The coal operations in western Canada of Sherritt International (TSX:S) have lost a couple of major customers lately due to the shutdown of coal-fired generating capacity in Canada, Sherritt said in an annual financial report filed with Canadian regulators on March 30.
The Highvale strip mine supplies thermal coal to the Sundance and Keephills generating stations under a contract with TransAlta (TSX:TA and NYSE:TAC) that extends until Dec. 31, 2020. Under the contract, TransAlta reimburses Sherritt’s Prairie Mines & Royalty Ltd. (PMRL) unit for all costs incurred by PMRL in operating the mine and PMRL receives a management fee and a recovery of capital investments.
In early 2011, TransAlta announced that after taking its Sundance 1 and 2 coal-fired units down for testing, it would pursue decommissioning of these units under the terms of the Sundance A Power Purchase Arrangement. The Sundance 1 and 2 units had 560 MW of generation capacity and required about 2.5 million tonnes of coal annually from Highvale. During 2011, TransAlta and Capital Power commenced operation of the 450 MW Keephills 3 power plant, which is expected to consume 1.8 million tonnes annually from Highvale, almost making up for the loss of the two Sundance units.
Sundance Units 1 and 2 made up 560 MW of the six-unit, 2,126 MW Sundance power plant, with the other four units still in operation. The TransAlta website noted that uprates of remaining units are underway. A 53-MW uprate to Sundance 5 was completed in 2009. A 44-MW uprate was completed on Sundance 6 in 2001 and a 53-MW uprate on Sundance 4 in 2007. In October 2010, TransAlta announced a 15-MW uprate to Sundance 3 for completion in 2012. The website lists Sundance’s current capacity at 1,566 MW.
TransAlta owns substantially all of the related equipment and facilities at Highvale and PMRL owns a portion of the mining equipment. Highvale’s 2011 production totaled 11.5 million tonnes. As of the end of 2011, the total amount of PMRL’s surface mineable reserves at Highvale subject to the provisions of the royalty unitization area agreements with TransAlta was 7.1 million tonnes. PMRL also owns 111.5 million tonnes of indicated coal resources adjacent to Highvale, and 23.1 million tonnes of measured coal resources adjacent to the Whitewood mine, which was shut in 2010.
Another PMRL strip mine, Bienfait, had supplied thermal coal to Ontario Power Generation (OPG). But Bienfait’s contract with OPG expired in 2011 and was not renewed as OPG plans to convert several of its power plants to a biomass fuel source, Sherritt noted.
Under a 2008 coal supply agreement with Norit Canada, PMRL supplies coal from Bienfait to an adjacent activated carbon plant jointly owned by Norit Canada and PMRL to produce a high-value activated-carbon product which is used in the control of mercury emissions for thermal coal-fired power plants. The activated carbon plant supplies several customers including SaskPower and TransAlta.
PMRL also owns and operates a char plant at Bienfait. The char plant uses a carbonization process that nearly doubles the heat content of the coal and lowers its moisture and volatile matter content. PMRL supplies char produced at the plant to a third-party charcoal briquette manufacturer under contract that expires in 2013. PMRL is currently negotiating an extension of that contract.
PMRL owns all of the equipment and facilities at Bienfait and is responsible for all equipment operation and maintenance. In 2011, Bienfait produced 0.6 million tonnes of coal. Management believes that based on 2011 production and proven and probable reserves of 59.1 million tonnes as of the end of 2011, the estimated reserve life of Bienfait is approximately 118 years.
Sheritt’s Prairie Operations business unit operates seven surface mines in Alberta and Saskatchewan, including Bienfait and Highvale. Six of these mines are owned, including one mine in which PMRL has a 50% joint venture interest. The seventh mine is operated under a long-term contract. Other than Bienfait, all of the Prairie Operations mines are located adjacent to power plants and, as such, are considered “mine-mouth” operations.
PMRL generates a substantial portion of its revenue from long-term contracts with ATCO, Capital Power (formerly EPCOR Utilities), SaskPower and TransAlta, which are the major electric utilities in Alberta and Saskatchewan. These utility customers operate thermal coal-fired power plants that are located adjacent to, and serviced exclusively by, the Prairie Operations’ Boundary Dam, Genesee, Highvale, Paintearth, Poplar River and Sheerness mines.
Dodds-Roundhill gasification project still on hold
The Carbon Development Partnership (CDP), in which Sherritt and OTPPB SCP Inc. each hold a 50% interest, is dedicated to the development of about 1 billion tonnes of proven and probable coal reserves, 6.9 billion tonnes of measured and indicated coal resources, and 4.5 billion tonnes of inferred coal resources. CDP is currently assessing the potential for monetizing its coal through the development of various projects.
CDP is evaluating opportunities for the application of coal gasification technology to its vast coal resources. Coal gasification produces a synthetic gas that can be upgraded to produce energy-related products in Alberta such as diesel, natural gas, gasoline or hydrogen. Through the gasification process nearly all CO2 emissions can be captured, which in turn may be sequestered or sold to nearby oilfields for enhanced oil recovery.
In 2007, CDP completed a feasibility engineering study for the commercial application of coal gasification technology for the Dodds-Roundhill project, located about 80 kilometers southwest of Edmonton, Alberta. During 2008, additional engineering studies were completed that further defined the project design for several end-products. During 2009, the timing of the project was placed under evaluation until the required improvements in the economic climate occur. “Although a financially viable project, the current economic climate is not robust enough to warrant prioritizing this project for development at this time,” the company said.
The Dodds-Roundhill deposit has 533 million mineable tonnes of proven and probable reserves, and a further 212 million tonnes of inferred resources.
CDP has recently focused efforts on researching underground coal gasification due to the potential to access deep, currently unmineable coal seams, as well as other advantages which may include lower capital and operating costs, and other environmental benefits.
Also, in the Countess area of Alberta, CDP owns about 348 million tonnes of reserves (341 million tonnes proven and 7 million tonnes probable), as well as an additional 224 million tonnes of resources, of which 210 million are measured and 14 million are indicated. These reserves and resources are located 25 kilometers southwest of the town of Brooks, which is 150 kilometers southeast of Calgary, Alberta. Some of these reserves and resources have been conditionally dedicated to a third party who is preparing the necessary applications to develop a power project at this location.
CDP also has significant coal resources in Heatburg and Judy Creek South, Alberta, as well as Telkwa, British Columbia, that may be developed into reserves in the future.
- The Heatburg property is centrally located in the province of Alberta near Joffre, 35 kilometers east of Red Deer. The property is estimated to contain over 421 million tonnes of low ratio measured and indicated coal resources.
- The Judy Creek South property includes 126 million tonnes of indicated resources and 70 million tonnes of inferred resources adjacent to an existing transmission line that serves the oil sands projects near Fort McMurray, Alberta.
- The Telkwa tract is about 10 kilometers south of Smithers, British Columbia, and is estimated to contain over 85 million tonnes of measured, indicated and inferred resources in close proximity to rail and port infrastructure.