Western Coal

Western Coal on track in 2010

Western Coal, headquartered in Vancouver, B.C. is a company that is constantly evolving. The company currently produces high-quality metallurgical and thermal coal from mines in northeast B.C. and West Virginia in the U.S.

The company was incepted in 1997, originally named Western Canadian Coal, and was made up of a forward-thinking, company-building management team. But in 2009, the company went through a dramatic shift in structure, and hence changed its name. After merging with Cambrian Coal and announcing a $52-million bought deal financing, the company changed its name to Western Canadian Coal, and integrated an entirely new management team—including Keith Calder, now President and CEO.

The transition was all for the good of the business, and according to the company, the shareholders. Today, Western Coal has a positive strategy laid out and looks to reach all of its milestones in the coming years. The company currently has the capacity to produce 7 million tonnes per year with a 20+ year coal reserve base. Western also owns 55 per cent of Energybuild (AIM:EBG) which produces anthracite and thermal coal from mines in Wales, U.K.

Clear communication of a new Western

David Jan, head of investor relations for the company, explains that Western has been very clear about its new identity, and its business strategy, ensuring that external stakeholders know what’s what going forward. Things weren’t easy for anyone in commodities last year, but Western has pulled through, even with their massive transformation. “There was a strong desire from our investors and shareholders to understand the new Western last year, with the merger and name change. We were very busy from that perspective.” Jan says that the company felt the crunch, but didn’t completely halt production.
“We pulled back discretionary spending, to keep things alive. We just weren’t as active, because no one knew where or when this thing would end—so our production pulled back a lot. Our customers, steel mills, pulled back so we followed suit,” Jan reflects. However, things have clearly turned around when it comes to production, for the new Western Coal.

Ramping up for the next wave of demand

In a recent public release, Calder reported that the company was pleased with the continued strengthening of global market conditions. He said that more positive conditions have provided Western with “a unique opportunity to grow our business through low-risk expansion projects in a significantly improved pricing environment.”

“Our plans for this year will focus on investing in our core business of seaborne metallurgical coal production and continuing our steady reduction in unit operating cost. We will be putting our strong financial position and cash flow generation to work by expanding our business, which will provide a solid platform for further growth in the coming years. Over the next few years, our plan is to make Western a top-tier international producer of seaborne metallurgical coal, which combined with a competitive cost structure, will provide superior long-term returns for our shareholders.”

The company has been doing very well of late, echoes Jan: “Growing production from 3.4 million tonnes to 6 million tonnes, that reflects us coming back.” This February, the company announced its operating results for the three and nine month period ended December 31, 2009. According to the release, on $118.7 million in sales, the company earned $24.0 million or earnings per share of $0.10 on a basic basis for the third quarter 2010. For the nine month period ending December 31, 2009, Western Coal earned on sales of $302.0 million, net income of $29.6 million or $0.13 earnings per share on a basic and diluted basis. Clearly, Western Coal is doing something right.

Recent highlights

However negative the price environment has been for coal, and despite lower sales volumes—both of which results of the economic downturn—Western has been able to reduce its per-unit cash costs.  The company has also been able to invest in the business. Operations commenced on a permit for a Maple Coal surface mine which increases reserves of marketable tons to over 10 million short tons, which is a 67 per cent increase in the Maple surface reserves.

Other key points for the fiscal third quarter:
- Continued strong financial position with cash in the bank as at December 31, 2009 of $150.1 million or $55.5 million more than September 30, 2009
- Approved $23.9 million investment for six 250-tonne haul trucks and front-end loading equipment at the Wolverine mine. The new equipment, which is expected to arrive in Q1-2011 as the mines increase production rates, will replace eight 150-tonne trucks, which could be redeployed at Brule and Willow Creek. Overall productivity and costs should improve at the mines which will allow the Company to take advantage of the strengthening coal markets
- Sold AGD Mining Pty on November 30, 2009 for a gain of $7.0 million
- Commenced a share buy-back program on December 17, 2009.
- Participated in the Energybuild Group Plc fundraising which increased the Company’s ownership to 55 per cent. The funds were raised to grow Energybuild’s operations

Coal sales update, from a March 16 statement:
- To date, Western has negotiated a sales price of US$200 per tonne for its hard coking coal and US$170 per tonne for its low-volatile PCI coal for 2.5 million tonnes, or 75 per cent, of its sales in Asia for fiscal 2011. These prices are for the period April to June 2010.
- These prices reflect an increase of 59 per cent when compared against fiscal 2010 hard coking coal contracts and an 89 per cent increase when compared to fiscal 2010 low-volatile PCI coal contracts.

Key messages for the coming year

Western’s upcoming strategy is fairly simple: “We want to focus on organic growth, continuous growth, and strategic growth,” Jan says. The company is emerging, from a period of transition to a period of rapid success. “We’re a company that’s changing from being an exploration company to a junior producer—so we’ll look for growth and evaluate the other opportunities around us,” he continues. Western has new regions to start producing from—and the team is well up for it. “It’s an exciting time; we’re here for the long run.” Western is in an excellent position to capitalize on market demand. Because they are in the metallurgical coal business, they have an advantage, as currently the world is experiencing more demand than there is supply. “The market is an important part,” Jan concludes.

In any market they attempt to broach, Western is poised for success in 2010 and beyond. Calder shares our sentiment: “I am quite excited for the company’s future. We have come out of the global economic recession with a lower and improved cost structure, which combined with the increasing demand for the Company’s products and higher coal prices into the future, means Western is well positioned to generate higher shareholder returns. Our strategy will be to take advantage of these improved conditions to grow and expand our business which will further bolster our competitive position.”