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Teck waiting for next coal wave to revive Quintette

Teck Resources Ltd. is sitting on a mountain of untapped coal at its Quintette property in northeastern British Columbia, hoping for market conditions to improve and give the project a new beginning.

Quintette supplied metallurgical (or coking) coal to Japanese steel mills from 1982 until it closed in 2000. Today the coal market is all about China, but prices have plummeted in the wake of the country’s slowing growth and ample industry supply.

In June of this year, the B.C. government issued a mining permit to clear the way for Teck to operate an open-pit mine at Quintette, which is forecast to produce three million tonnes a year of metallurgical coal, a key ingredient in the production of steel. But with coal prices down more than 50 per cent over the past couple of years, Teck announced in July that it decided to delay capital spending of $300-million in 2013 and $350-million in the first half of 2014 that had been earmarked for Quintette.

Having watched the corporation nearly collapse during the 2008-09 recession, Teck executives are being cautious in their approach to Quintette.

A subsidiary of China Investment Corp. has held a stake of more than 17 per cent in Teck since July of 2009. CIC, China’s sovereign wealth fund, became a crucial investor as it provided a lifeline of $1.7-billion in cash, months after the mining company faced severe financial pressures as its stock tumbled to $3.42 a share in March of 2009.

Teck expects to make a decision next April or May on whether to proceed with restarting the Quintette project, which would create up to 500 full-time jobs.

If Canada’s largest diversified miner gives the go-ahead, the project could be in commercial coal production in mid-2015, said Teck spokesman Chris Stannell.

Teck has spent more than $200-million in the past few years in an effort to revive Quintette, including money for engineering and development work.

Gordon Gormley believes the Quintette coal play has the potential to transform from a money pit into a valuable asset for Teck. Mr. Gormley formerly worked as an open-pit mining manager for Denison Mines Ltd., which oversaw Quintette’s launch in the 1982. He has kept meticulous geological records of the mining property. He sees a motherlode of untapped metallurgical coal, with rich seams of high-grade product that would be attractive to steel makers in China.

“The key is whether Teck is willing to take a chance,” said Mr. Gormley, 65, who now works as an independent geological consultant. “Teck has lots of data already on the high quality of the coal. They shouldn’t rule out having an underground operation, but that’s not for me to tell them what to do.”

Mr. Gormley conducted a confidential study on Quintette’s reserves for one of the Japanese steel mills in 2002. What he found was enormous potential to tap into coal deposits, accessible through open-pit and underground mining methods. Deposits at the project’s Babcock Mountain were barely touched in Quintette’s production phase, he said in an interview.

The trouble is that the short-term prospects for the coal market will be challenging. Meredith Bandy, an analyst at BMO Nesbitt Burns Inc., is forecasting benchmark metallurgical coal prices will average $155 (U.S.) a tonne next year, down slightly from this year and off sharply from an average of $300 a tonne in 2011.

Given that Teck is looking for a recovery in coal prices before reopening Quintette, Ms. Bandy said Teck could delay its decision yet again so that production would resume in 2016 instead of 2015.

Two producing coal projects in northeastern British Columbia enjoy a strategic advantage in being able to ship coal to Asia from the Ridley Terminals Inc. export facility in Prince Rupert, and Quintette is positioned to also take strategic advantage, said former Ridley chairman Daniel Veniez.

While the pace of China’s economic growth has slowed, the Chinese will still require increased coal shipments to feed its steel mills eventually, said Mr. Veniez, who is now chairman of investment management firm EMR Capital Corp. “Coal markets are awful now, but long term, metallurgical coal is going to be just fine,” he said.

Source: The Globe and Mail