Delivering The Goods

Every day the big trains roll through Sparwood in the Elk Valley of southeastern British Columbia and for the town’s 3,900 or so residents, the rumble of scuffed up cars lurching along shiny, steel rails is music to their ears. It is the sound of jobs and prosperity. Five times daily, three or four diesels head west toward the Port of Vancouver, pulling 102 to 124 cars — each loaded with high-grade bituminous coal destined for steel mills around the world. The same number return, cars empty and ready to take on another load at one of the five huge open pit mines that Calgary-based Teck Coal Ltd. operates in the valley.

“The mines are a huge, huge economic driver, not only of this region, but the whole province,” says Sparwood mayor David Wilks. “Without Teck Coal, Elkford, Fernie, Sparwood and the entire valley would have a bleak future.”

Make that no future. Teck directly employs approximately 2800 people in the Elk Valley and close to 335 at its sole Alberta property — Cardinal River Operations, located near the town of Hinton. It supports several hundred suppliers of equipment and services and as many as 22,000 direct and indirect jobs. The company produces approximately 90 per cent of Canada’s steelmaking coal and is the second largest contributor to the global steel industry. Teck’s Elk Valley and Cardinal River output accounts for more than one quarter of the total tonnage handled by the Port of Vancouver annually and generates revenue of $5 billion a year.

“All our mines are very significant in scale, even on a worldwide basis,” says Bob Bell, vice-president and chief commercial officer of Teck Coal, which is the strategic coal business unit of Vancouver-based Teck Cominco Ltd. “We spend hundreds of millions of dollars a year purchasing supplies and services. A large percentage of that is sourced locally.”

Bituminous coal — the kind extracted from Teck’s mines — is a superior product to either sub-bituminous or lignite, which are mostly used to generate electricity. It is older and harder, it has a higher energy content and it is an essential component in the steel-making process. The coal is actually heated until it melts, at which point it re-solidifies and forms lumps called coke that resemble a hard, shiny pumice stone.

“There is only a narrow band of bituminous coals that will coke,” says Bell. “Sub-bituminous and lignite will not coke.”

Teck ships about 10 per cent of its production east to Canadian and U. S. steel mills in the Great Lakes region. The balance goes west by rail to the Port of Vancouver, a journey of more than 1,100 kilometres, and from there ships move it to customers around the world. Steelmakers in Japan, Korea and Taiwan buy about 47% of Teck’s annual production, Europe accounts for 33%, North America 14% and South America the remaining 6%. In Europe, the company’s sales are scattered among a number of countries, including Germany, Italy, Spain, France, the Netherlands, Finland and the United Kingdom among others. Brazil is the most important steel-making nation in South America, and Teck’s largest buyer on that continent.

But heading into 2009, Teck faced an unsettling period of turbulence and perhaps even retrenchment. The big question is, what would happen to world demand for steel in the wake of the meltdown in the stock markets, the failure of major fi-nancial institutions and the recession that was taking hold in Canada, the U. S. and other leading economies?

“In the short-term we really are in uncertain times,” says Bell. “The steel industry is facing uncertainty because the entire economy is in turmoil.”

Long-term, however, Bell has nothing but confidence in the prospects for the world steel industry and, therefore, demand for Teck’s bituminous coal. “Steel really is an integral material in helping economies develop,” he says. “China produces half of the world’s new steel every year, but their consumption per capita is still quite low. Brazil and India are even further behind. If you add Russia, you’ve got what are called the bric nations. These countries need steel if they are to make the transition from bicycles and public transit to personal vehicles. Their citizens are just starting down the path of acquiring appliances. These products are major consumers of steel.”

The company’s other major challenge in the short-term is reducing its debt load. Teck raised $10 billion (U. S.) from various sources last year to acquire all the assets of the Fording Canadian Coal Trust. In November, Don Lindsay, president and chief executive officer of Teck Cominco, Teck Coal’s parent company, announced a number of measures that should significantly lessen that burden.

Dividends will be suspended for 2009 on Class A common shares and Class B subordinate voting shares, a step that will save about $486 million. The company will also cut its capital expenditures by $730 million. Other measures include the sale of the Lobo-Marte gold property in Chile and a reduction in zinc production at the company’s metallurgical complex in Trail, B. C.

“Current global economic and financial market conditions dictate that we take all prudent steps available to significantly reduce spending,” says Lindsay.

But the debt burden has in no way undermined Teck’s commitment to the well-being of its workforce or the communities in which it operates. Several years ago, a worker died in an accident at one of the mines which further enhanced the company’s commitment to safety and led to several steps to ensure that such mishaps do not occur in the future.

“We have adopted safety as a core cultural value of the company,” says Bell. “Business decisions have to be driven by our corporate values. That means safety is at the forefront of our thinking when we make decisions around the way we operate. It’s not just something we talk about.”

The company provides safety training and frequent refresher courses to prevent employees from becoming complacent. Teck has also invested in heavy equipment simulators at its operations that can create a virtual replica of mine sites. Truck drivers in training, or those upgrading their skills, can practice on the simulator before getting behind the wheel of a real vehicle.

“Our safety statistics have improved dramatically in recent years,” he notes, “but we will never be satisfied until we get down to zero accidents.”

Teck also takes an active interest in the towns and villages where its workers live. The company has a community investment plan under which it puts money into such things as healthcare, education, First Nations, environment and social services and recreation that enhance quality of life for employees and their families.

Apart from making these communities more vibrant, investments of this nature can produce a business dividend. They make it easier to attract and retain skilled labor, which became an issue during the red-hot, commodities boom of the past several years.

“Skilled workers were in short supply and we faced a major challenge from the oilsands developments in Alberta,” says Bell. “Similar equipment is used in both operations. We actually made changes to our compensation and wellness programs in 2008 in order to retain and attract people.”

Transportation will always be a challenge for Teck since its mines are located over 1,100 kilometres from tidewater, signifi cantly farther than its U. S. and Australian competitors. As well, the rail line to the coast is heavily used and it is subject disruptions due to weather.

“We strive to maintain an excellent relationship with all our clients,” says Bell. “Our focus is to make sure we provide a good product on a timely basis and deliver the maximum benefits to the end users.”