---

Proceedings of the Special Committee of the Senate on
the Cape Breton Development Corporation (1997)

Issue 2 - Evidence

---

OTTAWA, Thursday, March 20, 1997

The Special Senate Committee on the Cape Breton Development Corporation met this day at 10:30 a.m. to continue its study on the annual report, corporate plan and progress reports of the Cape Breton Development Corporation and related matters.

Senator Bill Rompkey (Chairman) in the Chair.

[English]

The Chairman: Honourable senators, we will resume our hearings into the Cape Breton Development Corporation.

Welcome, Mr. Shannon and Mr. White, please proceed.

Mr. Joseph P. Shannon, Chairman of the Board, Cape Breton Development Corporation: Mr. Chairman, also with us today is Mr. Merrill Buchanan, Vice-President, Finance and Corporate Secretary for the Cape Breton Development Corporation.

First, I should like to apologize to you and the members of the committee for not being available in Cape Breton. We were unavoidably out of town on commitments that had been made prior to the scheduling of your hearings.

I am sure that you had a good visit to Cape Breton. I am sure that Senator MacDonald and all of the other Cape Bretoners treated you very well. We are pleased that you had a tour of your favourite mine, the Donkin mine, and that some of you went underground at Phelan.

I am pleased to report to you that the day that you went underground was probably one of our best production days since 1994. We got over 10,000 tonnes that day. We only got 1,000 tonnes from the shift that was working when you were there and 9,000 tonnes from the other two. I do not know if that is because you sprinkled some of your Senate wisdom around or not, but we did a lot better after you left.

I will say a few words and then ask Mr. White to talk about the operational issues. Mr. Buchanan will then give a summary of our financial position and where we are expecting to be at the end of the year.

I was not at the hearings and I did not read the transcripts of what went on in Sydney; however, if the press reports of what happened at your hearings in Sydney were factual and accurate, then I am disappointed with the picture of our company that was painted.

We were here in Ottawa not too long ago. Considering where this company has been, where we are trying to go with it and the conditions with which we are operating in terms of with the mandate that we have from our shareholder, the federal government, our company is in much better shape than it was represented to be, particularly with respect to the media reports. There are some things that are not going as well as we would like; and there are some things that we cannot control. However, generally speaking, I am satisfied with where we are today in the company. We are going through a major turn-around process. We have hundreds and hundreds of employees who are going to work every day. They are starting to enjoy going to work at the Cape Breton Development Corporation and contributing to the success of this industry. I think that we have made great progress.

I want to go on record as saying that the company is not a basket case. We are making progress. We are happy with where we are today. We have had some unfortunate situations because of roof falls. We do not like the idea that we had to bring in coal from offshore for the power corporation, but those things happened, we dealt with them and we got back to work.

On behalf of all our employees, I wish to say that they are doing a good job and we will get this situation turned around. I should also like to say that the chairman and the board of directors have total confidence in the management of the company. We support absolutely the president, Mr. George White, the job that he is doing and the direction in which he is taking the company.

With those comments, I will ask Mr. White to tell you about where we have been since we visited last, about some of the progress that we made and about some of the things that are happening at the corporation.

Mr. George R. White, President and Chief Executive Officer, Cape Breton Development Corporation: Mr. Chairman, thank you very much for this opportunity to address your committee. Almost one year has passed since I became the chief operating officer of the Cape Breton Development Corporation. It has been a very exciting and busy year and one in which I have learned a lot. We are grappling with a whole series of changes that are required to be implemented over a five-year period and beyond so that we can become a commercially viable business.

It was hard for me not to be at your committee meeting in Sydney on Monday morning. I wish to apologize for not being able to attend. We had made plans to bring ourselves up to speed on what is taking place in the international coal markets with clean coal technology, environmental services and other industry trends. We had made those plans many months ago and we are trying really hard to stick to our plans. That is why we were out of town at the time.

We have many issues with which to deal. We have set our priorities and we are making significant progress in terms of them. It is my hope that you and the members of your committee will come to understand the kinds of changes that are required to create a commercially viable industry and that those changes require time. In fact, our five-year plan makes provision for a sequence of events such as workforce reduction, improvements in our key indicators, short-term and long-term planning improvements, product quality improvement, management quality improvement, training, and all of those things which must take place continually over a period of time.

At the same time, certain minimum outputs in revenue and product have been specified because we are a business and we must stay in business while these changes take place. We also recognize that a culture of continuous improvement and self-sufficiency must become part of the fabric of our company. We are less than one year into a process which will provide at least 15 years of continuous operation for the existing collieries.

Our progress during this first year can be measured against a number of output criteria. If you pick a traditional one, such as units of production, you already know from our quarterly reporting that in the first and second quarters we did not do as well as we thought we would. In the third quarter, we saw some stabilization. In the last few months, things have improved and we are seeing significant recovery against those plans.

If you choose another indicator, such as safety or absenteeism, you will see an immediate and continuous improvement. If you choose development advances as your criteria for measurement, then you will see that at our Prince colliery we are close to achieving the balance required between development and production. If you choose the same measurement standard at our Phalen colliery, then you will see that we have not yet achieved that balance.

We must understand, however, that basic systems, such as maintenance planning, operations planning, organizational effectiveness, quality management, communications training and accountability of management are being implemented and that these fundamental systems will result eventually in further improvements. We have not gone out looking for production in the company; we have gone out looking at the fundamental things that are causing us to lack in terms of production.

It is unrealistic to expect that all of the material problems will be solved in the first months of a five-year plan. However, it is also unrealistic not to expect that certain changes will be implemented quickly. I should like to spend my time here elaborating on some of those areas.

I will speak briefly on the following topics, which I have listed in order of priority. The first is our human resources issues, the people issues in the company; the second is our customer service and marketing and sales issues, all of which revolve around the customer. I should also like to talk about the business case for a bit, and Mr. Buchanan is here to talk about the numbers. We also have some technical issues to address. Finally, I will give a short briefing on the long-term planning and the strategy issues. I should like to elaborate on these individually and then give you some idea of our particular successes. I will also highlight areas where work is ongoing and where improvements are still required, and I will refer to key indicators as they present themselves. My goal is to demonstrate that we are effectively positioning our company to meet our long-term goal.

In dealing with the human resource issues first, we are concerned with three groups of employees. They include our management team, our engineering and technical team, and our work team, which involves our unionized workforce. There are three groups. It is not just management and labour; there are management and technical people and the labour group. All these groups must talk to one another and coordinate their activities so that we can be successful.

I can say that we possess an experienced and knowledgeable workforce. You saw some evidence of that on Tuesday. I am very proud of our people in that regard. We also have people who have high technical skills who best understand the conditions in which we are working. This means that we have the experience and expertise required to solve our technical and operating problems and, therefore, the ability to implement our business plan. That is crucial to the fabric of the business.

I have found, however, that the management of these resources has presented a different story over the years. We have had difficulty managing that side of the business. In order for the company to move forward, major new management skills need to be acquired. During the last six months, we have been working on this. We have been working carefully and prudently with our management team. To give you an example, we are currently in the midst of a major effort to improve our communications with all our employees so that they understand how the work that they do contributes to the marketplace and to the customer. Our senior management team has responded enthusiastically to this communication effort.

Last November, we met with the senior union leaders and indicated that we wanted to spend time working through these management issues. They agreed, and we have done this.

We have worked continuously to improve management skills. We held a strategic planning process. We have re-defined our business plan to incorporate marketing and customer service goals. We have developed plans for operating cost reductions. We have plans for both domestic and international sales. We have established volumes of coal which we think can support the business plans. We have agreed as a group to improve the utilization of the corporate services, such as our central shops, our international peers, and our Victoria Junction coal preparation plant. Our management team now recognizes the need to be market driven and customer focused. Training programs have been identified and started. Numerous information sessions have been held within the company, and future sessions are planned.

We now have labour contracts signed with our four bargaining units. This is the first time in 21 years that agreements have been reached without a conciliator or outside involvement. We appreciate the cooperation of our bargaining units in this respect. I know that you have been briefed on the effort that they have put in. I should also like you to know that hard work and cooperation was required on all sides, including the community, in order to achieve these agreements.

Details of the early retirement programs have been agreed to through the joint union-management process. For me, on the operating side, it is a real luxury to have these in place. Many companies are forced to go through downsizing or workforce adjustments these days. Often, the employees are the last to know how they will be affected. In our company, we have already made the decision as to how and when the people will leave the company, all through early retirement programs. In some respects, that helps us.

Absenteeism is now at 11.6 per cent. It is the lowest in two years. The major improvements are at the collieries. Grievances and arbitration statistics are the lowest in the history of the company.

We have begun the implementation of our quality management program which has identified millions of dollars in potential savings. Already, we have some teams of employees assembled for certain improvements in major operations. The union leaders at the locals levels -- the presidents of the union at the collieries, for example -- have been met with and have all expressed much interest and support for these improvements which will affect the long-term viability of their workplaces. I have found that these union leaders are very much in tune with the requirements of our day-to-day operations. They understand that change is required, and they are looking for change. I have had many meetings with them, and I believe that many of the issues that they have put on the table have been or are being resolved.

We have spent a lot of time decentralizing our operations and moving the decision-making to the field operations. Perhaps you saw some evidence of that at Phalen. The general manager at Phelan colliery, for example, is in charge of his operation. He runs the day-to-day operations there. Your trip was organized by him -- even your sandwiches were purchased by him. In the old days, it would not have been like that.

We have had a management reorganization at Phalen colliery. Since this new reorganized team has gone to work, we have been able to achieve our targeted production from the long wall.

I find it particularly pleasing that we have been able to find people from within the company who can be recruited into top positions in the company. Last summer, I spent about three months looking around the world trying to recruit some senior executives for the company. I was not very successful in getting people to come work for us. In the long run, that probably will augur well for us because we have some bright young people who are being promoted and some older managers who want to take charge and change the company.

Our accident frequency is down to 11.9. It is the best ever accident frequency in the history of the company. It is a credit to both our safety committees and to our management who create the safety and health environment. It is an additional credit to the effectiveness in regard to our business plan because it reduces our long-term costs, our disability costs and workers' compensation. Ultimately, it provides a more secure workplace for our employees.

On the service and sales side, we quickly recognized that in order to survive in today's economy a company must be driven by the marketplace and by providing exemplary customer service to our customer. Our main customer now is Nova Scotia Power. We have been under long-term contract with them in a contract that runs until the year 2011. One of the biggest pluses our company has is that we have sales for a significant portion of our production under contract at least until that time.

I can talk to you at length about what is taking place in the world economy in regard to coal. The fact is that coal has become a commodity. Its price is more important than anything else. There is a lot of readily available coal in the world right now. People who cannot compete on the basis of price go out of business. Examples of this can be found in Great Britain, France, Spain, Chile and Brazil. The governments of those countries have ceased to subsidize their coal production, or they have cutback severely on their support for coal production because coal is available elsewhere.

To survive in the long term in such an environment, we need to become a reliable producer of quality product that is competitively priced. In order to be a viable coal company, we will need to strive to meet the competition, both domestically and internationally.

Also, in the domestic market, our main customer is the local power utility. They are finding themselves in a much more competitive situation. Many of you know about the deregulation in that industry. They are trying to reduce their costs. They understand that they will have to compete and sell their product, which is electricity, directly against competitors in the future. As a result, they are pushing for lower prices.

We also face competition from other forms of fuel, including oil, wood, natural gas, hydro, nuclear or emulsion. All these things are in the marketplace now. We have to get our costs down, not just to compete against other coal companies but to compete against other energy sources.

Environmental concerns have been highlighted in recent years. There is no significant signs of abatement there. Knowing this, we need once again to reduce our production costs so that we can afford to enhance our product and to minimize the effects of the environmental legislation and restrictions; or, on the other hand, we need to offer the customer a price that will enable them to invest in plants that can remove effectively unwanted elements of combustion, such as sulphur, nitrogen oxides and carbon dioxide.

On the business case side, our corporate plan was approved last year. It established clearly that the corporation was required to become profitable. In order to move the corporation to a profitable position as quickly as possible, our approach is to maximize sales to our primary customer, that is, our domestic customer, the power utility, while at the same time restructuring our cost base so that we can move to a cost per tonne which allows us to be competitive in other markets.

We have made progress in 1996 in terms of revenue. We sold more coal domestically than in any previous year, and at a better margin than we would have achieved in any other market. We have reduced our operating costs at Phalen colliery. We have additional costs at Prince; but we have undertaken those to bring on new production earlier than planned. We have brought on the production at Prince six weeks in advance of when we had planned, which is contributing to our bottom line in this fiscal year.

We are confident that our cost structure will move in line with the corporate plan projections as we go forward. Mr. Buchanan will show you how close we are today.

The management team feels that our quality management program, which has identified major savings for us, will provide us an opportunity for a cost structure that is even better than we have forecast in the corporate plan.

You will see later in our presentation that the overall funding for 1996-97 is currently forecast at $34.1 million, and our operations will come in quite close to that number this year.

On the technical side, you have heard many issues, I am sure, about the situation that we face at our Phalen colliery. I believe that we are turning the tables on some of the technical issues. We have seen some improvements in infrastructure, installation and commissioning of new pumping stations at Phalen, for example. The mine you travelled underground in on Tuesday, I believe, is a safer place to work than it was a year ago because we have more capacity to deal with water ingress in that operation.

We have installed new transportation systems at our Prince colliery, which has increased the working time at the face by 14 per cent. You will know also from your travel how long it takes to get from the surface to the workplace. At Prince colliery, for example, that 14 per cent translates into an improved output of approximately 80,000 tonnes per year.

Last year, we introduced a revitalization plan for Phalen to address some major technical issues. I felt that there were certain things that we were doing that were right, but we were not doing them very well. We decided that we would try to improve. As an initial plan, we tried to do more of the right things well. We put in a 15-point plan. Most of that work has been completed now. It has contributed to our productivity.

At the same time, we introduced a new mine plan, which includes a new layout for our Phalen colliery. We have implemented the north-south arrangement at the Prince colliery well ahead of schedule. That did a lot to improve morale and to lengthen the life of that colliery.

Sometimes it is not the large things that make a big difference. The company, for example, lacked simple things like personal productivity tools, a modern telephone system, personal computers and things like that which are a major part of the workplace nowadays so that people can communicate and transmit information collectively. It is difficult in our operations to communicate underground. We have installed new systems of communication underground. We have plans to do more of that kind of thing. We put in a technology backbone, or an information systems backbone, which is required for a modern operation.

On the long-term planning and strategy issues, we have revised our corporation mission statement to include words like market driven, competitive and reliable -- all of the things with which we have had problems over the last years. We have talked about our corporate vision, which we will talk through with our unions, to enhance the promotion of safety, to be recognized as a consistent and reliable supplier, to promote and maintain our highly skilled workforce and to be accountable in our decision making. We would like to move from being a rules-based decision-making body to be more of a values-based system where we have values for our customers, our employees and our communities, all of whom are important stakeholders.

What changing from being a rules-based structure to being a market-driven structure really means is that the customer will dictate our outputs. That is the reverse of the planning system we have had in place over so many years.

Our operation was one in which production drove the business. Someone decided that it looked like we would be able to achieve 3 million tonnes this year, or something of that nature. However, now, you have to work backwards through that scenario to arrive at what you will do for your customer. To have that process drive the production side of the business is quite a change.

If we are to survive in the long run, we recognize that this is absolutely necessary. As the company's production volume increases, something which we intend to make happen, the development of export customers will be critical. The volume, quality and price of our product required will drive the planning process. This new process will cascade through the rest of the organization with goals, objectives and plans that are tied to market-driven requirements. These plans will also cascade to the employee level. What is important to me is that each employee will understand how their individual work effort contributes to the goals of the company. There are many ways you can do that in a modern environment. That is what we are working on.

We have plans for a communication plan. We have delivered three quarterly reports to our stakeholders. Our year end is coming up, so we will be reporting on our first full year of activities in our annual report.

We understand that it is also necessary to empower our employees and to do a lot of work on the team development side of things. We find that our employees already work well as teams. Each production crew, for example, is a team. Each development crew is a team. However, the approach of having all those teams work together as a team is also strange in our operations; and we will be working at that.

I will finish up with our quality management program. They come in many different names and guises. Whether it is TQM, BQI or CPI, there are different acronyms for it. The objective of our quality management program is to develop a business strategy, which we call "Beyond 2000", with goals and objectives to transform the company to become a market-driven, competitive and reliable supplier of coal.

The quality management program uses a team approach where you involve employees in making major changes. I believe that it will become the fundamental method by which we will change the culture of our company. It provides our management group with business training. It changes training philosophy so that we understand what is taking place at the employee level when management wants to change things. It also includes methods to involve our employees in those changes. It will become an ongoing program of continuous improvement focused on achieving our company's long-term strategic goals and objectives.

I will end there, Mr. Chairman. I have had a chance to talk about some of the exciting things happening in the company. We are very encouraged, particularly with the results we have been getting in the last month and a half. We think we are well on our way to commercial viability.

The Chairman: Senators, I wish to draw your attention to the presence in the committee room of former senator, former minister, and former everything, Mr. Allan J. MacEachen.

Hon. Senators: Hear, hear!

The Chairman: It was felt on both sides of the table that we value his advice. I asked him to be with us and he kindly agreed. We are pleased to see him here.

Mr. Buchanan, please proceed.

Mr. Merrill D. Buchanan, Vice-President, Finance, Cape Breton Development Corporation: Mr. Chairman, the one-page summary that is being circulated to you may assist in following some of the numbers. I will highlight a few numbers to present to you an overview of where the corporation is positioned very close to the end of the first year of the corporate plan.

Two columns are represented on the summary document. The left-hand column represents the corporate numbers for the year 1996-97. The current forecast is on the right, which represents the actual results to the end of February and a one-month projection for the last month of the fiscal year.

On saleable production, the Prince colliery is projected to have 854,000 saleable tonnes produced against a budget of 688,000. The 15 West Wall, which is the one that just started in mid-February, came on stream six weeks earlier than set out in the corporate plan. That accounts for the favourable projection of 166,000 tonnes more than forecast.

In terms of the Phalen colliery and the 1.9 million tonnes in the corporate plan, we expect in this forecast to come in at 1,410,00 tonnes, or 490,000 tonnes short of the corporate plan. Of that 490,000-tonne shortfall, 420,000 tonnes are attributable directly to the two major roof falls that we had during the year. In September and October, we were out of production for a number of weeks, as we were again in January for about a four-week period. Of that total 490,000 tonnes, 420,000 tonnes are represented by those two incidents. That gives us a total saleable production of 2,264,000 tonnes projected for the year against 2.6 million tonnes in the plan.

In order to achieve our sales level, we will have to draw about 198,000 or 200,000 tonnes from our inventory. That will enable us to have sales at about 2,464,000 tonnes compared to the 2.6 million tonnes in the plan.

Turning to the dollar side of those numbers, the revenue at $164 million projected now against $166.1 million in the corporate plan document represents a shortfall of approximately $2 million. Our operating costs are projected at $128.5 million, approximately 600,000 tonnes lower than the corporate plan projection. Although the numbers are very close on the forecast, there are differences in the individual components of our costs. We expended considerably more on labour. Actually, we expended over $7 million more on labour during the year than planned because operations, particularly at the Prince colliery, were to be curtailed from November through to the end of March. We kept that operation going full steam in order to bring the next wall on stream six weeks earlier than planned.

Offsetting the labour increase, we had lower expenditures in terms of our materials and repairs and on some of the major rebuilds. Those were timing differences due to the delays at the Phalen colliery resulting from the rock falls.

The inventory adjustment line at the middle of the page is $8.3 million. It is a cost item and represents the 198,000 tonnes that we have to draw from inventory in order to meet our sales.

Pensions and human resource strategy is on two lines of this summary. Part of it is under the financial summary and part of it under cash reconciliation. Our total pension and human resources strategy costs for the year will be approximately $50.8 million. That is $3.3 million lower than our corporate plan forecast. The difference is that the early retirements that started during 1996 came to us as a cost later than had been budgeted. Those going on early retirement exhausted other benefits prior to starting on the early retirement program. That represented the saving.

Under "cash reconciliation" is the other item of significant difference on capital expenditures. We had a budget of $14.9 million. Our capital expenditures for the year will be approximately $8 million. Again, that difference is primarily tied to the deferral of expenditures on capital resulting from the timing on the walls. Those capital equipment purchases will have to be made, but the timing on 7 East Wall finishing and the start of 8 is later than planned. It is associated with the roof fall, which moves those expenditures ahead.

The bottom line in terms of the corporate plan number identified a cash deficiency or a cash requirement of $35.1 million for the year. That was in the approval of the corporate plan and the arrangement on financing which was put in place for the corporation. It was actually $34.1 million for the current year net of the interest factor of $1 million. The $34.1 million, plus the $9.4 million from the carryover from 1995-96, represents the total of $43.5 million that has been provided through Supplementary Estimates for the year. At this point, we are confident with the results of production for March that the numbers, if anything, will be better than what we have here. The result is that the $34.1 million that we are projecting is in line with the funding that has been put in place for the year.

Senator Murray: I want to talk about Phalen because it is still fresh in our minds. However, before I do, I want to thank Mr. Buchanan for this succinct presentation as to the financial picture.

I want to ask whether Mr. Buchanan, Mr. Shannon or Mr. White is in a position to tell us what these projected results mean in terms of 1997-98; that is the fiscal year that begins on April 1.

Mr. Shannon: I do not know what you mean, senator.

Senator Murray: Your inventory is way down, is it not? The loss in the fiscal year that ends at the end of March and some of these numbers, inventory and others, will have an impact on your plan for 1997-98, will they not?

Mr. White: As Mr. Buchanan mentioned, we are almost 500,000 tonnes short on our inventory. That coal is underground on the wall that you travelled on. It is fully developed with all of the costs associated with it, with the exception of the minimum amount of labour that is required to do it. That coal will be produced in the next year in addition to the coal that we have identified in the five-year plan.

Senator Murray: To get down to cases, how many tonnes of coal will you sell to Nova Scotia Power in fiscal 1997-98 and how many tonnes of coal do you expect to export in fiscal 1997-98? Will you have the coal?

Mr. White: Yes, we will. We have three goals in that fiscal year. First, we must build our inventories to some reliable level.

Senator Murray: That was my original point.

Mr. White: In addition, we plan to make our planned deliveries to Nova Scotia Power. We are also projecting to start our washing facilities some time in the month of May. We will start developing some production so that we can deliver some cargos internationally. The reason for that is not necessarily to deliver large volumes of extra coal into the international market, but we have to keep our presence and maintain our relationships with some of the customers that we think will be players in the future.

Senator Murray: Are those export customers?

Mr. White: Yes.

Senator Murray: If I understand you correctly, you expect that the problems encountered this year will not impede achieving the goals that you have set for yourselves in the five-year plan in 1997-98; is that right?

Mr. White: That is right. We are set up very well for next year. We have also identified in both operations contingency goals which are not included in our corporate plan. For the volumes next year, we are set up fairly well.

Senator Murray: Will you be able to make up for what you lost in the first year of the plan?

Mr. White: For example, our planned production at Phalen is around 30,000 tonnes pr week. Right now, we are producing 48,000 tonnes per week. We are headed for a bigger week this week. When things start to turn around in our business, they usually go quite well.

Senator Murray: I hope so.

Mr. Shannon: The other thing, too, as Mr. Buchanan pointed out, is that the Prince mine is in production six weeks earlier than originally planned. It cost us a lot more money to do that and that coal has all been developed and is ready to be taken out. We have invested the money in the development of that wall. That is ready to come out.

By March 31 of this year, we will have close to 200,000 tonnes in inventory to start off this fiscal year. A lot of the grunt work, if you will, has already been done to get some of these larger production numbers that we want next year.

Senator Murray: I was very glad to hear Mr. White say that Phalen is a good deal safer place to work now than it was one year ago. We heard no testimony to the contrary either in our public meeting or in our private encounters with miners and others around Phalen.

We hid hear, however, as we heard last spring when we were holding these meetings, that there was a great deal of uncertainty about Phalen. As far back as November 1995, in the corporate plan that Mr. Shannon authored or for which he was responsible, Devco suggested that an assessment had to be made of the long-term viability of Phalen.

We heard in our hearings last year, especially from the union, that it was really a week-to-week operation. Those meetings were held in the aftermath of the very serious problems of a shut-down of approximately 10 or 12 weeks.

Since that time, you have again had your share of incidents at Phalen. I have your quarterly reports here for the first three-quarters of the fiscal year which ends at the end of this month. In each one of them, there are references to problems: At 8 East, bottom-level development encountered rock gas outburst-prone areas not anticipated in the plan forcing stoppage of work and an equipment mining method change. Slope development was also delayed due mainly to unexpected water inflow from 2 East Wall.

That was in the first quarter. In the second quarter retreat rates and production areas were significantly lower than planned because of heavy roof conditions, water flow emanating from sandstone roof and ventilation delays caused by the roof condition. A fall of stone on September 17 halted production for an estimated four weeks.

In the third quarter report, you noted that, after the cut-off for the third quarter, another roof fall had been encountered on 7 East in mid-January.

The union spokesmen from whom we heard continued to be of the view, on the basis of these incidents, that it is a week-to-week operation there. Of course, the whole situation at Phalen is linked very closely to their concern and the concern we expressed in our report last spring that something be done to update the Donkin study. I will get to that study in a moment.

What reason do we have to believe that you have turned the corner on Phalen and that, over the next year, we will not have another series of incidents of this kind?

Mr. Shannon: Before Mr. White answers that, I do not want to leave the impression with your committee that we were operating an unsafe mine last year. Mr. White said that the mine was safer this year; and you mentioned that as well, senator. I want to make it clear that we were not operating an unsafe mine last year. I do not want anyone to have that impression.

Mr. White: I was also looking at it from a business point of view, that is, the security and long-term security of our operations.

Senator Graham: By the way, you should know that the point that the chairman just made was emphasized by the president of the Phalen local union. He said that at no time did the men themselves feel they were in unsafe conditions.

Mr. Shannon: It is very important that we all recognize that. It is on the record that we are operating a safe company. Safety is certainly the principal issue in our operation. It has been as long as I have been there.

Mr. White: In regard to the uncertainty in the mining conditions at Phalen, the issue comes down to two points. One is what we can and cannot control as part of our operations. The company obviously was in a tremendous amount of turmoil at the beginning of last year. Major changes took place in the company, all of which contributed to communications, to uncertainty and insecurity in the workplace. People are not at their best at that time.

There are many companies in the world in which security of employment and whether you will be in business tomorrow, in a month's time or in a year's time is dealt with effectively, particularly in competitive situations and that kind of thing.

The technical problems that we have at Phalen are manageable. We will have work delays from time to time. We still have weight and water problems at Phalen. The difference is that in the last three months or so, since we had the last major fall, we have been able to control them. We are developing operating parameters and standards that will help us do that.

In the long run, if we can learn to do this, we will get through this aberration in the activities at Phalen. In the long run, we will come into some better conditions. We know that, as the mine progresses, what we have at Phalen is a major river system that has run through that operation for many millions of years. We are trying to work through that. Once we get through that system, we will be back into more secure conditions.

I have described this as being like a tag-team match. There are five major issues with which we have to deal. They include water inflows; the ventilation systems used on the wall face; gas and methane and the maintenance problems caused by such conditions; coal quality; and the weighting or sandstone conditions in the roof which cause the roof to come in. We have all of these things against us.

Sometimes we are in the ring with at least two or three of them at the same time. As we have developed better standards, technology, communications and an understanding of what the requirements are to manage those situations, we have been able to do better against some of the forces of nature that are there.

It will probably never go away. We can improve on what we have done; and we are demonstrating that we can do just that. The strategy is to isolate these things and to try to deal with them one at a time. When we know that we have a weighting situation approaching, something which our technology tells us, we know that we will not have a maintenance problem at the same time. When we go through the weighting situation and when we have a maintenance problem at the same time, then we have some conditions from which it is hard to recover.

Senator Murray: This committee previously recommended to Devco and the province of Nova Scotia to undertake this update of the feasibility of Donkin. As we were reminded at our hearings in Cape Breton earlier in the week, this is not a situation where you must start from the beginning. There has been much data compiled and much study has been done, but it needs to be updated. That was our recommendation to you. What has happened to it?

Mr. Shannon: With respect to the Donkin situation, when we first developed some sort of picture of where we had to go with Devco a couple of years ago, there was a suggestion in a preliminary draft document that we should identify $750,000 to do exactly what you are saying, namely, gather up into one document information on all of the studies and see what is going on at the Donkin mine.

If you remember, senator, the Government of Canada had the Boyd people come in to do a major study on the corporation.

Senator Murray: That was not of Donkin.

Mr. Shannon: Donkin was included in the recommendation.

Senator Murray: They dismissed it, Mr. Shannon; they simply gave it the brush-off.

Mr. Shannon: Exactly. That was the point I was about to make. They made a strong recommendation that there was no opportunity at the Donkin mine, that sufficient coal could be mined out of the Prince and Phalen mines to meet all the requirements with which the Cape Breton Development Corporation would be able to deal.

As result of that, in the final plan, the money was extracted from the business plan. We developed a final plan and it was not in there. The focus was to be on restructuring the company, that is, trying to get the Prince and Phalen mines into a respectable condition so that they would meet the production requirements of the corporation.

There is no plan in our business plan, or in the plan that is going to Treasury Board either yesterday, today or tomorrow, to study the Donkin mine.

Senator Murray: Was our recommendation placed before your board for any discussion?

Mr. Shannon: Yes. All the recommendations that the Senate committee made, and some of them were very good, we looked at.

Senator Murray: They turned down that one, did they?

Mr. Shannon: Yes. Our focus must be on the operations we are doing now, the Phalen and Prince mines, and trying to straighten them out.

Senator Murray: Did you not discuss it with the government of Nova Scotia?

Mr. Shannon: No, I did not.

Senator Murray: The Boyd report gave it the brush-off. They said that it would be a distraction at this time. I do not know what that is supposed to mean under the circumstances. Without any data or documentation in particular, they dismissed the economics of the Donkin development, which is why we thought there should be an update of the studies that had been done.

I will leave it at that because I happen to know there are other senators who are interested in the subject.

The Chairman: I should like to bring to Mr. Buchanan's attention that there is some slight discrepancy between the numbers on this page and the numbers that we have in our report with regard to the corporate plan. For example, in total saleable production, the numbers on this paper are 2588, whereas the numbers we have in our report from the corporate plan are 2593.

Could you reconcile the figures so that we are all talking from the same number base?

Mr. Buchanan: I do not have an explanation off-hand.

The Chairman: Could you advise us on that?

Mr. Buchanan: I certainly shall.

Senator Graham: When we were listening to the unions in Sydney, they talked about the great fourth quarter that the corporation was sure to have. I do not know what the transcript will show, but I remember in general terms asking the question, "If you are to have such a great fourth quarter, why can you not put together four quarters that are equally as good?" I asked my question understanding the unpredictable nature of underground mining and so on.

One of the men said, "Because they listen to the men." That was a theme they emphasized for a couple of minutes. They suggested that there was greater consultation between the management and the union.

One of the concerns that we expressed in our report of last year was the nature of the relationship between union and management. I know that you alluded to this earlier, Mr. White; namely, that there seemed to be an improvement. I know that collective agreements have been signed to the year 2000. Would any one of you care to comment on the relationship today between union and management as compared to what it was one year ago?

Mr. White: That is an astute question. I believe to some extent the answer to that will say much about how the company will perform over the next few years.

It has taken some time to develop how this communication could take place. It is not a small company and there are many issues to be dealt with. There are certain priorities for the short term.

First, senior union officials were directly involved in the negotiations concerning the collective agreements that were being negotiated. It was a process on which we were focused. That process played out within six months or so. We did most of the work associated with those agreements at that time. Once those agreements were either in hand or almost ready to be signed, we started working at the local levels with the managers and asked them to work with the employees and their union leaders.

In the traditional way, many confrontational things happened in our company over the years and there was a lot of confrontation at those levels. There were many occasions upon which I got involved and met with both managers and union leaders at the collieries and said that we had to find ways of working together to resolve some of the issues that are stopping us from doing things.

We found that once there was a desire to deal with some of those small and mediocre issues that were stopping major things from being done, we were able to move forward. That is not entirely the way either we or our labour leaders wanted it, but we have added human resource people at the colliery level, where the rubber meets the road; we have worked with safety and mine committees to improve relations between the management and labour leaders; and we are also starting to get our people involved in our quality management system.

You must remember that this is the third time our company has tried to put in place a team-based quality management system. The first couple of efforts did not work, not because the workers did not want to get involved but because management was sometimes not able to figure out how to implement the recommendations of some of those committees, and so on.

There is a tremendous commitment on the part of both labour and management to make these things work, particularly at the local level. By "local level" I mean the local union presidents and their elected officials at the collieries.

I have had numerous meetings with the senior people, including the district executive. I started a system of trying to meet every Wednesday to get some feedback on how we were doing. Those meetings were held for a while but did not pan out as I would have liked. I found that it was difficult to contain information. Some of the things we wanted to do needed to be planned and set up and they took time to implement. Very often people got the wrong idea about what we were trying to do. I sometimes ended up having to go back into the operation to clarify things that we had discussed at more senior levels in the company, so we stopped that, but I should like to return to it.

The answer to your question is that at the local levels, where the actual work is done and where the problems occur, the management team that we have put together is working diligently and prudently to deal with the individuals. I hope that is what you will see when you talk to our employees. They may not understand all the decisions that we make, but they understand many that they may not have, and that is because of the communication that has taken place.

Senator Graham: One of their big concerns is long-term viability. Some people are saying that Phalen has only three or four years left. One gentlemen who was asked said that he will educate his children because Phalen will not go beyond three or four years. I know that there are reserves down there that may last for 20 or 25 years if they are developed properly.

Is there any way that you can raise the level of confidence among the people who live in the community and are so dependent upon it? This relates to the attitudinal response that you will get from the employees. Is there anything you can do to improve that level of confidence in the future?

Mr. White: There are two major points to be addressed. One is that people do not believe that you will create something special in an organization nowadays if you have not done it in the past. We have to have some successes in hand before we can go back.

As a mine manager many years ago, I learned that if you want to tackle a big problem you have to have good success with little problems and use that as leverage to give confidence that you can go forward with the bigger problem. We did that many times. When trying to solve safety issues in the past, we often went after housekeeping, because it was an easy thing to do. When we made gains there, we pointed out that improvement and said that we would take the next step.

We are having some successes now. We brought the Prince mine on six weeks in advance of when we said we would. We had planned on having layoffs in association with the Prince operations and we did not do that in order to make that happen. There is a response between the company and the employees. The employees were kept on to do the work. They brought the job on stream on time and the production outputs that they have been achieving after the fact recognizes that, because they are producing more than we had planned. There is an effort at that colliery.

We had a major downturn of events at Phalen with a roof collapse in February that cost us sales to our main customer. The employees brought the wall back on two weeks in advance of when they said they would. We did not lay off people at the site. We had another major problem at the site at the same time. We have repaired that. We have worked through it. They showed a lot of creativity and a lot of hard work in solving those problems. We are now back in operation and are producing well in excess of what was planned.

Those kinds of things are not being communicated to the extent that some of the negative things are. Maybe we need to handle communications better. If there are two stories to report about Phalen, one good and one bad, the bad one will be reported.

Senator MacDonald: Were the failures at the 7 East Wall responsible for the fact that you had to buy 150,000 tonnes of American coal?

Mr. White: Yes. There was no other reason for that. Our production from Phalen colliery was not what we wanted it to be. We knew that we had a problem early in November. We had met with the power corporation almost every week, either by telephone or in person, to appraise them of our problems.

We were able to handle the situation all the way through the Christmas period and part of January, but we were right on the line. They wanted to have a six-week supply somewhere in the province of Nova Scotia. We were right on the six-week inventory level for a period of time. When we lost the wall at Phalen because of the roof condition, it was estimated that we would be down for four weeks. With no production from Phalen for four weeks, we knew that we could not maintain that six-week supply.

Senator MacDonald: In hindsight, is there any way that you could have avoided that?

Mr. White: If we had eyes to see the future, we could have done some things differently. We could have developed some contingency product at Phalen or tried to develop a wall somewhere else. However, a year or a year and a half ago, the performance of the development was not as good as it is today, and it is not up to speed today, so I doubt that we could have made those decisions and delivered on those plans.

Senator MacDonald: I got a completely different impression underground than I did in our hearings from union people. On top, you are being blamed for not doing the development that was necessary to save the 7 East Wall. Down below, the same union people were saying that there are no prophets up above, in management, or down below.

Senator Bryden: They were not the same union people. The people you talked to upstairs were the leadership, the paid officials and so on. The people you talked to downstairs were the employees and the members.

Senator MacDonald: And union.

Senator Graham: One of the recommendations that we made was greater concentration on the development of an export market. Have you done anything since we last met in that regard?

Mr. White: We have some export contracts that were negotiated in the past which we have not delivered on, and which we will have to deliver on in the next year or two. In addition, we have pretty good customers in Europe that would take coal from us if we could provide it.

Senator Murray: Are those long-term customers?

Mr. White: Yes. We would have to develop the market. Our problem is that we have not been able to deliver. Until you can deliver a few cargoes, it is very much a relationship type of business. Also, we must get our costs down so that we can compete.

We have a marketing department of one. That person has been in Europe on a number of occasions and is talking to those customers on a regular basis. I participated in a conference call yesterday exploring whether we could bring our wash plant on line a couple of weeks early to enable us to get a cargo to an entirely new customer in a new market in northern Europe. We think that could be a very valuable customer.

Senator Graham: Obviously the international pier is not being used very much.

Mr. White: Exactly.

Senator Graham: Could the international pier be made available for other users? Would you be prepared to make it available to a developer interested in another kind of industry?

Mr. White: Yes, we certainly would.

Senator Graham: We have heard a lot about Sable gas. Are you prepared to meet the challenge of competing with Sable gas?

Mr. Shannon: If we shipped our coal out to the export market today, we would lose between $8 and $10 a tonne. That is not acceptable to us. Your recommendation regarding the export market was that we export profitably. We are not in a position today to export profitably, although we are working toward that. As Mr. White indicated, we have never given up contact with the customers we traditionally supplied. We have all been working hard to be ready to go back into the export market in a major way when we get our costs down and our systems in place.

Senator Murray: I believe it was one of the union people who said that Devco had lost money on the spot market which it entered when it wanted to solve a cash-flow problem, but that over the years Devco had made money on long-term contracts.

Mr. Shannon: We made money on the Nova Scotia Power Corporation contract also.

Senator Murray: I am talking about the export markets.

Mr. Shannon: I do not know whether we did.

Mr. White: The marketplace is very tough now. We are watching the numbers all the time. I do not want to put on the table here the numbers we have to bid, but sometimes we bid just to be in the game. When you bid low as a loss leader just to stay in the game and you are underbid by someone else, you know the kind of market you are in. We cannot currently compete internationally on a cost basis. However, as we have said in our plan, we think we can produce 2.5 million tonnes into the domestic market. We need to have approximately 1 million tonnes in order to operate the wash plant facilities viably. It is a big operation. With those kinds of numbers and the cost reductions associated with the quality management program, we think that we can compete internationally.

Senator Murray: Is your plan not for 700,000 tonnes in export a year?

Mr. White: Yes.

Mr. Shannon: When we reach that we will be able to compete with the gas. The power corporation said the other day that they are going to apply to the Sable offshore gas company for 17 per cent of the gas, but they also said it would have to be competitive. Our challenge is not to give up simply because they want to buy gas. We will not give up on our main customer. They are in the province of Nova Scotia and it makes sense for us to supply that customer.

We must be able to compete with gas. I cannot tell you what the gas price will be, but we hope to be competitive with gas by the time it gets ashore. If we continue in the direction we are going with the company and continue to do the things that Mr. White has initiated, we will be there in a couple of years.

Senator Graham: You mentioned safety improvements and said that the level of absenteeism was down to 11.6 per cent in the last two years. That still sounds very high to me. What was it before and how does it compare with coal industries elsewhere?

Mr. White: Perhaps I should send the committee some supplementary information on how we calculate absenteeism. It has been as high as 20 or 21 per cent. You must know how we measure absenteeism to be able to compare it with other companies. For example, we count long-term disability and those kinds of things as absenteeism, while some other companies do not.

Senator Graham: Including long-term disability does not give us a complete picture. I am interested in the level of absenteeism on a week-to-week basis compared to the rest of the industry.

Mr. White: I can provide you with the details behind those numbers.

Senator Bryden: Please include a comparison to the past, to see if you are going in the right direction.

Senator Buchanan: Thank you for being here today. I think I speak for all members of the committee who were in Cape Breton when I say that Cape Breton miners are among the best in North America. Anyone who has been underground, talked to the miners and watched them working will agree with that.

Devco is very fortunate to have Ray Ward as mine manager at Phalen. I did not hear anyone say anything negative about him. He appears to be very knowledgeable about the industry and very interested in Phalen. When we were there, he came underground with us and explained everything to us.

Did you say that the contract is ending in the year 2011?

Mr. White: Yes.

Senator Buchanan: It is an interesting contract.

I wish to pay tribute to a former member of this committee who is sitting at the other end of the room -- Allan MacEachen. He was the founder of Devco and he saved the coal industry of Cape Breton. In the 1970s, when Nova Scotia Power Inc. was negotiating with Devco, he played a leading role in forming the contracts.

There was also a minister named Ed Lumley who was always sure to say he was prematurely gray. He told Mr. MacEachen and I here in Ottawa one day that we were the politicians and he was the businessman. I do not know what he meant, but we both objected to it at the time.

On the way home, Rollie Thornhill and Ed Lumley and I were with Allan MacEachen in a federal government plane. There was a heavy fog that night at Shearwater airport and we could not land. We went to the Halifax international airport and could not land. We went back to Shearwater and the captain came on and said, "We may or may not be able to get in, but we will try." Ed Lumley turned to me and said, "Look, if we do not make it, I would really like to know what price the power corporation is prepared to pay for the next five years for coal." I said, "Listen, I hope we make it because, if we do not, it does not matter what the price of coal is for the next five years."

Ed Lumley had a great interest in Devco and in Nova Scotia Power Inc. and in the plan that was developed to the year 2011.

Senator Bryden: Is there a question at the end of this road?

Senator Buchanan: Yes, there is.

My concern on these five-year adjustments on the contract with the power corporation commenced approximately a year ago when -- and I am not saying this is wrong -- the power corporation was privatized. One of the first comments made by people at the power corporation was that they would now take a different look at the contract and at how they negotiate contracts with Devco. It is a private corporation. They are now answerable to their shareholders and not to the government or the people who were the shareholders then.

The concern is that, for the first time, as far as I know, Nova Scotia Power Inc. had brought coal in from the United States. That has happened before with the steel plant when metallurgical coal was brought in and mixed with our coal at 26 Colliery to give a better metallurgical quality. However, this was the first time that the power corporation brought coal in.

We have already discussed the reason here. They brought it in because of a fall at Phalen and they were concerned that you would not have the stockpiling to cover the down-time at Phalen. You have already answered the question for someone else that you may not have those stockpiles. My question is: Did you? We heard that there was no need to bring that coal in.

Do you agree there was no need to bring in coal, or did the power corporation do the right thing to bring that coal in from the United States?

Mr. White: We had business discussions with the power corporation from November on with regard to inventories. We had made some decisions on what we thought and what they thought was acceptable as far as the minimum inventories allowable in the circumstances.

They have new people in charge in their coal area now. They kept very close tabs on the inventories. We agreed in November that six weeks was a reasonable amount and that if we could not keep a six-week supply, that should be reason to go outside to buy it.

We worked with those numbers all the way through until January. We had some quality problems during the month of December. It became obvious that we would get very close to that six-week period. Because we had continuing ongoing discussions with them, we were able to get them to reduce that to five weeks. That meant there were only five weeks of coal in the province of Nova Scotia and we were in the middle of January. They would have to purchase coal from somewhere else and have it delivered by boat to somewhere in the province. It had not been done before.

We got them down from six to five. We had a meeting in Halifax that Monday morning to discuss all that. We got an agreement. We were willing to take some risks and even put some money up to prevent coal from coming in. When we got off the plane, we found out there was a roof-fall at Phalen and the estimate was that the colliery would be down for four weeks.

Senator Buchanan: In your opinion then, it was necessary?

Mr. White: I feel we worked through that issue and did what we could.

Senator Buchanan: After the last shareholders' meeting of Nova Scotia Power Inc., there were some comments made. David Mann, the new president, was asked about the 50,000 tonnes, but he was also asked what will happen at the end of the five-year adjustment period in the contract. His answer was cause for some concern. He said: We will wait until that time arrives; we will look at markets and production costs around the world; we will look at such things as gas; and then we will make the decision as to what we are prepared to do with Devco.

That kind of comment is certainly the right kind of comment for the president of a private corporation to make, but it did not leave a very good feeling in the minds of the people who work for Devco when they consider that they have basically one customer. Here is that one customer saying that, in four years, they may seriously look at bringing in more coal from outside. Now there is an announcement that they are prepared, at whatever the cost, to buy 17 per cent of Sable gas.

Committee members should know that most of that Sable gas would be used for Tufts Cove where you do not supply coal anyway. We have also had that in the equation, hoping that the power corporation would buy gas for Tufts Cove because it uses oil. The concern that I am hearing now is that the power corporation is looking at supplying Trenton and Point Tupper with natural gas if the cost is right.

First, Nova Scotia Power Inc. is saying they intend to look at this in four and a half years with regard to whether they will look outside Nova Scotia for coal. They will also look at the gas situation which will be coming on-shore by then, by the way. There is no doubt about that now. I said it years ago.

The question is: Do you really believe that, by the year 2000, after the end of the next five-year term, you can successfully compete to ensure that Trenton and Point Tupper are not supplied by Sable Gas and, second, that with any other problems at Phalen and any costs attributed to that, you can compete with coal from Hampton Roads in the United States or from other areas in the United States?

Mr. Shannon: One of the problems with the Nova Scotia Power Corporation is that whoever negotiated the contracts with them put them in a box; a very strong box. I do not know whether it was Senator MacEachen who was responsible for the negotiation of the original contract. Whoever negotiated that contract was in a box to buy Cape Breton coal for all of their coal-fire generating.

Senator Buchanan: I say that is true. I had no problem with that.

Mr. Shannon: The problem is that they started to climb out of that box. They have a leg out of it already.

Senator Buchanan: That is right.

Mr. Shannon: When the contract was opened and the Trenton power plant coal supply was given to the Westray project, that got them part way out of the box. Their legal advisors say it will be easier to get the rest of the body out of the box now than before that happened.

I am not judging whether it was the right or the wrong decision to give that part of Devco's contract to Westray. I was disappointed that there was no condition in that agreement that, in the event the Westray mine did not proceed and produce coal, all the supply of coal would revert back to the Cape Breton Development Corporation. Unfortunately, that was not in the agreement.

The power corporation keeps throwing this up to us. That contract was opened and they are starting to walk away and get out of that box that we had them in. That is one part of the problem.

With regard to the other part of your question, senator, I believe that the Nova Scotia power corporation will buy our coal, if it is environmentally acceptable, at a competitive price. If we cannot compete with the gas, both in terms of the environmental requirements and the price, we will be out of luck. We must be able to do that.

Senator Buchanan: When Trenton No. 6 was built, it had to use a certain quality of coal. There is no doubt that a blended coal from Devco could have been used. Point Aconi would have been coming onstream at the same time as Trenton No. 6. As a result, there was a tradeoff of coal from Trenton to Point Aconi. As I understand it, most of the coal mined at Prince, which is a higher sulphur coal than Phalen, is now used at the Point Aconi generating plant.

According to the people to whom I have spoken, both at the power corporation and at Prince, the fluidized bed plant at Point Aconi is doing very well by using the higher sulphur, higher ash coal out of Prince. The fluidized bed plant is working fairly well.

Mr. Shannon: Yes, sir. We are providing the fluidized bed plant with about 400,000 tonnes of coal per year directly from the Prince mine. About 600,000 tonnes are going to the VJ plant.

Senator Buchanan: The Point Aconi plant was a good thing.

Mr. Shannon: Any decision made from 1978 until whenever you joined the Senate was a good decision.

Senator Bryden: I hesitate to talk about Devco with all these Nova Scotians and Cape Bretoners around me.

One of you said this morning that you are less than one year into a process that you hope will keep the business viable for 15 or 20 years. Is that correct?

Mr. Shannon: Yes.

Senator Bryden: As a former businessman who has been involved in turn-around plans, both with smaller manufacturing companies and large commodity-based companies, what surprises me about this stage of your plan is not that you have missed it but that you came so close.

When you start one of these plans, you cannot budget it with tonnes that, if you make your plan that first year, are still not enough. It is very creditable that you have been able to make adjustments in very difficult circumstances in which you had accidents and other events that you did not anticipate, and still be able to come this close.

This committee must realize that you cannot manage a situation such as this on a quarter-by-quarter basis. In the commodity business in which you are involved, and with the history that you have, your ability to turn this around and make it do what you want will be gauged in terms of years, not quarters. That has been my experience and I wanted to pass it on to you. It has been my experience that, when trying to change a corporate culture, all the things you are proposing here take a tremendous amount of time.

You indicated that with regard to human resources there has been a reduction in your grievances and arbitrations and an improvement in your absenteeism and your lost-time accidents. That has just begun to happen. Are you using any outside expertise in managing those human resources?

Mr. White: We have added a couple of people to our human resources group. We are using the quality management program to try to change the culture of the company. That means that we have to do more communications. Because of that, we have to look at our work processes to find out what is going right and what is not. We have to feed that back to our supervisors and mid-managers. That is what is making the difference.

Senator Bryden: Did you develop the quality management work program with assistance?

Mr. White: We went to external consultants. We are using Ernst & Young from Toronto. I have worked with them on a number of projects. They were the successful bidder, so we are working with them.

Senator Bryden: Even if a consultant mainly tells you what you want to hear, they are a very valuable check on the wisdom of your own judgment.

Mr. White: That is right.

Senator Bryden: In talking about the future of the Phalen mine, you have to deal with water, ventilation, maintenance, the quality of the coal and the sandstone conditions. You asked, "How long will it take to work through them?" What did you mean by that? Did you mean that you will get to a point where you will be past those physically; or are you trying to work through them so that you can manage them?

Mr. White: Someone upstairs put a roadblock in our development plan for the mine many millions of years ago. We are doing some horizontal drilling programs, testing and that kind of thing which indicate that it is the sandstone conditions that are causing many of the technical problems we are having today. This is finite. Eventually, we will get through it. The drilling that we have been doing indicates that the plan is quite conservative. We should be through it before it is expected that we will be.

Senator Bryden: When do you think you will be through it?

Mr. White: The way the mine is being developed, most of this five-year plan will be under these kinds of hardships. There is some light at the end of the tunnel in regard to conditions at Phalen.

The kinds of activities that we must get involved with to manage this kind of operation in these kinds of conditions will set us up pretty well for conditions that we might encounter in the future.

Senator Bryden: Are you estimating five years to get through the conditions?

Mr. White: The five-year plan is based on being in these conditions.

Senator Bryden: Do you plan to be out of them in six years?

Mr. White: One of the biggest assumptions and features of the plan in the sixth year is what is happening in the market place as we come out from under these contracts with regard to change in prices and so on.

Senator Bryden: Every year you are out, there is less certainty.

Mr. White: We have included assumptions with regard to gas, offshore sales and those kind of things.

Senator Bryden: I want to return to the matter of the Donkin mine to see if I understand correctly.

I understand there was a recommendation from this committee in the past that this be re-examined. Did you say that although the recommendation from the committee was considered, in making a choice of the allocation of management time and financial resources the decision was made by the management and board of directors to concentrate on the mines that are now operating rather than the Donkin mine?

Mr. Shannon: That is correct, yes.

Mr. White: Yes.

Senator Murray: I should like to say something for the record on this matter.

Senator Bryden, it is not a matter of management time. It is not even, to any great extent, a matter of financial resources. Mr. Shannon quoted a figure of $750,000 for a study and the committee was talking about sharing the cost of that study with the province of Nova Scotia.

I believe you are running a high risk strategy by setting your faces completely against even an update of the feasibility studies that have already been made. If the worst happens and you run into serious trouble again in Phalen, there goes the industry. You will not have a contingency plan; you will not be ready to do anything with Donkin. It is a high risk.

I cannot understand why the corporation and the government of Nova Scotia -- which has, I would have thought, some interest in the future stability of the industry in Cape Breton -- would not participate in updating a feasibility study. That does not seem to me to be an unreasonable course to take at this stage in the life of the industry. Your position is indefensible. I hope that we do not have serious reason to regret it a few years from now.

Senator MacDonald: I agree with Senator Murray. I believe that Mr. Shannon and the board have taken an almost defeatist attitude toward the ability to develop the Donkin mine in addition to Phalen. It is one of the insurance policies the coal industry has.

The Chairman: Do any of the witnesses from Devco wish to respond to that?

Mr. Shannon: There is probably no person in this room -- and I know that is saying a lot -- who has worked harder for the economic stability of Cape Breton Island than have I.

I was born and bred in Cape Breton and still live there. I am the only one in this room, other than the three of us, who still lives in Cape Breton. I am committed to Cape Breton beyond any doubt; to the economic development, to the university, to our young people, to building a new economy and to changing the culture and the attitude in Cape Breton. I have worked hard at all kinds of volunteer positions in Cape Breton to do that. Your remarks about Donkin are easy to make when at the Senate table.

We have a responsibility to turn this company around. It is easy to forget where we were two years ago when I joined this outfit. It is easy to forget the trouble we were in. We have come a substantial way in trying to stabilize the company. We believe that the direction in which we are going with this company is the right direction to turn it around. We believe that we will succeed with the Phalen mine. We believe in our people. Those of you who were underground saw the attitude of the miners.

Senator Buchanan expressed it well. I cannot measure our miners with others throughout the world, because I have not seen them, but I know that we have good men. You will not find anyone who has worked as hard as the guys on 7 East. Time and again when those roof falls came down, they never walked away. They never went home early. They stayed there and they worked. We believe in these people. We believe that the courage and the stamina is there to turn this around. We believe that we can succeed at Phalen.

We have a new planning process that will make it easier for us to get more coal in the future. As we indicated earlier, we are ahead at the Prince mine by six weeks. We are going in a north-south direction six weeks earlier than we had planned. We are getting better production out of those coal mines today than we ever did in the past. We are reaching 50,000 to 60,000 tonnes a week and we believe that we can maintain that with some of the work that is being done and the improvements that we are making.

It is not a matter of writing a cheque for $300,000. In the scheme of things, we did $165 million in revenue. Three hundred thousand dollars is not much money if we are to share that expense with the province. However, that is only a small part of it. There is a huge amount of work to be done.

With regard to the Donkin mine, you have to be concerned about raising false hopes for our people. That is a real problem down home. It is something that we have all been challenged with. For example, how many people stayed around and waited for the Greenfield steel plant in Gabarouse to come to fruition?

I take your point that we should be doing it, but we have chosen what we believe is the right direction for the company. I have enormous respect for your business acumen, your past and your advice, senator, but we have chosen a direction for the company which we believe to be the right direction. We believe that we can win in the direction we are going. We do not want to change our focus by starting a new project. That shifts the issue. We must learn how to do what we are trying to do. We must get our mined goods out of the ground at least $10 more cheaply to get into the export market. We must compete with offshore gas. We must learn to do all those things.

If we cannot learn to operate economically the mines that we now own, what is the point of having the Donkin mine? We will not be able to afford to run it.

Senator MacDonald: I have the highest respect for the present management of Devco; the three gentlemen who are sitting at the table. You have taken some unfair hits by one particular union, which we saw when we were in Nova Scotia. However, I maintain that neither you nor your board have been aggressive enough in exploring possibilities for the future of the Donkin mine.

Although I cannot prove it, I believe that you may have been influenced by the government on your corporate plan, that you may have been discouraged.

Mr. Shannon: No, senator, just the opposite is true.

Senator Buchanan: I have known Mr. Shannon for a long time. We are not faulting you at all for your commitment to Cape Breton.We know that you have that commitment.

The concern we have is what I hear from people in the power corporation; from the former president, the former chairman and others who, over the years, have wanted to do certain things that they are now free to do with the new people there.

The power corporation says it has a responsibility to the power users of Nova Scotia. Therefore, if there is any instability in Devco, such as the potential of more problems in Phalen or that the Phalen mine may go down in five to eight years, they want to know that there is a fall-back position. I have been told that they want to know that. They are making plans now to look elsewhere, which is quite right for them to do.

Our recommendation is to update the studies that have been done to see what the situation is at the present time in order that you will have a fall-back position. As Senator Murray said, there is a risk there, so assess the risk and study what could be done if it comes to fruition.

John Savage has said, and I do not agree with him, that Devco and coal mining in Cape Breton is a federal responsibility. That is nonsense. It is a provincial responsibility.

My recommendation is that we have the study. I am told that it could be accomplished for less than $750,000. The provincial government could pay half and the federal government could pay half, and we will see exactly where we will be in the future.

Mr. Shannon: Senator, at your meetings in Sydney I believe there was an offer made that some people in the community would do a study for free, or would contribute their time for half the cost.

The best way for us to maintain the business of Nova Scotia Power Inc. is to continue to provide it with an environmentally acceptable product at a competitive price. That and absolutely nothing else will maintain the business of Nova Scotia Power Inc. That must be our objective.

Senator Buchanan: I agree with that, except for their statements that they want to look at long-term stability.

Mr. Shannon: If we can provide a good product at a competitive price, they will buy our coal. That is all we have to do. That will keep us in business and maintain that customer for us.

Senator Bryden: The point has been made by the other side that there is a risk involved in not updating this study on the Donkin mine. I understand what you are saying. There is also a risk in holding out the Donkin mine as some sort of saviour that is also is your back pocket.

Am I correct that the way to secure the future of the Nova Scotia Power Inc. contract, and the future of Devco, is to learn to produce coal out of the mines that you have in a competitive and environmentally safe manner?

Mr. Shannon: You have captured the whole issue, senator.

Mr. Shannon: In Sydney, one of the presenters said that we had lost $25 million. I thought someone would have raised that here. I do not know where that figure came from, except that under "net operating costs" in our third quarter report there is a $25 million variance between the plan and the operating cost.

It was stated at the Sydney hearings that there was also an increase of $20 million in sales. Our costs obviously had to go up in order to get those extra sales. The variance at the end of the nine-month period would have been $5 million between budget and actual.

It is important to point out that more than one line must be extracted from the statement. The figure of $25 million is a clear misrepresentation. We had $20 million of additional coal sales that were offset against that $25 million in costs.

Senator Murray: How much will you have drawn down from the federal loan as of March 31?

Mr. Buchanan: We have drawn down $43.5 million.

Senator Murray: Of the $70 million?

Mr. Shannon: Yes; exactly what was in the plan. Of that, $9.4 million would have been for last year's loss and $34.1 for this year. That was the original contract we made with the government and we expect the company to come in right on budget this year.

The Chairman: Thank you very much, gentlemen, for being with us today.

Mr. Shannon: Thank you for giving us the opportunity to come here. We appreciate the interest that the Senate is showing in the Cape Breton Development Corporation and in Cape Breton generally. We look forward to more discussions with you in the future.

The Chairman: Our staff may be in touch with you requesting other information that we may need.

I would now ask the minister to join us.

Thank you very much for coming here today, Minister. It is a pleasure to see you again. I would ask you to make an opening statement, after which we will want to ask some questions. If you would like to introduce the people with, please do so.

The Honourable Anne McLellan, P.C., M.P., Minister of Natural Resources: It is a pleasure to be back before this special committee on the state of Devco.

With me today are Bill McCann, Acting Assistant Deputy Minister, Minerals and Metals Sector; and Bob Lomas, Senior Commodity Specialist, also with the Minerals and Metals Sector.

Mr. Sully, who was the representative of my department on the board of Devco, was with me the last time I was here. Mr. Sully is not here today because he is now in a new job at the Department of Transport where he is dealing with thorny issues of divestiture. We were obviously sad that we lost Ron from the board and the department, because he is one of the most knowledgeable public officials in this country on the mining industry. However, we are very pleased that he has made an important move within the public service of the Government of Canada.

The Chairman: What are you going to do about a replacement?

Ms McLellan: We will be replacing Mr. Sully as the federal government's representative on the board, but at this point I have not decided who will fill that position. I will be making that decision in consultation with the Prime Minister.

You had the opportunity to visit Cape Breton earlier this week and to go down the mine. Therefore, you have a good appreciation of the onsite conditions and realities of coal mining at Devco.

I understand that your order of reference is to examine and discuss Devco's annual report, its corporate plan, its progress reports and related matters. I also understand that you would like an update on the implementation of the recommendations from your June 1996 report.

I wish to begin by reviewing Devco's corporate history, then I will turn to progress during the past year and provide you with feedback on the recommendations in your June report.

Since Devco was formed in 1967, it has received more than $1.5 billion from the Government of Canada. In 1991, the federal government approved subsidies of $150 million over five years, ending, as we all know, on March 31, 1995. The government clearly stated that from then on there would be no further subsidies for Devco. The federal government directed the corporation to become self-sufficient by fiscal year 1995-96. Unfortunately, Devco did not meet this goal. This government's position is that the corporation must become commercially viable. I believe, as I hope we all believe, that commercial viability is the best guarantee for the future of Cape Breton's coal industry.

Devco's unions have also acknowledged that the corporation needs to be, and must become, competitive. As you know, the corporate plan approved last May called for changes to all aspects of Devco's operations: employment levels, new technologies, productivity improvements, better management and, above all, cooperation between management and labour.

I remember the lengthy discussions that we and you had with others last June in relation to the state of management-labour relationships. I believe that Mr. Shannon and Mr. White have spent some time this morning talking in detail about the items I have just mentioned. I can state unequivocally that the Government of Canada is confident that this plan will put the corporation on track to become commercially viable and maintain its important contribution to Cape Breton's economy.

The government agreed to provide up to $79 million in interim loan financing until 1998-99 to allow Devco to implement the required changes. Funding is being provided net of interest charges.

In the past year, we have seen considerable progress, despite the production problems encountered at Phalen and the consequent coal imports by Nova Scotia Power. I will provide you with a brief summary of the past nine months.

Absenteeism is down over 11 per cent in this past year and accident rates are down over 40 per cent throughout the corporation. I understand from your discussions this morning that the corporation may be providing you with further and better particulars relating to absenteeism. A detailed long-term mine plan has been developed for Phalen and the north-south mine plan is being implemented at Prince.

Contingency coal supplies have been identified at Phalen and areas for contingency production at Prince are being investigated. The John T. Boyd Company's multiple entry mining suggestion is being implemented at Phalen. We also have a new mine manager at Phalen and a re-organized senior management team. I had the pleasure of meeting that new mine manager just a couple of weeks ago. He instilled confidence in me in terms of his ability and his rapport and sense of spirit, which results from working closely with the men in the mine.

In addition, management is conducting a revitalization program at Phalen involving 15 teams that are focusing on a range of operational issues.

Finally, the technical changes that have been implemented at both mines will improve productivity and reduce the cost of coal production. We are on track to meet our financial targets for the current fiscal year, the first year of Devco's five-year plan.

During your hearings last June, several witnesses, including myself, suggested that mastering the technical challenges alone would not be enough to make this corporation successful, that labour relations would have to improve as well. This, I can assure you, is still my opinion. Therefore, I am extremely pleased that for the first time in the corporation's history, contracts have been reached with all of Devco's bargaining units without the use of an outside arbitrator. In addition, unions and management have reached an agreement on criteria related to early retirement offers as part of the human resource strategy. These are signs of progress in labour-management relations. However, I do recognize that we need to see further improvements. I expect that the quality management process being implemented at the corporation will make a positive contribution in this area.

Mr. Chairman, Devco is striving in all aspects of its operations to achieve its mandate. Union contracts are in place, both mines are operating and technical changes are being implemented. Last year, there were record sales to Nova Scotia Power despite sales being limited by production problems at Phalen, of which we are all aware.

While there is still work to be done, the unions and management are working together to meet the challenges they face. I believe this is one of the first times, if not the first time, that management and labour are working together, seized of the same challenge, and moving in the same direction in a constructive way. That is so important. As all the business people around this table understand, any entity, Crown corporation or otherwise, can achieve success only if its employees and management work together and understand the nature of the shared vision.

I believe all involved in Devco -- workers and management at all levels -- should be congratulated.

That, however, does not mean that everything is perfect at Devco. I am sure Mr. Shannon and Mr. White did not indicate this morning that we have yet reached at Devco a state of perfection, but I think we are well on our way to seeing an amazing corporate turn-around.

With regard to your June, 1996 report, your first recommendation recognizes the importance of having business experience on Devco's board. This is a recommendation with which I could not agree more. I heartily endorse this recommendation. This is a business. It must have the expertise of highly qualified business people. Business experience has always been, and will continue to be, a key consideration for this government.

When I appointed Mr. Shannon as chairman of the board and Mr. White as president, their strong business backgrounds were key considerations. However, there are other areas of expertise that are also important. For example, I recently reappointed Mr. Allan MacIntyre to the board. Mr. MacIntyre's position as the president of the National Health and Welfare Union gives him an important understanding of labour issues, a critical area for this corporation. I am moving as quickly as possible to fill other vacant positions, following Mr. Sully's resignation. In so doing, I will certainly consider the business backgrounds of the candidates as an asset.

Your second recommendation was that your committee should meet to examine Devco's progress reports. I am pleased that Devco has met its commitment to produce quarterly reports. I believe that the quarterly reports have increased management and employee accountability to the community and to the shareholders. I find these reports informative and I hope you do as well. Devco intends to continue issuing these reports as a means of keeping all stakeholders informed of the corporation's progress.

As recommended by your committee, a private accounting firm has verified these reports.

This committee also recommended that the Auditor General special examination include a review of Devco's quality management system, budgeting process and other aspects of the corporation's activities. I understand that the Auditor General will ensure that all of these areas identified by your committee will be addressed through either the special examination or Devco's regular annual audits.

You recommended that government provide an appropriation to Devco to cover half the cost of the unfunded liability associated with the non-contributory pension plan and payments to older preretirement and early retirement plans. The government's position is that these are legitimate operating costs and are therefore the corporation's responsibility. The beneficiaries from these plans are Devco's former and current employees.

Devco's financial needs have been addressed through the loan arrangements that the government approved in May, 1996. I also understand that the corporation's pension plans have benefited from the favourable performance of investments in 1995 and 1996, and that the corporation's liability related to the non-contributory pension plan has declined. Obviously, that is good news for all of us.

With respect to your recommendation on the environment, we do not see a need to comprehensively evaluate the corporation's environmental liabilities at this time. More specifically, Devco addresses and budgets for environmental issues during the corporate planning process. An environmental audit was undertaken in the early 1990s and Devco has remedied the environmental issues identified at that time. Currently, Devco is developing an environmental management system to implement its environmental policy. An environmental audit will form part of the environmental management system.

Your recommendation to sell more coal profitably in the export market is consistent with the strategic direction of the corporate plan that the government approved. I am sure that Mr. White and Mr. Shannon talked to you in some detail about that this morning.

Devco's mission is to become a profitable coal mining company. Reducing costs is key to its becoming profitable, both in domestic and international markets. The corporation has indicated that it is willing to compete in export markets if it is profitable to do so. Devco projects that exports will account for 30 per cent of sales by 1998-99.

Your next recommendation indicated that this committee's review of Devco's performance should include examining the progress of labour-management relations. I agree with the view that continued improvement in labour relations is crucial to Devco's success. As I mentioned previously, all of the corporation's unions managed to agree on contracts without the use of a mediator. This is a clear sign of progress. I expect that the quality management process being implemented will contribute to a further improvement in labour-management relations. Key components of that quality management process include the empowering of employees and the development of teams to address operational issues.

I come back to the point that it is extremely important to get past the old way of doing business in corporate Canada; namely, "us" and "them" -- that is, labour pitted against management. If you look here and elsewhere around the world, the success stories are those where labour and management understand they have a shared objective and a shared mandate. It is only by working together in a spirit of cooperation that all prosper. Therefore, I think that we are beginning to see an important cultural change in the way labour-management relations are conduct in Devco. This is an important and healthy sign that extends well beyond Devco as a discrete corporation. I think it speaks to the way we must do business -- and by "we" I mean all of us -- if we are to be a successful and competitive nation, whether we are selling coal or fibre optics or remote sensing equipment.

The committee also recommended a study to determine the potential and cost of opening the Donkin mine. I believe that Devco's management and unions need to focus on the most important challenge at hand, which I have already said is establishing the commercial viability of its existing facilities. I have heard arguments that Donkin is required as a contingency to back stop the existing mines. It is my view that the Donkin mine must be economically viable in its own right to justify development. The corporation will have to be in a position to finance it. Again, I should like to reiterate that I see Donkin not as a contingency but as a full-scale commercial mine whose development is based on sound business principles.

On the subject of future plans for the existing mines, Devco has developed a long-term mine plan for the Phalen colliery and the corporation has presented this plan to the unions. The plan details labour requirements and projected outputs for all areas of the colliery over the next five years. In addition, the corporation has decided to implement the north-south mine plan at the Prince mine. This change, supported by Devco's unions, is expected to add 15 to 20 years to the mine's life. I know that all of you in this room appreciate how significant that is in terms of the life of a producing mine.

I agree with your recommendation that Devco needs to adopt a long-term perspective on current and future mine development with contingencies. As I mentioned previously, Devco has identified contingency coal in the Phalen mine and it is identifying contingency coal at Prince.

Let me conclude by restating my conviction and that of the Government of Canada that Devco has made important progress in the past year. I will go beyond that and say that, because of the management and workers at Devco, we have gone well beyond important progress. We are seeing a potential corporate miracle. We are not there yet, but in comparison with where we were two years ago at Devco, the men and women who earn their livings at Devco and who live in those communities have done a remarkable job of understanding the challenge and seizing the moment. They have begun to deliver in the way that the Government of Canada always knew they could. We have the right management team; we have a contract with our major customer and a positive, new relationship with them; and we have the right business plan.

Most important, we are seeing a spirit of cooperation among unions, management and all stakeholders. Without this cooperation, Devco will not meet the essential objective of commercial viability. Its future is right where it should be -- in the hands of the employees and management of Devco. Devco's achievements and its ability to respond to this committee's recommendations indicate that the corporation has the potential to make its operations successful.

The ultimate objective is for Devco to maintain its position as a major employer in Cape Breton and a pillar of economic growth in this region of Nova Scotia. I think we are well on the way.

Senator Graham: Thank you, Minister, for your words of confidence in the future. Many of us around this table share the commendation that you have heaped on the management and the people who act in such a responsible way. We agree that much progress has been made in the past year. There are many people like Mr. Shannon, the chairman, who act in many volunteer capacities on our island. I am always grateful for that.

You talked about a potential corporate miracle. Do you believe that the Senate report of last June may have contributed in some small measure to that potential corporate miracle? Were you pleased that such a study was undertaken?

Ms McLellan: Let us be absolutely candid here.

The Chairman: A simple "yes" would be fine.

Ms McLellan: I will go even further than a simple "yes". It was not a secret that when I appeared before the committee last year I was not sure whether this special committee would be useful in helping Devco's management and employees keep their eye on the ball and move forward. However, over this past year I have changed that opinion. The Senate's recommendations further focused the attention of management and the unions on key issues that speak to the future success of the corporation. That was a very valuable service provided by this committee. Your recommendations identified the things that are needed if this corporation is to be successful.

Mr. Chairman, to make a long answer short, "yes".

The Chairman: Please give a long answer. You are doing very well.

Ms McLellan: If you are to succeed, you must keep your eye on the ball and stay focused. This Senate report helped keep the pressure on, and therefore I think it was a most valuable contribution.

Senator Graham: Be proud of the employees. The way in which we were welcomed when we were there for the hearings, and most particularly in Phalen mine on Tuesday morning, indicated the concern of the people about their future, their jobs and their community. I urge you to go there, minister. You have to be there to feel it. Meet the men and the women who work there. I am prejudiced, because I come from there. I worked for Devco. I think those employees are the most wonderful and dedicated in the world.

You mentioned the $75 million and the loan, and you said that the funding is being provided net of interest charges. Can you explain that?

Ms McLellan: The interest charges are being deducted from the amount of the payout to the corporation. That was done in the Treasury Board's submission and with the full cooperation of the senior management of Devco. Perhaps Mr. Shannon or Mr. White could speak to this more directly. However, at the end of the day, it provides Devco as a corporation with maximum flexibility and potentially reduces the interest payments that they are required to make on this repayable loan once the final instalment thereof is disbursed. The actual total payout over the three years represents $69 million as opposed to $78.6 million, which represents the interest that would be paid by Devco on that money during those three years.

Senator Graham: Was that deducted off the top?

Ms McLellan: Yes.

Senator Graham: Is that the usual way of doing business?

Ms McLellan: I do not work for Treasury Board, so I do not know if that is usual. However, that is the agreement made with management, the Treasury Board and the Government of Canada. It provides the corporation with maximum flexibility.

Mr. Shannon: I hope it did not show a lack of confidence. The loan was provided by the federal government to the Cape Breton Development Corporation on commercial principles. We are running a commercial company, and it would be the same structure of loan as would you get at the Royal Bank or any other bank, if you were capable of borrowing money from them, which we are not.

Senator Graham: Many references have been made to Donkin. One of our witnesses, a former mine management employee, described Donkin as the Crown jewel. Someone asked how much it would cost to update the Donkin study and he said that he and several colleagues could do it for out-of-pocket expenses.

Would you object to that? I know that it is not in the Devco plans at present. How would you feel if that were done and someone said it was wonderful that people think it is feasible, and someone came in from elsewhere and said they were prepared to put up all the funds to open and operate that mine as a private operator?

Ms McLellan: Send him along, senator.

I have a serious answer to that. First, I want to clarify the record, although it is not for me to do this. I believe that when Mr. Currie offered Mr. MacIntyre's services, he did not consult with Mr. MacIntyre. As you are probably aware, in the Cape Breton Post on Wednesday, March 19, there was an article headlined, "MacIntyre uninterested in study." Mr. MacIntyre said there is no way he could take on anything like that and that it would be a big job. There, of course, is the voice of experience speaking.

You raise a very serious point in terms of Donkin and the prospect of a feasibility study. John T. Boyd looked at Donkin but said that, to be able to make any firm conclusions about the viability of Donkin, a complete study, including a geological study, would have to be done. As you gentlemen are undoubtedly aware, that study will not cost $750,000. It is a $1 million a hole when you start drilling for a geological study.

Therefore, if you want to update other aspects of Donkin, I suppose you could, but it is all premised on the fact that you have a feasible body of ore that can be mined and for which there is a market. In the latter point, I am referring to the sulphur. At this point, for example, there are important things we do not know about even the sulphur content of that coal.

To do the kind of study that Mr. Boyd and others believe is important to get a true picture of the long-term viability and profitability of Donkin as a commercial operation, would be fairly costly.

With regard to your point about some in the community or elsewhere, individuals or private sector companies, who wanted to come forward and offer to do a feasibility study of Donkin with the long-term view, based on positive results from that study, that they would open some kind of private sector operation there, I would be most interested in meeting with those people and receiving such a proposal.

It must be emphasized that Devco is not interested in doing a feasibility study. It is not part of the Devco corporate plan. Devco must keep its eye on the ball. We have lots of coal in Phalen and Prince. We have to work out some of the technological problems. Immense progress has been made there. We have many years of production in Phalen and Prince. Our task, the task of the management of Devco and the workers, is to make Devco profitable.

However, senator, let me assure you that if there are those within the Cape Breton community or elsewhere around the world who would be interested in doing a feasibility study and talking to the Government of Canada about the prospect of pursuing, as a private sector venture, the development of Donkin, I would be delighted to meet with them.

Senator Buchanan: Thank you for being here, minister. You are very articulate and very persuasive. Of course, I would have expected nothing else from a fellow Nova Scotian. Although you are very persuasive and articulate, you did not persuade me of some of the things you said. Let us concentrate on Donkin for a minute.

I have been living with Donkin since 1978. No drilling is required for Donkin. Five to six million dollars was spent on drilling the Harbour seam and the other seam in Donkin in 1979-80. I know about that because the province put up $5.5 million to bring the drill ship in. When our good friend Allan J. MacEachen came back into government in 1980, he had the federal government repay most of that money to the province of Nova Scotia.

The province of Nova Scotia, assisted by the federal government in the early 1980s, completed a comprehensive study on the coal industry of Nova Scotia, primarily Cape Breton, including the Donkin mine. The $1 million you spoke of per hole is probably correct in today's dollars. I believe there were nine or ten holes drilled at that time. That is all paid for and the assessments were made.

You mentioned the sulphur content of the Donkin coal in the Harbour seam. Some 3,000 tonnes of that coal was thoroughly assessed in 1985. It was found that with selective mining methods and new technology the coal would contain approximately 1 per cent sulphur, although that could be decreased if the coal were washed.

As well, you mentioned that a complete feasibility study is required at this time. That is not correct because in 1985 or 1986 it was decided by Devco to flood the two tunnels that had been completed at a cost of $88 million. There was a controversy in Cape Breton at the time, but most people who knew coal mining agreed that the only way to preserve those two tunnels was to flood them. We were consulted at that time by Devco. Our department of mines agreed that those tunnels should be flooded to preserve them.

Remember that at that time we had No. 26, Lingan, Phalen and Prince operating in Cape Breton. There was no question that there would be ample production to meet the requirements of Nova Scotia Power and export markets at that time. It was well known that within the next 10 years, depending on what happened with the mines in Cape Breton, there should be an update on the studies for Donkin.

The engineering and drilling work was pretty well completed. I think you will agree that the companies that were involved were the best in Canada. Montreal Engineering and Kilborn Engineering did exhaustive work on the Donkin mine. John T. Boyd did not do such exhaustive engineering work. However, it was decided at that time that there would be an update in the next 8 to 12 years, depending on what happened with Devco.

No. 26 and Lingan closed, leaving the two collieries, Phalen and Prince. The idea was that the studies of 1979, 1980, 1981 and 1985 done by Associated Mining Consultants would be updated. All we have asked is that those studies be now updated, not at a cost of millions of dollars but at a cost of hundreds of thousands of dollars.

The provincial government of Nova Scotia, through its premier John Savage, has said that it has no responsibility because this is a federal responsibility. There are approximately 100,000 people in industrial Cape Breton and the provincial government has a responsibility to them.

During our terms in government, we accepted responsibility. We looked after those studies. Most of the money was provided by the province, with some contribution from the federal government. We looked after the drill ships, and we also worked very closely with Devco over the years on coal mining in Cape Breton. The province does have a responsibility. They cannot slough it off by saying that coal mining has been a federal responsibility since 1968. That is nonsense. It is a provincial and a federal responsibility.

We are asking only that the provincial government and the federal government, not Devco, cost share an update of the Montreal Engineering study, the Kilborn study and the Associated Mining Consultants studies. I contacted two of these companies and was told that they would be prepared to update their studies because they have all the engineering work in their files. They have the studies of the drill ship assessments and the assessments of the coal, which were done in 1985, showing the sulphur content to be in the range of 1 per cent with selective mining.

Do you not think that the provincial and federal governments should now take a look? Even Devco is saying that the Phalen colliery could have a longevity of 15 years. However, others estimate it at five. I think it is more than that. Others estimate it at eight to ten.

There is a risk here. Surely it would be responsible on the part of the federal and provincial governments to update those studies now that there has been a 10- or 11-year lapse since the studies were completed. If a situation developed in five, six or seven years' time, you would have something to look at.

Ms McLellan: Senator, you raise many important issues. I have no doubt that the companies which did studies in relation to Donkin some years ago were first class. Nothing I am about to say casts any doubt on the quality of the work done at that time. However, at considerable expense, the Government of Canada hired John T. Boyd, probably the world's leading mining company in terms of looking at aspects of mining operations and their feasibility, to do a major study of Devco. John T. Boyd has done a great deal of work in the United Kingdom, the United States, this country and elsewhere. Included in that study was the state of the knowledge, the core samples and what was done in the years that you have just identified.

At this point, I can only operate on that which the Boyd consultants told us at the time. They felt that the original core samples were not complete and that better core samples would be needed in order to define the extent and quality of the resource. They also went on to say that they felt that the exploration drilling results that they had done, as you have indicated --

Senator Buchanan: They did not do them.

Ms McLellan: No, but as you indicated, they were done by others. Those results drew an inference. That is all it is. They drew an inference that the Donkin washed coal quality would not meet the requirements of NSPI today.

Senator Buchanan: That is not correct.

Ms McLellan: Those were among the conclusions. I am the first to concede that Boyd did not do a detailed study of Donkin. However, it would seem to me that responsible business people and, I would think, even a responsible government, would make decisions about Donkin proceeding and the timing of that only after they were satisfied that they understood what they were dealing with: the exact definition of the resource, the quality of the resource and whether, after being washed, there were likely markets.

Of course, environmental standards are continually moved not only in this country but around the world. There will be further pressure on those who generate power from coal to ensure that their coal technologies, including their products and their methods, are of the highest standard. We all know around here that sulphur is a big environmental problem. It is a problem which exists with certain coal resources here in Canada and elsewhere.

At this time then, it is not useful to distract Devco, a Crown corporation, which must achieve commercial viability in order to maintain all those things that we care about so much in Cape Breton. It is not useful for them to be diverted to look at Donkin when they have a task ahead of them of ensuring that Phalen and Prince are both operating at maximum potential. They are identifying contingency coal. That is important.

I have every confidence that their business plan, as laid out by Devco, is a proper one; a reasonable one which will deliver to all of us the results that we want for the people who live in Cape Breton.

To go back to Senator Graham's point, if there are those who would like to come forward and discuss with me the possibility of doing work in relation to the ore body at Donkin and the ability to mine it based on known mining technology, I would be happy to discuss the possibility of doing that as a private sector initiative.

Senator Buchanan: I do not know if you have read the studies completed in the early and middle 1980s. They were expensive studies, made much more expensive when the cost of the drill ships is added in. The studies were conducted by professional mining engineers from Montreal Engineering and Kilborn Engineering, all very well known in Cape Breton as being tops in the engineering profession. Those people were not from Cape Breton but were very much involved.

They did a comprehensive study including an engineering study, a feasibility study and cost studies. The Cape Breton Development Corporation itself completed in 1985 an assessment of the coal and determined that the coal, with selective mining, would contain in the range of 1 per cent sulphur. Devco itself said that in its annual report of 1985. It was also reported in the Cape Breton Post of the day.

It is not quite correct to say that all this work needs to be done. What is needed is an update on the costs from those days to the present day to determine the cost of proceeding with Donkin. We are not saying it should go ahead now. We have not said that in this committee.

I suggest that you have your officials look at what the Cape Breton Development Corporation itself said in 1985 about the quality of that coal. Have your officials look at the competency and the quality of the people who were involved in these studies in the 1980s. You may change your opinion that these were just fly-by-night studies. I know that we paid a lot of money for those studies.

Ms McLellan: I said at the opening of my comments that I was in no way calling into question the quality of the studies done at that time. Boyd is calling for further exploration in certain areas. For example, with regard to selective mining techniques, there is a genuine issue as to whether that would be possible in relation to Donkin. Again, Boyd raises that question.

We have all learned from sorry experience that before moving forward with a venture it is important to ensure that we understand what we are doing, the quality of our resource and whether there are markets. We are not talking about now or five years from now, but about what is likely to be the state of play for coal of this quality 15 years or 20 years from now.

We need to look at the state of the existing technology and where that might go. All those kinds of things are of interest to good business people as they decide whether it is feasible to proceed with Donkin and, if so, how.

The Boyd consultants have raised some serious questions. We may well have some of the answers to the questions. Although Mr. Boyd certainly was aware and studied in great detail existing work that had been done, some questions have been identified.

At the end of all this, we can almost put that to one side because we are talking about Devco here today. Donkin is not part of the business plan of Devco. The managers have made that absolutely clear. It is a decision the Government of Canada supports, but, as I have said in response to Senator Graham, if there are others who want to enter into discussions with the Government of Canada about updating or further enhancing the feasibility studies done in relation to Donkin with the prospect of developing them through some private sector initiative, I am more than willing to discuss that and to make available that which we have.

Senator Buchanan: Minister, if tomorrow or next week the Province of Nova Scotia changed its mind and decided to cost-share with the federal government and to update, would you agree to that?

Ms McLellan: That would be up to the province of Nova Scotia.

Senator Buchanan: They might just change their minds after today.

Ms McLellan: I am glad you raised that point about the province. I know your point is in relation to the Devco study but, as we have gone through these past two years which have been difficult for many people in Nova Scotia, I have always found the government of Nova Scotia to be very cooperative and open and available to sit down and talk about these issues and to talk to the local people in Cape Breton. I do not want to get back into a discussion of Donkin, but regardless of what may or may not happen today in Nova Scotia, the government of Nova Scotia has always dealt with me and with other federal government representatives on this file with openness, transparency and a great deal of respect.

Senator Murray: Minister, I do not recall that the John T. Boyd report found flaws in the geological assumptions or the technical side of the studies that were done in the late 1970s or early 1980s. If they did, they did. I think it would be incumbent upon John T. Boyd to identify what the flaws were in the studies that were done at that time. I recall two things about the John T. Boyd report, and I quoted part of it at the committee last year.

First, they were doing a study of Devco, as you have pointed out. I got the impression that they took a sideways glance at Donkin as they did their study of Devco. They said that at current extraction costs -- and they may have also said "given the state of current markets" -- Donkin is not on at this time. Indeed, they said that in the foreseeable future Donkin is not on. I take that seriously. Given the previous studies and the possible importance of Donkin in the future, that statement has to be looked into. It has to be examined very closely.

Another thing they said, which I found condescending almost to the point of being offensive, was that Donkin would just be a distraction at this time, as if Cape Bretoners could not walk and chew gum at the same time.

Your position last year, as this year, is that you do not micro-manage the Crown corporation. You appoint managers in whom you have confidence and you let them get on with it. I think that is absolutely the right position for a minister to take. It would be absolutely unacceptable to find ourselves in a position where the community, the unions or whoever, think they can do an end run around management and go to the political authority.

There are issues, and specifically there are recommendations in our report, that must engage you as the minister and the government. Two of those issues are the question of the old social costs and whether the Government of Canada ought to take a portion of those off the books of Devco. We had a long discussion about that in the committee when we were preparing our report. Eventually, we agreed upon a figure of $40 million, I believe, that the government could properly take off the books of Devco. We unanimously recommended that that be done.

The second issue was Donkin. As I said to Mr. Shannon earlier, if history repeats itself at Phalen -- if we get into big trouble at Phalen and Phalen has to go down -- there goes your industry. You are the sole shareholder here in right of the Government of Canada. What happens to the coal industry if the worst happens at Phalen should be a legitimate concern of yours. In the past year, a series of work stoppages and incidents have occurred there that have not been very reassuring with regard to the future of that operation.

I agree with you that Donkin would have to be economically viable. You said that you saw it as a full scale commercial operation based on sound business principles. I agree with that, too. However, that is what we want to try to find out as best we can by updating the feasibility study and, in particular, the economics of the thing.

If the answer comes back to us after a fair study that Donkin is a non-starter, then not only you but you and all your colleagues will be looking at a very serious problem in terms of the economy of Cape Breton and how you will cope with much worse unemployment than exists there today. It is said that there is 50 per cent unemployment there now. There is nothing on the shelf at the moment of which I am aware to take up that slack.

I leave those two issues with you, minister, in terms of your responsibility and that of the government as distinct from the responsibility of management. First, we recommended that the old social costs be taken off the books at Devco. Second, once again, why not update that study and establish whether Donkin would be an economic proposition in the foreseeable future?

Ms McLellan: When you speak of social costs, I suppose you are referring in particular to the unfunded pension costs.

Senator Murray: Yes.

Ms McLellan: As I mentioned, we believe that these are legitimate operating expenses of Devco, just as they would be with other corporations. Therefore, it is important that those liabilities are dealt with through the revenues of Devco and not borne by the Canadian taxpayer. That is the position of this government.

I certainly understand your position. However, I think Canadian taxpayers have made their views very clear. Those views have been echoed by the Minister of Finance and other of my colleagues in other settings when talking about the role of government and getting government right.

In its corporate plan, Devco has budgeted for these factors. Therefore, I think the corporate plan is a responsible one. It points us in the right direction. It speaks to Devco taking responsibility, as any other company must, for its liabilities. That is so important in terms of changing and adapting a corporate culture. That is an ultimate responsibility for management and employees for their future and their well-being.

The position of the government as it relates to those liabilities is consistent with that basic philosophy and belief in the ability of management and the men and women who work at Devco to deal with this issue and have a profitable company.

With regard to both Phalen and Prince, technologies continue to change. In fact, in both Phalen and Prince management is working with the employees to implement new technologies and new ideas. There will be more of them over the years which, no doubt, will successfully extend the life and increase the profitability of both Phalen and Prince.

As has been indicated already by Mr. White and Mr. Shannon, they are working on the problem of contingency coal so that the situation which existed in the past year will not exist again. Based on my experience with the mining industry and companies I know well and have spent time with, that is exactly the way they do business. That is why I have such confidence in the corporate plan of Devco.

There are other mining companies around the world, coal and other types, that encounter problems from time to time. It could be flooding, roof collapse or other things. It is expected that management and employees have contingency plans in place and work to prevent those things happening in the future.

Again, I am pleased to see that Devco is coming to grips with the fact that it is a business. It must operate like a business and it must accept the new corporate culture, not only of this country but of the world.

I can do no better than say at the end of it all that I have confidence in this corporate plan, in the management and in the employees of Devco.

The Chairman: Thank you very much for being with us, minister, and for your forthcoming answers.

The committee adjourned.

---