By Lee Buchsbaum
In the summer of 2008, Teck Coal Ltd., a subsidiary of Teck Resources, was booming and the company was focused on figuring out how to capitalize on the most robust export metallurgical coal market in years. One growth strategy was consolidation. In a bold move, on July 26, Teck made an offer to purchase all of the outstanding units of the Fording Canadian Coal Trust, thereby giving Teck ownership of its largest direct competitor and controlling all of the production out of the massive metallurgical coal resource of southeastern British Columbia’s Elk River Valley.
The dynamic company confidently borrowed C$14 billion and ebulliently embarked upon a new era. But coal shipments started to slow down over the summer as the world’s steel markets began a sharp decline and the Great Recession took hold of the globe. By the time shareholders voted to close the deal on September 30, the world had indeed changed. How Teck survived without going into bankruptcy is a fascinating story, but how the company has gone from the brink to increasing its stock value by more than 540% in less than a year is perhaps the more incredible tale. With resurging Asian demand and a well-timed buy-in by one of China’s sovereign wealth funds, Teck today is thriving as it puts in place a new growth strategy to increase production by nearly 50% over the next five years. As a new decade dawns, Teck has already been to hell and back, and now they’re preparing to soar.
The Chinese Connection
Since 2000, China has grown to become Canada’s second largest trading partner, behind the U.S. Last year China purchased C$54 billion worth of goods. Though far behind the Americans, which were responsible for more than C$600 billion of trade, China’s investments in Canada, particularly in raw materials necessary for the country’s brisk industrial expansion, have grown exponentially. Without a doubt, China’s internal expansion has also acted as the engine of recovery for Teck preventing it from going into bankruptcy and instead turning it into the biggest turnaround stocks on the Toronto Exchange. By the end of 2009, Teck’s share prices had skyrocketed from a low of C$3.35 to C$40.15 at the closing bell.
Instrumental in this reversal was a C$1.74 billion ($1.5 billion) investment from China Investment Corp. (CIC), one of China’s sovereign wealth funds. While this stabilized Teck, it was only one part of a survival strategy that included a $4.2 billion U.S. bond issuance and a series of strategic non-core asset sales, including that of the company’s gold division, which yielded more than C$1.6 billion or roughly 5% of Teck’s total value of C$31 billion.
The perfectly timed CIC buy-in, which amounted to a 17% stake in the company, also helped align Teck with an entity that has unparalleled insight into the Chinese economy, now one of the main drivers of the company’s collective health. CIC has helped introduce Teck with Chinese steel producers who may become the primary consumers of an expanding production base from the company as it begins to ramp up to 30 million metric tons per year (mtpy) from the current capacity of 20 to 25 million mtpy. Already the world’s second largest seaborne met coal producer, “the CIC relationship has been very helpful in terms of furthering relations with Chinese steel and coal companies,” said Donald Lindsay, president and CEO, Teck Resources. By the end of the third quarter in 2009, Teck reported that it had extracted approximately 13.6 million mt since the beginning of the year from its six operations, with most of the production coming from the five met operations in the Elk Valley. This is nearly 50% more than the third quarter of 2008, the difference being the acquisition of Fording. In total, Teck produced 14 million mt in 2008, itself a 29% increase from the year prior.
“We have a long-term plan to continue to grow as the market permits and we’ll be very careful in terms of when to bring tonnage on relative to demand. You make more money on price than you do on volume,” said Lindsay. With more tonnage heading to China, previously planned temporary production shutdowns at several mines have now been cancelled and the company is instead moving robustly in the opposite direction. “We’re open for business,” said Lindsay.
Coal Mining in the Canadian Rockies
Most of Canada’s metallurgical coal and a portion of its steam and PCI coal is extracted along a north/south axis following the spine of the incredibly scenic Canadian Rockies. Nowhere is mining activity more concentrated than within southeastern British Columbia’s Elk River Valley, a verdant region known equally for its incredible hunting and fishing opportunities as well as its vast mineral wealth, particularly the billions of tons of high grade metallurgical coal that lies buried in the surrounding mountains. In this relatively small region, Teck controls more than 627 million mt of met reserve and 4.5 billion mt of in-situ resources.
North and south of the mining town of Sparwood, Teck’s five metallurgical mines are far and away the main employer in the Valley and the only real game in town. All five are open-pit, truck and shovel combination surface mines that use a terracing technique to mine down through steeply pitching multiple seams. The expense of mining higher ratios is borne by the met coal’s superior quality, incredible plentitude and the premium off-take price.
In 2008, Teck and Fording Coal Trust produced a total of almost 20 million mt from their Elk Valley mines. In 2009, despite the Great Recession, Teck was on track to do the same. Once mined, the coal is sent through a series of heavy media flotation and cyclone circuits where it is washed. Then it is conveyed to a thermal drier. The clean coal is then railed almost 900 miles to Vancouver and the Pacific coast, specifically to either Westshore or Neptune Terminals, the latter of which is 46% owned by Teck though much smaller in throughput capacity than Westshore.
Of Teck’s five operations in the Elk Valley, two, Coal Mountain and Line Creek, each produced about 2.5 million mt last year and are expected to extract roughly the same in 2009. Last October, Teck petitioned environmental regulators and other groups to add to the Line Creek’s mine plan two new coal mine operating areas on the north side to support production of 52 million mt of coal over a 20-year period at an average of 2.6 million mtpy.
Teck’s third largest operation is the Greenhills mine which produces approximately 14% of Teck’s total output. A 20% joint venture with Pohang Steel Canada Ltd., a division of the Korean-owned Pohang Iron & Steel Co. Ltd., Greenhills has a reserve base of more than 81 million mt and a resource base approaching 600 million mt.
Throughout its Elk Valley mines, Teck uses a variety of 30- to 72-cu-yd shovels. The Komatsu dominated haul truck fleet is mostly populated with 240-ton capacity models, though it is beginning to migrate from Komatsu 830s to the significantly larger 930s which have a haulage capacity of 320 tons. “Currently we have somewhere around 40 to 45 Komatsu 930s throughout the fleet,” said Bill Fleming, vice president of operations and engineering.
Operating from multiple pits simultaneously, mobility and flexibility is key for Greenhills’ success and all of the mines in the Elk Valley. Greenhills’ equipment fleet includes four shovels, one P&H 4100XPB, one Marion 301, one P&H 2800 XP and one P&H 2800. The haul truck fleet is populated by 29 Komatsu 830Es. There are also two BE 49R drills and five loaders, one Letourneau L-1850, one Letourneau L-950, two Cat 994s and two Cat 992K loaders.
Greenhills has roughly 500 employees who have worked more than 3.1 million hours without a lost-time accident. The mine has been virtually injury free since March 20, 2006. During this period, the employees have won numerous regional and Canadian national safety awards. Teck’s second largest met producer is Elkview, which is responsible for about 22% of total production. However, with almost 1,000 employees, the giant Fording River mine is Teck’s largest single operation, responsible for approximately 35% of the company’s total coal output. Fording River sits on an immense 256-million-mt reserve block and an additional 2 billion mt of measured, indicated and inferred reserves. Since 1972, Fording has produced more than 215 million clean tons.
Major mining equipment at Fording River includes two 72-cu-yd P&H 4100 XPB/XPC shovels, four 60-cu-yd P&H and Marion shovels, and one 30-cu-yd P&H 2800 shovel. The truck fleet includes 31 320-ton Komatsu 930Es, 15 240-ton Komatsu 830E and Cat 793C trucks and seven other 240-ton coal trucks. There are also four Bucyrus Erie 49R 13.75-inch diameter drills, four coal loaders, and nearly 20 Cat D11R and D10Ts.
Fording’s preparation plant, which blends coal on site, uses a variety of water-only cyclones, heavy media cyclones, spirals and flotation circuits before the coal reaches the plant’s dryers and is then stockpiled for rail transloading.
Fording has also been a three-time winner of the Jade Award for Reclamation in British Columbia. They are also an eight-time recipient of the Coal Mine Reclamation Citation and a 2007 winner of the Mining and Sustainability Award. The mine has also had a lost-time incident rate lower than two reportable accidents per 200,000 man-hours worked.
Motherloads in the Pits
A year ago when world markets were spooked and most forecasters were complaining of near term invisibility, Teck determined that though they would have to cut back nearly everywhere, they weren’t going to resort to layoffs and they were not going to merely slow down. Instead the company proactively increased its overburden removal schedules, stripping down to the coal in as many pits as feasible, and actually hedging that when markets rebounded and supplies were getting tight, Teck would be in the catbird seat.
“Haulage of waste is a big cost area, and we have typical ratios of 22 tons of rock per 1 ton of coal,” said Fleming. When mining in a mountain environment, generally the higher strip ratio is at the top of the mountain, but the best strip ratio is the last day of the mine. “So literally you will have a year or two of very high strip ratios, and then at the end, you have the gravy boat,” Fleming said.
Because of heavy localized faulting, in any given pit, Teck may mine up to 30 seams ranging in size from 3- to 50-ft thick. However, in many places seams intersect to form “motherloads” that are nearly 150-ft thick or more. “Elkview might have two to three distinct faults on its property, and where you have a larger mining area, you rave about it. But the big thing is that 85% of the area is un-faulted and has an even 5-ft of thickness,” said Fleming.
Teck mines in horizontal benches, averaging 50-ft high, mining “up to the toe of the coal, if it is on a flat. We’ll go until we touch coal with the electrical shovels or excavators, and then use dozers to work from top and push down that wedge of rock where the shovels can’t get at it,” said Fleming. Teck’s dozers will then push the rock off the coal to where the shovel can load it into trucks. “Once the raw coal has been exposed, we use the dozers to push the coal down to a working bench,” from there an excavator loads the coal into a haul truck that transports it to the wash plant.
Because the coal seams pitch so steeply, after the coal is removed from a particular area, “we will typically blast through the next seams, placing explosives below the coal, into a gravel layer, and blast from below the coal. Though it all gets blasted in the end, we hope to take the rock from the top,” said Fleming.
Another complication is that individual seams may have their own unique characteristics, changing locally as well. For that reason, Teck tends to stockpile by quality type. “We may have 30 to 40 seams we’re mining from. When they are loaded out from the stockpile, they are blended, and dumped directly into our feed system depending on coal quality, which is closely monitored,” said Fleming. Ultimately as coal is sent into a rail load out, “the feed plant does some final blending depending on what we want the end product to be and what our customers demand,” said Fleming.
Teck is constantly transitioning from one mining area to a different pit, working to balance areas where it has high strip ratios with those areas where they are down at the bottom of the pit with excellent ratios. “We are constantly scheduling around the start of a new area, and how far we have to haul waste,” said Fleming.
With the recovery seemingly in full swing, Teck is also in full production. Since September buyers have been increasing their off-take and today “we’re producing at maximum rates,” said Fleming. The turn-around was so swift that by the end of summer, Lindsay acknowledged demand was eclipsing what they could feasibly produce that quickly. While the company had no permanent lay-offs, when the recovery began, it began hiring “in earnest, especially in September and October. We’re continuing to hire to ensure that we can have maximum production going into 2010 and perhaps beyond, if the markets can sustain it—which we believe they will,” Fleming said.
Surging Demand Fuels Expansion
In early December, Teck announced that it expected its total coal production for 2009 to fall between 19.5 and 20 million mt. But it also stated that based on current orders they expect to reach 23.5 million to 25 million mt in 2010 and increase output further in 2011 and 2012 toward an eventual goal of 30 million mt. Reuters quoted Lindsay stating that in November 2009 the company was seeing “a tenfold increase in Chinese imports of metallurgical coal” with no real end in sight.
“Our plants collectively have the capacity to get to 30 million mt,” Fleming said. “Where we are constrained is at the mine site. We have waste issues and we have other logistics to contend with in order to move to that level. All things market permitting of course, we want to maximize assets.” Late last year, Lindsay met with each mine’s management team to determine “what needs to be done to increase production each year through 2012,” Lindsay said. “Our coal team is focused on near-term expansion opportunities in light of the tight market that we expect for high quality hard coking coal. We are fortunate to be able to add production with relatively small incremental capital.” The company expects that expansion will continue over the next five years.
Toward the end of its near-term growth plan, Teck does foresee a scenario where it could also re-open its Quintette mine located in the Tumbler Ridge area of northeastern British Columbia, a region that is also seeing increasing attention. Under an optimistic growth strategy, Quintette could go back into limited production beginning in 2012. Shuttered in 2000, Quintette has a plant capacity of 5 million mtpy. “We have done studies on it, and have some sense of what would be required to get back into mining there, but we have made no decisions to go forward,” said a very cautious Fleming. But as markets improve and demand for coal increases, “it’s logical that [its re-opening] would be on our radar screen,” he said.
One question needing to be asked, however, is that given that the sudden collapse of the markets in 2008 surprised the financial experts as much as they’ve been surprised again by recent market turnarounds, with the export market’s infamous volatility, how sustainable is this next upswing? “Over my career, I’ve seen similar downturns and rebounds, but it’s still surprising how fast it can go sour and how fast it can come back,” said Fleming.
But Lindsay feels confident that Teck’s coal division will be very busy through the next few years on surging Chinese demand. With Asia, particularly China, rapidly increasing their met coal demands as they build some of the largest integrated steel works in the world, Canada and Teck are going to be mining and moving significantly more volumes. “We can expand production somewhat, but not nearly to the extent that the demand can increase,” said Lindsey. With the U.S. still mainly supplying European and North American markets and Australia continuing to have port and rail challenges, the door is wide open for Teck to continue to move its high quality coking coal into the expanding Chinese market.
Buchsbaum is a Denver-based freelance writer and photographer specializing in industrial subjects. He can be reached through his Web site at www.lmbphotography.com or by phone at 303-746-8172.