EDITORIAL Quintette: a question of confidence

Perhaps Quintette Coal is indulging in a bit of mid-negotiation posturing when it says it may have to close its northeastern British Columbia coal mine unless it can resolve differences with its partner-buyers. But the point the company makes is valid. If Japanese investors — who themselves hold an equity interest in Quintette — fail to honor their contract to buy Quintette’s coal, it will have far-reaching implications.

Quintette has fulfilled its part of the bargain so far and appears willing to hold to the contract even though it is struggling. The British Columbia government has fulfilled its part of the bargain, contributing about $1.2 billion to build a railway, ocean terminal and other facilities to get the project going.

The Japanese minority interest partners, however, have to be dragged kicking and screaming to fulfill their part.

Yes, the contract locks the Japanese partners into buying the coal at prices that are much above current spot market prices. They could get their coal cheaper on the open market. But the nature of a long-term contract is that the buyers must forego such short-term gains for the long-term security of supply.

If the Japanese investors feel they’re getting burned by having to pay $95 per tonne when the market price is closer to $55, think of how Quintette, its parent company Denison Mines and the governments involved must feel about having this massive project rely, apparently, on the whim of Japanese investors.

Remember, too, that the $95 per tonne paid today is considerably less in terms of Japanese yen than that agreed to back in July, 1981, before construction on Quintette even started. If the Japanese investors felt they could live with that price five years ago, the price has already dropped considerably thanks to the devaluation of the American dollar.

Should the project be closed down now, the fallout would be tremendous. Denison has written off its entire $240-million investment in the operation, the second largest coal mine in Canada. But it’s more difficult for the British Columbia government to write off its investment. Development in northeastern British Columbia has been based on Quintette and the $2.7-billion investment that it engendered.

In fact, the province billed the entire northeastern coal project (which included Teck Corp.’s smaller Bullmoose coal mine) as “the largest industrial undertaking in B.C.’s history.”

On an operating basis, Quintette has solved most of its startup problems. But the project has an onerous debtload — about $750 million — which can only be serviced by achieving prices close to the original contract price of about $102 per ton.

At stake is the survival of Quintette, the viability of the government’s huge investment in the area, and the reputation of the coal mining business in British Columbia, a reputation that is already far from ideal. If Quintette fails, it will be a long time before mining can look to the provincial government for support.

Perhaps more important, though, if the plug is pulled on Quintette it will be a long time before Canadian companies will accept the word of potential partners from Japan.