Canadian coal: Expanding natural wealth

Canada’s natural wealth above ground is legendary. However, underground lie vast resources that arguably are less breath-taking, yet their expansion plays a vital role in the nation’s economy.

Canada holds 6.6bnt of proven recoverable coal reserves, which are estimated to hold over 100 years of supply at current production rates, according to the government’s Natural Resources Canada department. Around 3.5bnt are bituminous coal while another 3.1bnt are classed as sub-bituminous and lignite. In addition, the country’s bedrock holds an extra 192bnt of identified coal resources, of which 92bnt is bituminous and 100bnt sub-bituminous and lignite types.

In 2007, its miners produced 70Mt of the black gold, up from the 66Mt extracted the previous year and indicative of the strong markets both inland and overseas.

Canada’s coal deposits are concentrated in the west of the country with vast swathes of lignite and bituminous coal dominating the national coal map (see Figure 1). Furthermore, the country also has considerable supplies of sub-bituminous coal in Alberta and appreciable quantities of anthracite in British Columbia. Much smaller deposits occur in Ontario, Newfoundland, and Nova Scotia and in the north of Nunavut. All-in-all, the sector counts over 20 mines, mostly open-pit operations.

It is estimated that in 2006, installed mine capacity was around 81Mt (excluding the New Brunswick and Nova Scotia mines) of sub-bituminous, bituminous steam and coking coal and lignite. Approximately 35.30Mt or 43 per cent of this capacity is found in Alberta mines, while 40 per cent is located in British Columbia and the remainder in Saskatchewan.

Canadian coal …

… employs over 5000 people directly and creates over 50,000 indirect jobs nationwide.
… contributes CA$5bn to the national economy annually.
… is the number one commodity in volume hauled by rail – 31Mt of coal were transported by rail in 2006, mainly to Vancouver for export shipment.

In good company

Canada counts nine coal companies:
• Compliance Energy Corporation
• Grande Cache Coal Corporation
• Hillsborough Resources
• NB Coal
• Northern Energy & Mining
• Sherritt International Corporation
• Teck Coal, part of Teck Cominco
• TransAlta Corporation
• Western Canadian Coal Corporation

Thermal coal imports

Canada’s coal-fired electricity generation demands significantly more coal than the country’s mining operations can provide. Hence, it imports coal into central and eastern Canada from the close by US east and central coal producing regions. Around 80 per cent of imports are shipped into Ontario. In 2007, 19Mt of coal imports went some way to meeting the national deficit.

Cleaning up coal

Canada has been researching and developing so-called ‘clean coal technologies’ such as emission reduction, coal beneficiation and cleaning, CO₂ capture/storage, and coal gasification in both publicly- and privately-funded projects, aiming to combat coal’s poor environmental track record.

One example is Sherritt Coal Corporation’s Carbon Development Partnership (CDP), a 50-50 joint venture with the Ontario Teachers’ Pension Plan. CDP assesses opportunities to develop its coal reserves by considering projects in conventional power generation, surface and in-situ coal gasification and coal bed methane extraction.

The initiative is presently concentrating on the Dodds-Roundhill project to develop the country’s first commercial application of coal gasification technology, a process that produces minor amounts of SO_x and NO_x and has CO₂ capture and storage potential. In addition, the project includes the development of a surface coal gasification unit to produce coal syngas, which can be used to manufacture hydrogen, clean diesel or synthetic natural gas. The project uses sub-bituminous or lignite coals and produces hydrogen for bitumen upgrading. Phase 1 would produce 270Mft³d of hydrogen and 12,500tpd of high-quality CO₂ that would be used for enhanced oil recovery (EOR).

Strong coal market

Nearly 60 per cent of national coal output is thermal coal and is mainly produced for the domestic consumption. National demand reached 58Mt in 2006, with the country’s 21 coal-fired generation plants consuming 51Mt. Coal accounts for some 14.5 per cent of electricity generation with off-take particularly strong in Alberta, Saskatchewan and Nova Scotia.

The remaining 40 per cent of output is coking coal. While Canada’s steel industry used around 4Mt and cement and other industries used an extra 3Mt of this type of coal in 2006, most of its coking coal is exported. In 2007, 31Mt of coal, of which 90 per cent was coking coal valued at CA$2.9bn, left Canada’s mines for 50 or so overseas destinations, making it one of the world’s leading coking coal suppliers. Japan buys around a third of the North American country’s exports, followed by South Korea (20 per cent) and the US (six per cent).

In 2008, the coal market continues to be strong. Examples of recent deals include the signing of a thermal coal supply contract between Hillsborough Resources and Vitol of Switzerland for 300,000t of Quinsam coal in 2009 at US$137 FOB and a further 300,000-350,000t at US$138 FOB the year after.

The brisk market provides for firm prices. Sources at Western Canadian Coal Corp (WCCC) have been settling selling prices at CA$300/t for hard coking coal from its Wolverine mine and at CA$248/t for low-volatile pulverised coal injection (PCI) coal from its Brule operation (prices locked in through March 31, 2009). John Hogg, WCCC’s president and CEO, commented: “With the strength of the coal markets, along with the 15 per cent weakening of the Canadian dollar, the company is generating strong cash flows and will continue to build on its strong financial position.”

Plenty of activity

A look at the country’s key coal miners quickly reveals that they view the future of coal in an optimistic light with plenty of acquisition and expansion activity going on. Teck Cominco announced it acquired all of the assets of Fording Canadian Coal Trust. Teck now wholly owns the country’s largest metallurgical coal producer, Elk Valley Coal, and the subsidiary will be renamed Teck Coal Ltd. The company is the world’s second-largest producer of seaborne hard coking coal after BHP Billiton Mitsubishi Alliance and operates around 27Mt of production capacity. Last year, its total output of bituminous coking coal was estimated at 22.6Mt from its six operating mines in British Columbia and Alberta. They are:
• Coal Mountain, Sparwood, with a production capacity of 2.7Mt, to be expanded to 4Mta.
• Elkview, near Sparwood (BC), with a production capacity of 5.5Mta. The largest of the Teck holding over 235Mt of clean coal reserves.
• Fording River, near Elkford (BC), with 8.9Mta capacity and reserves of 200Mt.
• Greenhills, near Elkford (BC), has a 5.1Mta capacity.
• Line Creek, Sparwood (BC) with 17Mt of clean coal reserves.
• Cardinal River, Hinton (Alberta), with a capacity of 2.2Mta.

Last year proved rather difficult for the company with coal revenues at CA$951m, down from CA$1177m and operating profit following the same trend from CA$444m to CA$209m. EBITDA fell from CA$526m to CA$295m from 10.6Mt of output. However, third quarter 2008 results are showing much more promise for this year. Revenues have leapt from CA$221m to CA$600m on the back of higher coal prices which jumped from US$93/t in 2007 to US$275/t one year later. This resulted in an excellent growth in operating profits, expanding nearly 10-fold from CA$36m to CA$350m. EBITDA are following suit at CA$419m, up from CA$52m.

Western Canadian Coal Corp (WCCC) produces over 3Mt of metallurgical coal from three mines located in northeast British Columbia: Brule, Willow Creek and Wolverine, as well as a 50 per cent interest in Belcourt-Saxon. The Brule Mine, successor to the Dillon Mine, has been producing around 1.3Mta of ultra-low volatile PCI coal for export, mainly to Korea, since January 2007. The company expects to raise production to 2Mta by 2009.

In June, WCCC obtained a mine permit allowing for the coal production at the open-pit Perry Creek mine, part of the Wolverine Group to the tune of 3Mta. This figure is expected to increase to 3.5Mta by 2012 when not only Perry Creek, but also EB and Hermann mines will enter production. In early May, WCCC bought out Falls Mountain Coal from its UK parent company, Cambrian Mining plc, effectively gaining Willow Creek coal mine, located 45km west of Chetwynd, British Columbia. An added ‘bonus’ for the company came in the existing wash plant and rail load-out facility, which can also be used by the Brule mine, significantly reducing the risk in its full-scale development as it cuts the original estimate by CA$70m.

WCCC is putting Willow Creek back into production after a care and maintenance programme had been in force since November 2006. In early 2009, low-volatile PCI coal production is to be launched with production earmarked at least partly for exports. At present, 900,000tpa of this type of coal are mined with the prospect of a hard coking coal output of 600,000tpa to be started up in the third quarter of 2009, pushing up metallurgical coal production to 1.62Mta.

Apart from these properties, WCCC is also part of a 50-50 joint venture with Peace River Coal. The cooperation holds the properties of Belcourt and Saxon, some 85km south of Tumbler Ridge, British Columbia. It is expected that the output of the mines will be around 5Mta, from 2013 onwards.

Despite the expansion of its coal mining activities, WCCC faced a tough year in fiscal 2007-08. The rapid rise of the Canadian dollar against the US dollar affected the revenues from its export sales considerably as the company was locked in fixed-price contracts. In addition, the opening of the greenfield Wolverine mine presented some technical challenges and the company also suffered from the widespread labour shortages present in the resource business sector. However, the company saw its run-of-mine coal reserves grow by around 16Mt.

In terms of financial results, by the end of fiscal 2007-08, company sales stood at CA$252m, up 88 per cent when compared to the previous year with volumes up by 116 per cent to 3.043Mt. The average realised price fell by 13 per cent to CA$82.97 as the Canadian dollar traded higher in the market. Yet, the company enjoyed better trading conditions in the six months ended September 30, 2008 (1H09). Total sales revenues advanced considerably when compared with the equivalent period the previous year: CA$297.8m against CA$122.07m. While tonnage sold fell from 1.5Mt to 1.2Mt, a higher realised price of CA$251.77/t (cf. CA$82.20 for 3Q08) made up for this drop to generate healthy revenues. As a result, the company’s net income went back into the black at CA$104.5m from the red (-CA$46.9m) experienced the prior year.

Hillsborough Resources owns and operates several mines in Canada. Its Quinsam mine is an underground thermal coal mine with a production rate of 0.52Mta of clean coal or 0.765Mta of raw tonnage. Its reserves are around 25.7Mt and are located near Campbell River, British Columbia. In March 2008, a three-stage drilling programme started to delineate further resources in the mine’s North area. Completed later in the year, the Quinsam North resource has been calculated at 21Mt with 13Mt immediately available, subject to a mining plan being approved.

In addition, it owns properties relating to the Gates and Gething formations in north east British Columbia, which contain primarily metallurgical coal with some PCI and thermal coal. David Slater, president and CEO of Hillsborough commented: “These properties truly represent Hillsborough’s horizon for growth. That is our future.”

In the south east of the province, Hillsborough acquired the Bingay Creek metallurgical coal property, some 20km north of the town of Elkford, in 2004. A total of 15.5Mt of measured and indicated resources have been identified plus an additional inferred resource base of 2.4Mt. The company is considering a larger mine development with an annual output of about 1Mt.

Further exploration initiatives see the development of the Wapiti project in British Columbia as a potential export thermal coal project in a possible venture with an undisclosed Asian power utility. The project was first started with the domestic market in mind, but the province’s government adopted a new approach to CO₂. This forced newly-built coal-fired power plants to sequester all of their CO₂, resulting in Hillsborough power partner AES Corporation withdrawing from the project as they considered there to be a lack of available technology. Wapiti’s resource estimate points at 80.1Mt of measured thermal coal and an additional 35.2Mt of indicated reserves. The current development project is based on its Heritage and Centre blocks and foresees a production of 0.9Mta over a 12-year mine life.

Full-year operating results for 2007 reveal that the company weathered 2007 better than 2006 with coal revenues up from CA$24,285,074 to CA$26,915,242. While net earnings figures remained in the negative, significant advances were made, reporting a decrease in loss to -CA$24,333 from -CA$5,384,822 in 2006. Nevertheless, the first nine months of 2008 saw the firm back in the red with net loss at CA$4,232,800 compared to a net gain of CA$2,310,202 in 2007. The termination of a domestic contract at the end of the year will enable the company to take advantage of a strong international coal market, selling its coal for export at better prices, according to corporate sources.

Meanwhile, until recently, Compliance Energy Corp held an interest in the Basin Coal Mine, located near Princeton, British Columbia. However, in August the company signed a memorandum of understanding (MoU) with NWPC of Australia, which has agreed to purchase Compliance’s 100 per cent stake in the 0.4Mta bituminous steam coal mine for CA$8m in a 50-50 cash-share arrangement. The deal will enable Compliance to focus on its activities Bear and Raven coal deposits on Vancouver Island.

Raven Metallurgical Coal is located nearly 80km north of Nanaimo, British Columbia, and holds a measured and indicated reserve of 39.1Mt and an inferred resource of 59.Mt of high-volatile A bituminous product. Last February, Compliance signed an MoU with Japan’s Itochu Corp and LG International Corp for the development of the mine, which has a target production of 1Mta, to start in 2010.

Bear Metallurgical Coal is just north of Raven and holds a resource of 8.6Mta, of which 5Mta is accessible by open-pit mining.

Compliance saw its business fortunes swing in 2007, noting a net income for the year of CA$1.36m improving its position significantly when considering the loss of CA$9.29m it suffered in 2006. Results from 1Q08 show a deterioration of net income to CA$0.47m from CA$1.24m although the company’s cash position appears to be improved.

Northern Energy and Mining (NEMI) owns and operates a 2Mt mine near Tumbler Ridge under the name of Trend Mine. Like other mines in British Columbia the property produces bituminous coking coal. Meanwhile, West Australian miner Aviva Corporation is teaming up with NEMI to create a CA$40m coal group. NEMI’s Peace River coal output is expected to serve as cash generator for Aviva’s project developments in Australia and Africa while debt-less Aviva will pour its cash reserves of CA$17m into NEMI’s coal mine expansions. Peace River started production early this year and is heading towards its permitted output rate of 2Mta.

Sherritt International Corp’s thermal coal operations are distributed between its Prairie Operations and its Mountain Operations. The eight Prairie mines are located in Alberta and Saskatchewan and delivered around 36.1Mt of coal in 2007. Its Mountain Operations consist of the Coal Valley mine, the Gregg River mine, Obed Mountain mine and Coleman properties with all but the first inactive. Coal Valley is situated around 100km south of Edson, Alberta. The majority of its output is earmarked for export with 3.4Mt shipped overseas last year. In 2004, the company announced a doubling of its capacity to 4Mta with a price tag of CA$125m, This was completed in 2006. Adjacent to existing operations, the firm is looking to expand its activities with three potential areas – Mercoal West, Yellowhead Tower and Robb Trend – under application.

In addition to its current mines, Sherritt is part of a 50-50 indirect partnership with the Ontario Teachers’ Pension Plan, named the Carbon Development Partnership (CDP). The programme is dedicated to the exploration and exploitation of 12bnt of undeveloped coal reserves and resources in western Canada. CDP is evaluating opportunities to develop its reserves by considering projects in surface coal gasification, in-situ coal gasification (eg Dodds-Roundhill), conventional power generation and coal bed methane extraction.

The company produced around 40Mt of thermal coal in 2007 and achieved record sales volumes at its Coal Valley deposit. In addition, it registered record realised prices as coal markets were buoyant. In the third quarter of 2008, revenues in its Prairie coal division stood at CA$150.6m, a CA$27.2m improvement YoY as higher royalties and increased cost and capital recoveries at the contract and Genesee mines impacted positively on income figures. At the Mountain operations, Sherritt enjoyed a “robust pricing environment for export thermal coal [that] continued to result in average realised prices that were significantly higher than in the prior periods.” The average realised price increased by 73 per cent YoY to CA$87.19/t, resulting in CA$39.3m record revenues. For the nine months ended September 30, 2008, total revenues for the coal division reached CA$529.9m, up from CA$446.3m when compared with the first three quarters of 2007 and EBITDA rose from CA$98.8m to CA$138.1m over the same period.

Relative newcomer Grande Cache Coal Corp, although formed in 2000, started its production in August 2004. Its coal leases cover over 22,000ha of the Smoky River Coalfield in west-central Alberta. Grande Cache has a production capacity of around 2Mta of bituminous coking coal. By the end of fiscal 2008, the company had produced around 1.42Mt of coal and sold 1.65Mt, increasing both indicators from 0.99Mt and 1Mt respectively YoY. Sales prices decreased slightly from CA$93/t to CA$89/t over the period, but revenues were not negatively affected, rising from CA$101.3m to CA$146.6m. The company continued to improve its situation, recording 1H09 revenues of CA$118m, up from CA$69m YoY, giving an income from operations of CA$41.3m against the previous year’s loss of CA$10.2m. Grande Cache’s sales declined marginally to 0.34Mt from 0.36Mt but soaring average sales prices, reaching CA$214/t (from CA$81/t) countered the potential loss in revenues.

TransAlta Corp – which possesses a diverse 8024MW energy portfolio, including five coal-fired thermal power plants in western Canada – owns two mines in the area, both of which are operated by Prairie Mines & Royalty.

Its Highvale mine is the largest surface strip coal mine in the country, covering 12,410ha. Located south of Lake Wabamun, it produces around 13Mta of low-sulphur thermal coal. This is delivered to the company’s Sundance and Keephills thermal generating plants. Upon the completion of Keephills 3 thermal plant, an additional 1.8Mta will be required.

On the other side of the lake lies its Whitewood mine, covering 3331ha and capable of producing 1.4Mt of sub-bituminous coal, which is supplied to the Wabamun thermal generating works. In May 2003, the Alberta Energy and Utilities Board approved an application allowing the mine to provide coal for the Wabamun power plant until 2010 when the works is slated to cease operation.

New Brunswick’s only mine, the Salmon Harbour mine in Minto, is owned by NB Coal, a wholly-owned subsidiary of NB Power Generation. Its 150,000t annual production is used to generate electricity at the Grand Lake thermal generating station. The company has been active in the region for the past 35 years, operating over 20 mines at various times. Former sites are now being reclaimed and the land restored to its original natural state of mixed forest, wetlands and ponds.

Further expansion and exploration

With export coking coal markets remaining strong and domestic thermal markets hungry for more product, Canada’s coal miners are confidently looking towards the future. This is reflected in numerous expansion and exploration projects that are about to start or are already underway.
For example, in April 2008, Goldsource Mines Inc announced it had intersected coal at a depth of around 80m in two core holes, located 1.64km apart and representing 26m and 32.5m respectively of coal seam. The drill holes are situated approximately 50km north of Hudson Bay, Saskatchewan. The coal is mainly ranked as high volatile bituminous C and sub-bituminous A belonging to the Mannville/Swan River Group of Cretaceous age. The company plans to carry out a major drilling programme on its permit area during the coming winter.

Greencastle Resources Ltd has been granted a coal exploration permit for an area on the Manitoba-Saskatchewan border, adjoining the eastern boundary of the coal exploration block of Goldsource Mines Inc. The Greencastle permit application covers around 1586ha in western Manitoba, some 25km southeast of the Goldsource discovery drill holes. Commenting on the recent coal initiative, Anthony Roodenburg, Greencastle CEO, stated: “We are pleased to have received final approval from Manitoba on our first application and will monitor exploration activity in the area closely, particularly the Goldsource winter exploration programme, while assessing our options for advancing the project.”

The Saskatchewan Ministry of Energy and Resources has issued a permit for the 18 Meter property owned by Westar Resources. The company can now begin exploration of the 138,240 acres near Tobin Lake and start mining this year, according to a company statement. Initially, Westar was testing for diamond-holding kimberlite, but found a significant thickness of coal at 47.7m, holding 7.6m of solid coal, followed by 11.2m of coal breccia.

In summary

Strong domestic and export markets, buoyant international coal prices, a solid supply from a good stock of proven recoverable reserves and continued exploration and expansion of identified resources – it appears that Canadian coal is set for a healthy growth in the future. Yet, the current global financial crisis warrants moving ahead with caution.

For more information:
Coal Association of Canada
Compliance Energy Corp
Grande Cache Coal Corp
Hillsborough Resources
Natural Resources Canada
NB Coal
Sherritt International Corp
Teck Cominco (Teck Coal)
TransAlta
Western Canadian Coal Corp