine production had been sitting at 1.3 million tonnes of ultra-low volatile pulverized coal injection (ULV-PCI) coal. Now Western Canadian is slashing that almost in half, to 750,000 tonnes per year. ULV-PCI coal can replace some 30% of the coke feed in blast furnaces and Western Canadian sells most of its Brule production to Korea.

The decisions stems from rising inventory levels due to customers deferring shipments. Coal prices are set by negotiation in March each year; as such there is serious uncertainty about the coal market beyond April, which has led both customers and producers to exercise prudence.

For its part, Western Canadian expects to operate at these reduced rates until the current economy improves and the demand for coal becomes clearer. The company says that when markets do improve it has the flexibility to quickly increase operating rates and pursue its now-deferred growth plans.

Investors didn’t like the curtailment plans and pushed Western Canadian’s share price down 27¢ or 25% to 80¢, on 11.3 million trades. The company has a 52-week trading range of 43¢ to $10.99 and has 210 million shares outstanding.

Western Canadian also announced a US$36-million loan to Cambrian Investment Holdings, a wholly-owned subsidiary of Cambrian Mining (CBM-L), money that subsidiary needs to repay a finance facility. Cambrian Mining is a major shareholder in Western Canadian, holding 34% of the Canadian coal company as well as $34 million in convertible debt and loans.

The day before Christmas Western Canadian and Cambrian announced merger plans to create “a financially strong company with diversified base of coal assets.” Cambrian brings to the new company two coal mines in West Virginia, which produced 400,000 tons of metallurgical coal and 600,000 tons of thermal coal in the year that ended in June 2008. The combined entity has coal production potential of up to 10 million tonnes per year, from existing assets.

The merger would exchange each Cambrian share for 0.75 of a share in Western Canadian. The deal values Cambrian at 28.8 million pounds sterling, which represents a 48% premium over Cambrian’s share price prior to the deal.