A Word in Your Ear About Coal
Psst… hey buddy! Want to hear about a new met coal partnership?
At first glance, the deal that launched the Fording Coal Partnership on Feb. 28 seems complicated. However, two executives from Teck Cominco Ltd.–a company not unfamiliar with mergers and deals–were able to clarify it for me over coffee during the PDAC convention in Toronto last month. Doug Horswill (senior vice-president of environment and corporate affairs) and Tom Merinsky (director of investor relations) explained it like this.
The deal covers six operating mines which produce most of the metallurgical coal mined in Canada: one is in southwest Alberta (Luscar), and the rest are in the Elk River Valley of southeast British Columbia (Fording River, Greenhills, Line Creek, Elkview and Coal Mountain).
Consolidation had been considered by various parties for years, but the way was finally made clear this winter when the six mines were joined with a 46% interest in the Neptune port terminal in Vancouver, to form the Fording Coal Partnership. Four companies supplied the assets. Teck Cominco contributed the Elkview mine and Cdn$275 million. In return it gained a 35% interest in the partnership and is managing partner. Fording Inc., Consol Energy Inc. and Luscar Energy Partnership were the other contributors.
The partnership is a force to be reckoned with. Combined sales from the mines last year totaled 22.6 million tonnes (they have 28 million tonnes annual capacity) for Cdn$1.6 billion, which was 20% of the world seaborne hard metallurgical coal market. This makes it second in size only to the BHP Billiton – Mitsubishi met coal organization, that had 28% of the world market last year.
The potential synergies are obvious: centralized planning, management, administration, purchasing, inventory and warehousing. Production can be shifted to the most profitable operations. Transportation can be rationalized. Equipment can be shared. The product can be better blended. With these improvements the operations should be more efficient, and the profits should rise.
What’s the catch? There’s always a catch.
To be more efficient you need to cut costs. That began on March 10 with the announced laying off of half of the 544 employees at Line Creek. Production there will focus on the more economic parts of the mine; a stripping program is being considered, to prepare for mining the more profitable coal in the future. On April 2 came another announcement, that the Luscar mine would close in a year, affecting its 290 employees. This was expected, as the mine is running out of reserves. The sting is that development of the nearby Cheviot project is now on hold until the met coal market grows.
The partners expect to achieve a baseline of Cdn$25 million in annual operating cost savings. Teck Cominco can increase its share in the partnership by up to 5% by reducing costs beyond that (1% interest for each additional $10 million of savings up to $50 million) in the first four years. That should be no problem, Horswill predicts, as the $75 million of savings represents only 7% of the partnership’s total annual costs.
So with good fiscal management, Teck Cominco should directly own 40% of the Fording Coal Partnership by April 2007.
Here’s the tricky bit. Teck Cominco also owns 9.1% of the Fording Canadian Coal Trust, the fund that owns the other 65% of the Fording Coal Partnership. So in effect Teck Cominco now controls 35% plus (9.1% x 65%), which comes to 41% of Fording Coal Partnership. This could rise to 46% by 2007.
Got it? Good.