Proceedings of the Special Committee of the Senate on
the Cape Breton
Development Corporation
Issue 1 - Evidence - November 18 Sitting
OTTAWA, Tuesday, November 18, 1997
The Special Senate Committee on the Cape Breton Development Corporation met this day at 4:05 p.m. to study the progress reports of the Cape Breton Development Corporation and related matters.
Senator John G. Bryden (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, on your behalf, I should like to welcome the witnesses from Devco. We appreciate their taking the time to appear before us. From what I read in the press, I understand there are some other things that they could be doing besides being here with us.
It is my intention to allow as much free flow of information and exchange as is possible. However, before we start, I shall make some suggestions will apply, with flexibility, to all our hearings and all our witnesses, and should point out that I have discussed the parameters with the Deputy Chairman, Senator Murray. I suggest that each organization that appears before us, if it wishes to make a statement, and we hope that they do, would try to confine that statement to approximately 15 minutes. We would then enter into a question and answer forum. In that regard, I suggest to senators that we attempt to keep our first round of questions down to approximately 10 minutes, in order to give everyone a chance to ask questions. If someone is on a line of questioning and needs two or three more minutes, then that is fine. We will continue doing that until, hopefully, we have exhausted the topic and everyone has had an opportunity to participate.
Mr. Shannon, please proceed.
Mr. Joseph P. Shannon, Chairman of the board, Cape Breton Development Corporation: Honourable senators, I would like to introduce two members of our board of directors sitting in on the hearings this afternoon. Jim MacLellan, who is from Glace Bay, is a lifelong employee of the Cape Breton Development Corporation. He started off as a miner and eventually was manager of the Prince mine and the Number 26 mine. He is now, incidentally, one of the leading members of the Men of the Deeps Choir at Devco. Al McIntyre, formerly a member of the Glace Bay town council, is President of the National Health and Welfare Workers Union. He lives and works in Ottawa now.
Do we have one hour, Mr. Chairman?
The Chairman: No. The meeting this afternoon is devoted entirely to the discussion of Devco. We could go to midnight, but we certainly hope that will not be necessary.
Mr. Shannon: I notice that there are several new members on your committee -- at least on this particular issue; for that reason I would like to take you back to the situation at the Cape Breton Development Corporation as it was a couple years ago.
In 1994, a major rock outburst in Number 3 Deep at the Phalen colliery virtually tied up the mine. It stopped production and caused quite a bit of chaos and confusion in and around the Cape Breton Development Corporation.
At the time we became involved, there was not much direction to the company. The board of directors was trying to run the company. Management was trying to run the company, and I think the union was trying to run the company. However, I do not think anyone was actually running the company, and it was slowly winding its way down into the ground towards ultimate collapse. We were also at the end of a five-year period in which the former federal government had given the corporation $155 million to become self-sufficient. They were at the end of the five-year period and the company still was not self-sufficient.
In 1995, when we became involved, no budgeting process had been set up in Ottawa for allocation of funds from the federal government with respect to the operation of the company. We were also in a situation with our major customer whereby, for various reasons, they gave us notice to quit. There is a provision in the contract under which they are allowed to do that. They gave a two-year notice to quit the contract, which meant that the contract would have expired in the spring of this year, 1997. At the same time, they were not paying their bill. They were paying us the price for the coal that they thought they should be paying, which was about 60 per cent of what we were invoicing, so we were having a very difficult cash-flow situation at the company. The company, besides running out of coal, was running out of cash to keep the operation going.
Since then, we have been able to make some positive changes. There is some good news at the Cape Breton Development Corporation. We were able to negotiate an agreement with the Nova Scotia Power Corporation, our main customer, to renew a five-year contract. In that contract, there were discounts in 1995, 1996 and 1997 totalling 18 per cent. In 1998, there will be an increase in the price of coal, and in 1999 there will be an increase in the price of coal. We now have a very good relationship with our customer.
Those senators who were on the committee when we were last here will remember that we were talking about a program we were going to develop with the Nova Scotia Power Corporation for the export of coal. We put that program in place, and it is working very successfully. We are pleased with the results of that program.
Over the last couple of years, we have put decentralization program in place, by means of which we have moved most of our professional people out of the general mining building and into the areas of the company where they should have been working in the first place -- that is, out at the pits and the wash plant. As a result, we have our engineering staff and geology staff at the sites on a regular basis, and they are underground on a regular basis, if not daily.
Through that program, we have also strengthened the human resource aspect of each location. As a result, most, if not all, of the problems created at the sites are being dealt with at the sites with the local executive of the various unions and the local management of the company. Labour relations at the local level are certainly showing a significant improvement over what they were. Some of the things they have been able to accomplish are a credit to both the union leadership and the management at the local level.
We also talked to you about introducing a continuous quality improvement program. That program is now in place. It is on its way, winding its way down. We have identified, over the last year or so, significant savings, some of them one-time savings. Some will be savings that will recur to the company on an annual basis.
We have five or six teams in place now, and the teams are working well, to the point where the whole 8 East Wall set-up -- the recommendation for the purchase of equipment, the design of equipment, et cetera -- was all carried out and recommended by a continuous quality improvement team made up of miners electricians, mechanics, superintendents, foremen and the people who work on the site. If you are interested in that program, Mr. White can develop that a little further for you.
Last year, when George White joined the company, the focus was on the production aspect of the operation. We have been able to make significant improvements in that area, to the point where we have been able to work through more than 30 weightings without losing production, whereas, in the past, we would have lost production in most of those cases. Again, that is as a result of the men and the management working together to solve some of the problems in the implementation of new programs and processes in the system.
Let me say one more thing about development. If you look at production, you find that, when we are in a manageable environment, we achieve our production numbers; but when you look at the company you see that we are not making our production budget. However, when you examine the budget and relate it to the ongoing activities, the loss in production can clearly relate to a geological problem which is beyond the control of management. We are having many geological problems. We are in a situation which I am sure Mr. White will discuss, and there are other problems at the mine which he can also talk about.
We are happy with the progress we have made in that area. The focus this year is on development. In the last quarter, we manned 96 per cent of the shifts we had budgeted for development. Unfortunately, for whatever reason, we only got about 46 per cent of the production. Mr. White can deal with some of those issues as well.
All in all, Mr. Chairman, some positive things are happening at the corporation. Clearly, some major issues are of concern to us, issues which will affect the longevity of the operation. We are dealing with them as they arise and are trying to manage what we can manage.
One of the recommendations of the first Senate hearing was that we must be able to adapt to different situations. In the mining business, particularly at the Phalen mine, almost every day you have a different environment within which to work and a different crisis situation with which you must deal. We have been trying to adapt to those circumstances as and when they arise.
There are things that we could and should be doing better, and there is no question that, given time, we will continue to make improvements in all aspects of the corporation. We are in the second year of the turnaround of a major, dilapidated company, a company that was on its last breath, and it has not been easy for anyone, including all of our employees and the families of our employees and the communities generally.
The other recommendation that the committee made in the beginning was that we should have good and open communication with all the stakeholders, and we have been doing that. We have regular meetings. We finished a series of meetings last week as a result of our six-month quarterly reporting period. We had a board meeting, and then we had meetings with the union executive. We had meetings with the municipal government and the business community and the clergy. This is the same group of people we have been meeting with over the last several years. We have been communicating to the best of our ability with the community and with all the stakeholders, including members of your committee, Mr. Chairman, I might add, when the opportunity presents itself to do that.
The Chairman: Thank you. Mr. White, did you want to add anything, or do you want to deal with your matters as the questions proceed?
Mr. George White, President and C.E.O., Cape Breton Development Corporation: I know some of the committee members have actually travelled to our operations, and some of them have gone underground in our operations. I should like to recognize that. That is a valuable deed on the part of members of the committee, and I hope that it helps the committee in its deliberations, as those members have firsthand knowledge not only of our conditions but also of our people.
I am available for questions.
Senator Murray: I think we had better start by trying to get a fix on what is happening at Phalen. To the extent that you are able to do so, tell us what the future holds for Phalen. We have all seen the media reports in the last few days about the problems that have occurred there. It must be a terrible disappointment for you and for the workforce.
I am aware that other problems which have occurred there have met with heroic efforts on the part of everyone. I also recall that you told us in respect of those problems that you were confident you could work your way out of them. However, this seems to be a new problem of a new order of magnitude.
Mr. Shannon was quoted in the media, I presume correctly, as saying that it appears that the life expectancy of that mine is rather less than everyone had hoped it would be. Indeed, the expectation that he raised in the media was that the mine might have a life expectancy now of somewhere between seven and ten years. Could you clarify that for us?
Mr. White: Yes. I know that you know this, but we do have two mines, Prince mine and Phalen mine. The Prince mine has been operating quite well for a long period of time, and we are encouraged by the results there. That has not been as troublesome as the Phalen mine. I just wanted to recognize that for the employees at Prince.
Senator Murray: According to the numbers, it appears that Prince has exceeded the production targets you had set. Is that true?
Mr. White: Yes, and we are very close to the development targets. We have one particular section to set up, and I believe we will then make our development targets there.
Senator Murray: What about Phalen?
Mr. White: At Phalen colliery, after our vacation period in the middle of the summer, we started up our 3 Centre Wall face and operated there quite well continuously for about four months, so that, in the second quarter of this year, we reported more or less a break-even situation. With Prince running fairly well and Phalen 3 Centre up in operation averaging 50,000 to 60,000 tonnes a week, we were able to show some pretty positive numbers at Phalen.
Three and a half weeks ago, we had a roof waiting on 3 Centre which caused a collapse of the wall face there, and that was accompanied by a large in-rush of water which made the working conditions on the face quite difficult. We are in the process of cleaning that up right now. We are about 40 per cent through the clean-up. We have had that happen before, and we have done clean-ups which are more difficult than this one. However, we did not expect that to happen, and, as a result, it has been discouraging for everyone.
While we will be back up and running by December 15, there is the chance that we could experience more of those situations on 3 Centre. However, in talking to the people, my impression is that there is a good chance that we will not have a recurrence. In any event, we will make some changes to try to improve that situation.
In the last four weeks, we have encountered a number of rock gas outbursts on the main slopes at the mine. We did have a rock gas outburst in 1994 which stopped the development of the slopes for many months at Phalen.
As part of our five-year plan, we wanted to get the slope drivages going again, and we implemented a plan to do that. We put in procedures for safe operation of the machinery on these slopes. We purchased the equipment, and we set it up, and we started the drivage.
We have a number of different slopes, and No. 3 slope was the one where we had the first rock gas outburst in 1994. We knew there was the potential that we could have them elsewhere, and, in fact, on No. 4 slope, we have had four of these outbursts within the last month or so. The troublesome thing about them is that they are getting more and more severe. The first one almost went undetected. Our geologists and our examiners noticed that there was something different about the section after a round was shot. They did some investigation and decided that an outburst had occurred. However, the next one was a bit more intensive, and the next one was even more so, and the last one was as intensive as the one we had on No. 3 slope a number of years ago.
The rock gas outburst is a phenomenon that occurs in coal mines all over the world; it is quite difficult to deal with. We have looked at a number of different scenarios. We need to do some exploration. We will do a drilling program in the area on No. 4 slope. The phenomenon is typified by certain rock conditions which we can measure. We can do a drilling program to determine whether that rock is continuous for a long piece or whether it is a short piece of that kind of material through which we could advance over a period of time.
There is another thing we will do in the process of developing the next wall face at Phalen. We intend to do some seismic work there to determine whether these kinds of conditions exist in virgin territory within the mine.
The worst-case scenario is the one you mentioned. If we did nothing as far as further development in the mine is concerned, then we have resources there, 11 or 12 million tonnes, that would be mined over a period of time, and that would dictate the life of the mine. That, however, is the worst-case scenario. We do have time and we do have exploration in mind. There are things that we can do in the meantime to see whether there is a way around this problem. It will take us some time to do that.
That is pretty much where we stand today with Phalen. We have a number of conditions which are not easy to deal with but which have been dealt with reasonably effectively to allow us to continue our operation. The first is the roof weightings on the wall face. We cannot have six or seven of them a year but we could manage a couple a year, and that is what we are trying to get to. With regard to the water problem that has plagued us from the beginning at Phalen, we are continuing to improve the water collection systems, and I am sure we can control that over a period of time.
The problem of rock gas outbursts is a different phenomenon. It is something new and it is worrisome, particularly to our employees.
Senator Murray: It is dangerous, is it not?
Mr. White: We have codes of practice associated with it. We have a lot of regulations, and our safety committees are working with us on all these things; so it is not dangerous, in the sense that we do not allow people into those sections of the mine and we strictly adhere to those codes of practice. In fact, we did that during the outbursts that we had. Although they were unexpected at the time, all of the safety precautions were taken and we did not have people in those sections at the time. However, they are a risk to the operation in the sense that, if you cannot control them, it becomes very expensive and uneconomical to run your mine. In practice, what most people do in these situations is plan the mine to avoid them. If we have the opportunity to do the exploration that is required, we will discover any problem, thanks to our drilling program and the seismic work we will do associated with the new development of the mine.
Senator Murray: When you were here in March, we spoke of the 15 year life expectancy of Phalen and a strategy that you would develop for that. I take it you would not be as confident about that today as you were then.
Mr. White: We now know more. We have done more. In fact, it is the implementation of our plan that has allowed us to determine that. We did not have any drivages on the slopes so we could not determine that there were any outburst-prone areas. Because we implemented the plan, we now know that. We did not know there was a stone intrusion, for example, in our No. 4 Centre Wall face, but because we implemented the plan, we found that stone intrusion.
All that is new information and that is what mining is about. As the new information becomes available, we have to plan around it.
Senator Murray: I agree with you. It could be worse. The nature of the industry, of mining, is such that sometimes there is quite a sudden development.
Mr. White: Yes. The fact that we have some reserves that are blocked out, the fact that we have some knowledge of the existing areas that will be mined out over the next few years, which we can do safely and effectively, gives us some time to do the exploration that is required.
Senator Murray: There is an old adage that says you should hope for the best and prepare for the worst. Assuming something along the lines of the worst-case scenario, being perhaps only a seven year life expectancy for that mine, what are you doing about revising the corporate strategy?
Mr. White: First, we are running a number of cases. We have implemented a business planning process for the entire company so that we can quickly take this information and make some assessment of what it means from a human resources point of view, from a financial point of view, and from a security-of-supply point of view. We now have the ability to run those cases reasonably quickly. I would say that within three or four months of this whole thing occurring, those reassessments would be done. However, today, we basically have two extremes. We have the plan that we put in place with the knowledge we had a year and a half ago, which says we have a 15-year life span, and we have the other extreme, which is that you stop development today and only work on the resource that we know is blocked out today, and that is a seven-year span. So the life of the mine is somewhere between those two.
Senator Murray: I presume you will be communicating your views on future strategy in due course to the shareholder. I am speaking of the minister.
Mr. White: Yes. We have a public process in place to consult with the community, and I think we did communicate very quickly the situation that we found ourselves in, or we tried anyway. We were not trying to alarm people when we said there was a serious problem there, but we did tell people immediately that there was a serious problem and gave them some idea of what the length of time would be.
Senator Murray: I am not going to ask you or Mr. Shannon any questions about the details of the arrangements or background to them with Donkin Resources Limited. Senator MacDonald may want to do that when his turn comes. However, I do want to ask you one question as a policy matter as a result of the situation in which you now find yourself, and that is whether you have cause to reconsider your position about Donkin, which was, the last time you were here, that we should not even be thinking about it because it would distract people from the important goal of putting the present operations on a paying basis. Have you changed your mind about that in view of the possible lower life expectancy of Phalen?
Mr. White: All of those things are open for consideration, but I still feel that we have a major responsibility within our own operations to put our house in order before we consider options that are outside our house, if I may put it that way. In order to be successful in the mining business, we have to continue to implement the basics of our plan, and that is to improve productivity, reduce our costs, and that kind of thing. If we do not do that, it does not matter what option we pick. We will end up with the same situation we have today. That is my focus.
Senator Murray: I understand that, and we will have the minister before us, I think, in early December. I should think he would want to know from you what your advice is on that matter, by which I mean Donkin, and whether the previous position should be reconsidered.
Mr. Chairman, I am very conscious of your admonition about time. I had actually written out my questions and I have not gotten to them yet. Half of them were about 1996-97 and the others were about 1997-98, but I am prepared to stand down now and come back in a second round.
The Chairman: I think we would do that in order to give you a break and perhaps to get into a different line of questioning.
Senator Butts: I want to continue where Senator Murray left off. I would ask a question of Mr. White first of all. You were quoted on October 28 in the media as saying that the problem at Phalen was a mechanical failure. I liked your analogy about the CN ferry being stuck in the ice, but when the ferry was stuck in the ice all they needed were some helicopters to drop some help and then wait for the ice-breaker to arrive. Are you still of the same opinion, that all you need is a few helicopters or something to rescue you?
Mr. White: At the time, I was responding with the information that I had. We actually had two conditions, and there is a bit of technical information that I need to pass on. When we are in these kinds of situations, and our experts -- our geologists and engineers and miners -- tell us that we have to continue, then we cannot stop our operations. When the roof is able to "take weight," as we refer to it, we must work continuously while that event is taking place. As Mr. Shannon mentioned, we have done that many times. In this particular situation, we had two mechanical failures on the wall face: One with the mining machine and one with one of the conveyers associated with the wall face. There were some delays in getting them fixed. While those delays occurred, we had a fall on the face which caused some stone to fall into the mine. That stone interfered with the operation and had to be cleaned up before we could continue. That is what we were facing when I made those comments.
Subsequent to that event, in the process of cleaning up we experienced secondary falls. That is when we had the major problem on the face. As a result, we have been down for quite a period of time.
We are trying to get word to our employees, because we do not always just report to the media. Sometimes we report to our employees, and the media then picks up that information from the employees. They call and they want to know what is happening. We have made some policies whereby we give them as much information as we can. In that circumstance, we had some problems after I made those comments. That is what happened.
Senator Butts: So it was an act of God rather than a mechanical failure?
Mr. White: The mechanical failure set the whole thing up, as it does in many acts of God. Things are set up for reasons. If we had not experienced the problems with the machinery, I do not think we would have had the problem at all. In that case, we would be sitting here with some pretty nice results to show you. However, that is not the case. We have been out of production there for three and one-half weeks.
Senator Butts: Mr. Shannon, are you as pessimistic as the media is portraying you to be?
Mr. Shannon: We are very concerned about the latest information that we got from the Phalen mine. The Phalen mine is about 10 years old now. It was originally scheduled to be in operation for 20 or 30 years.
The problem that we ran into two weeks ago is the same as what happened in 1994. It is almost exactly the same situation. I am also told that it was the same problem that happened at 26, at the same level. There must be something down there at that level. Mr. White could talk more about that than I could. It seems there is a barrier there and that it will be very difficult to get through. As Senator Murray said, it is dangerous and the board is concerned about the risk. First and foremost, we do not want any situation where any of our employees would be put at risk unnecessarily to try to make the mine work. That is the major concern, namely, that we do not want anyone to get hurt or trapped or killed, or whatever, in the mine. The board is deeply concerned about that.
When you work and work, as our people are doing -- and, a lot our guys are working long hours, most of them working five, six, or seven days a week -- it seems like you are always cleaning up a mess because of the roof falls and the water problems. We then have this. It is discouraging, but, as the president said, we will look at every option available to us.
To return to Senator Murray's comments about Donkin, we will look at various combinations of tonnages on an annual basis out of the Phalen Mine; we will mix that with various tonnages coming out of the Prince Mine. We will probably look at importing some coal to blend with ours, as well as the coal coming out of the Donkin Mine -- the private sector being the most likely source. Then, from the perspective of the corporation's doing it at Donkin, we will want to see what the consequences would be. Those are all the things that we will be doing.
Nothing is sacred. We will do everything we can while continuing to look for ways around this problem, as Mr. White has already indicated.
Senator Butts: I agree with you. It is very unfortunate. God is being tough on Cape Breton and on us.
Mr. Shannon: Between the budworm and the seals, the fish disappearing and the outbreaks, yes.
Senator Butts: I agree with you that, generally, you have helped, in that there are fewer accidents and there are lower rates of absenteeism. I was especially struck by the amount of training that has been taking place lately.
Do you have reserve funds or unspent funds for Phalen so that if it comes to pass that you cannot use it, you could use those funds to do something else like Donkin?
Mr. Shannon: This is something that is in the early stages of this examination and I do not want anyone to misinterpret what I am about to say. However, in the event that there is no long-term future for the Phalen mine, there would be an opportunity for the company to produce low-cost coal out of that mine. I do not know what day or year or month that will take place, but it is obvious that that will happen. The development will have been done and the coal will be extracted, so there will be money left over if that situation develops. I am not saying that it will, but if that situation develops there will be inexpensive coal coming out of that pit for a period of time.
Senator Murray: From Phalen?
Mr. Shannon: Yes, from Phalen.
Senator Butts: Could you reach it by another route around your falls?
Mr. White: That is exactly what we will try to do with the exploration program. The geologists will look at it and determine the extent of the outburst-prone areas that we have in the mine. They will then make recommendations regarding new changes to the mine plan to work around it. If that is promising, then we will turn the development in that direction to see if we cannot get around it.
One of the real issues we have had with our mines is the fact that we are underneath the Atlantic ocean. We can only approach the seam from within. We cannot drill holes in the ground to find out whether the coal or the stone is there. Most of our competitors can do that. Consequently, and because the cost of development is so high, the overall business case is not able to support a tremendous amount of development in advance of the wall faces. We are not achieving all of that, but we can support some.
There is a certain amount of business risk associated with operating these long walls with the amount of development that we do. There is a business risk associated with doing too much development, because you do not have enough money at the end of the day to pay the bills owing to the expense of the whole operation.
In the past, the Sydney coal field, the coal seam in which we operate, has been relatively consistent as far as the conditions are concerned. The Phalen colliery represents quite a conundrum in regard to its consistency. If we compare it to the Prince Mine, for example, the seam is about the same thickness, the quality of the coal is about the same grade, and it is about the same over the entire life of the mine. We have had some stone intrusions, but they are predictable. The Phelan seam has been less predictable and it has failed some of the tests as far as the risk analysis is concerned. That is why sometimes we run into stone when we do not expect it.
Senator Butts: Could Devco operate as a single mine operation?
Mr. White: It would still be called Devco but it would not look much like Devco today. If we had Phalen operate as a single mine without the help of Prince, we would have to have better results as far as our production and development are concerned. The workers at the Prince Mine will always tell you that the mine has always made money and has always been a good producer. By itself, that probably is true. Obviously, our overheads and everything else would be much less and we would have far fewer people. However, it would not look anything like the Devco of today.
Senator Butts: Would Prince Coal be saleable on the export market?
Mr. White: Yes, it would.
Senator Butts: All by itself?
Mr. White: All by itself. There would be a very large discount associated with the quality and that would have to be taken into consideration.
Senator Butts: So it might be saleable, but not to make money?
Mr. White: You would have to design your business case around that. You would have to design the productivity of the mine around that.
Right now with Prince we have a dedicated power plant there. There is a power plant right next to it that is designed to burn the coal from Prince mine. We sell an additional 700,000 tonnes, or so, of coal domestically blended with the Phalen product. That makes the Prince mine saleable in the domestic market. However, if we deeply discounted the price because of the sulphur and ash content of Prince coal, someone would buy it, but we are not sure we could make money on it.
Senator Buchanan: I should like to discuss with you the negative or positive impact of Sable gas on Devco. We have been waiting since the late 1970s for Sable gas to come ashore. It will now happen; there is no question about that. A group called the Cape Breton Alliance has been set up in Cape Breton, and I have been talking to them over the last few weeks. The group consists primarily of people throughout industrial Cape Breton, who are very concerned about the future of industrial Cape Breton, specifically with reference to the impact of Sable gas.
Last week I was in Boston at the energy conference, which I have attended for the last 15 years. I spoke to people involved in both Sable gas and the Maritime Northeast pipeline who indicated that at the present time they did not see that natural gas would be competitive with onsite coal-mines in Cape Breton for generating electricity.
Nova Scotia Power Corporation have not been as specific as that, but they have indicated that, under the present tolling, even with the 10-per-cent reduction over the first eight years of production, they do not see natural gas as being competitive with the onsite coal mines in Cape Breton in generating electricity. What is your position on that issue?
Mr. Shannon: Our primary responsibility in this company is to mine coal and to sell as much of that coal to Nova Scotia Power Corporation as we can at the highest possible price we can get for it. That is our main objective.
With respect to the gas, there are two points. First, in the late 1980s or early 1990s, the Governments of Canada and Nova Scotia made a deal with Clifford Frame and Westray to sell the coal that the Cape Breton Development Corporation had been supplying under contract. As a result, the Power Corporation is taking the position that it can put any energy source at the Trenton plant that it desires. Consequently, we do not have first call on that plant. It was included in our contract at one point, but now it is outside our contract.
Second, there is an environmental limit on SO2 emissions in the Province of Nova Scotia; that is 145,000 tonnes a year. We are presently at 144,000 and change. In other words, we are bumping the limit right now. If the Nova Scotia Power Corporation were to bring in gas and burn it at Tufts Cove or at Trenton -- and they are burning either coal at Trenton or high sulphur oil -- then it would lower the total amount of SO2 that is going into the atmosphere today. That would give us more opportunity to sell lower quality high sulphur Cape Breton coal to the Nova Scotia Power Corporation and stay within the total 145,000 tonne limit that is presently in effect by the Department of the Environment.
The Trenton plant can put gas in there if they desire or any other source of energy. If they burn gas, we might be able to pick up an advantage because, as you know, one of the restrictions on the Prince coal is the high sulphur content.That is why we blend it with Phalen coal; if we have to cut back on Phalen, the sulphur content of our total package will be higher. So if Trenton burns gas, that might help us in that area. I do not know whether that makes any sense.
Senator Buchanan: It does make sense.
Mr. Shannon: There is an advantage there.
Senator Buchanan: That is something that was talked about all through the 1980s, when we thought gas was coming ashore. One of the first things that the Power Corporation wanted to do with gas when it hit the Halifax area was put in Tufts Cove. I know all about the 145,000 tonnes, because I signed the agreement that made that the level.
Mr. Shannon: I hope we can keep it at that level.
Senator Buchanan: I did not know you were that close.
Mr. Shannon: We are at 144,300 and something.
Senator Buchanan: If it had not been for the insight and long range thinking of doing Point Aconi, you would be above it now, would you not?
Mr. Shannon: You are right on there.
Senator Buchanan: The arrangement made then, as you are aware, was that Trenton would go to Westray Coal, but Point Aconi would take up most of the slack.
Mr. Shannon: The problem is that we still lost Trenton, and that opened the contract. That is the difficulty we are having with the lawyers. They opened the contract and extracted that out of the contract and now the Power Corporation are taking the view that that has nothing to do with Devco anymore; that is outside the contract.
Senator Buchanan: It is a given as far as the Power Corporation is concerned; they are not happy with the tolling arrangement. They did not like the postage stamp tolling of natural gas. They wanted a much bigger reduction than 10 per cent. What they tell me is that that 10 per cent will not really make them competitive with coal, but it might in Trenton, and certainly in Tufts Cove there is no coal.
Do you know what the production of energy of is at Tufts Cove now? Have they reduced it substantially because of environmental concerns?
Mr. Shannon: I have no idea.
Senator Buchanan: I have been told that the production level at Tufts Cove could be higher, but they reduced it because of environmental concerns with oil. However, with the advent of natural gas and the use of natural gas in Tufts Cove, and with the environmental concerns pretty well gone, they could increase generating capacity back up to the higher level, which would reduce generating capacity down in Lingan.
Mr. White: Lingan and Point Aconi are the real dispatch stations. I am not an expert on this, but Nova Scotia Power dispatches its production on the basis of the cost of production; so the lowest cost production is the first on the line. Lingan generating station, with 600 megawatts, burning mainly our coal from Phalen, has always been a good dispatcher, and the Point Aconi station has also been very efficient in the last year or so. They have a couple of less efficient plants; the Trenton 6 plant is a new plant, but the cost of the fuel there is higher because of the transportation. So that makes a difference. They also have the Tupper plant, which has just been improved. They put new rotors in their turbines there and improved the productivity and efficiency of that plant. As a result, the Tufts Cove plant, from my understanding, does not work very much at all. There is an environmental concern associated with the oil burning there.
Senator Buchanan: That is particularly so in Senator Forrestall's backyard.
Let me ask you about Point Tupper. What have the Power Corporation people told you, if anything, about their plans for Point Tupper and coal versus natural gas?
Mr. White: They have a coal-fired station where they have just made an investment.
Senator Buchanan: I opened the big addition there.
Mr. White: I think you have opened more than that one.
Senator Buchanan: Yes, I opened all four Lingan mines, too.
Mr. White: I know the story. I remember that not only did you open the plant but you also had the road paved a couple of weeks before that.
Senator Buchanan: That is right.
Mr. White: The Power Corporation has invested at Point Tupper and I am assuming that they are investing in coal-based technology because it is difficult to convert these coal-fired plants to natural gas efficiently. They would need different technology.
I have met with them a number of times in the past few weeks and we had discussions around Point Tupper just this morning. They were telling me about the improvements they have made there to the coal-fired systems. I am assuming that they will continue to burn coal there.
Senator Buchanan: Knowing what you know now about natural gas and whether it is competitive or not, do you see natural gas as a threat to the Lingan generating plants in Point Aconi?
Mr. White: I do not see it from an efficiency point of view. In other words, I do not see someone building a plant, bringing in the gas and then producing cheaper electricity. However, our business plan calls for us to get our costs down; we need to stay competitive.
I do worry a little about the market penetration of electric heat. There is quite a bit of electric heat in Nova Scotia. In the last few years, the oil companies have been pretty successful in competing in that market and converting electrically heated houses to oil-fired furnaces. If natural gas came in and became used domestically as a primary heating source in our cold climate and if it started to displace a reasonable amount of electric heat in the wintertime, then there is a possibility that that could lower the load.
If the load were lowered and Tufts Cove came on as a gas-fired generator, then the gas would not be fuelling the growth; it would be fuelling our market for coal. That is a possibility, but I do not know how much of a possibility.
Senator Buchanan: It is interesting to note that, in Alberta, 65 to 70 per cent of their electricity is still generated by coal. Yet they have massive amounts of natural gas. Just this morning, the Energy Committee heard from David Manning, President of the Canadian Association of Petroleum Producers and past Deputy Minister of Energy for Alberta. He said they still use coal because they find coal is more efficient and more competitive than even natural gas produced right in Alberta. That augurs well for the Cape Breton coal industry.
Mr. White: If you do not think of gas and coal but of energy, the energy conversion for a gas plant is more efficient than a coal-fired station. You can get more electricity out of a unit of gas than you can out of a unit of coal. The whole economics of the thing is not based on whether it is gas or coal; it is based on the efficiency of the process. Therefore, the price of the fuel is dictated by the process and by the B.T.U. value of the fuel itself. The gas would be priced a little higher than the coal.
Senator Buchanan: Back in 1980, we signed an agreement with Gulf, Nova Scotia Resources and the federal government for the coal liquefaction plant. Alastair Gillespie's Synfuels group was also involved. The agreement was to use anywhere from 300,000 tonnes to 500,000 tonnes of Cape Breton coal in that process. That was 17 years ago, and it is still there.
I had some interesting discussions a few weeks ago about natural gas. This is not new. When natural gas comes into the Guysborough area and right across to Port Hawkesbury where they plan to put the liquefaction plant, vast amounts of hydrogen will be used in the coal liquefaction plant. Have you taken another look at the coal liquefaction plant with reference to natural gas and the by-products of hydrogen?
Mr. White: About a year ago, we spent some time looking at a Synfuels type of project and at coal-conversion types of projects. We actually went to an international conference where we heard about what was going on in the world as far as these things were concerned. The economics are not there right now based on the price of oil. The oil prices have to go up somewhat. The Cape Breton Development Corporation was active in these things in the past, not only with Mr. Gillespie's project but also with "carbo-gel," which was a slurry type of system.
As far as I know, only two countries, Italy and Japan, are involved right now, whereas there were many countries involved at one time. Both Japan and Italy have cut back considerably and they have other reasons for wanting to do that. Japan has all kinds of problems with energy and oil.
We did look at it and it did not look very promising then. The offshore gas was not a big issue at that time. I will certainly take your comments under advisement.
The Chairman: To change direction, we have been going for about a hour and one of the principal reasons for this meeting is to continue our mandate to monitor the performance of the corporation in relation to its business plans. I should like to put the focus there now, if no one objects.
Senator Murray, would you begin?
Senator Murray: When the special committee met in May and June 1996, and again in March 1997, we had before us a five-year corporate plan for the years 1996-1997 through to the year 2000-2001. As I understand it, the corporate plan is revised on an annual basis. When you appeared in March, we were told that the revised five-year plan was awaiting the approval of Treasury Board.
A document was tabled in Parliament on October 9, entitled, "Corporate Plan Summary 1997-98 to 2001-2002," but the forecasts for production, sales, revenue and expenses in that document end with the present fiscal year.
My question is: Where is the revised five-year plan?
Mr. Merrill D. Buchanan, Vice-President, Finance, Cape Breton Development Corporation: The document that was tabled would be a summary of the corporate plan that was approved covering the years 1997-1998 through the five-year period to 2001.
Senator Murray: Mr. Buchanan, it does not contain that information. Most of the information ends with 1997-98, the present fiscal year. There are no projections forward as there were in the corporate plan that you gave us in 1996. There were projections on a number of matters taking us through to 2000-2001. Have you not revised any of those projections for subsequent fiscal years?
Mr. Buchanan: There would be revisions to the numbers in line with the mine plans that were done to support the newly submitted corporate plan in the spring of 1997. That corporate plan, the detailed document, would include all of the projections that you mention, but they are not in the corporate plan summary. The practice in the past, with the exception of the year that you identified, was always to include only the current year in the corporate plan summary.
Senator Murray: When can we get the five-year plan?
Mr. White: That is what we operate from. We operate from the five-year plan.
Senator Murray: There are places where you either have fallen short of your targets or have done better than the targets in 1996-97 and in the present fiscal year, as it appears. Surely, these will have an impact on the numbers that you would project for 1998-99 and forward. Why can you not give us those numbers?
Mr. White: I think we can. We have copies of such a plan and that is from what we operate.
Senator Murray: It is not a public document as we speak, Mr. White.
Mr. Buchanan: The corporate plan summary is the public document, senator.
Senator Murray: I do not want go on all night about this, but a five-year plan was tabled with this committee and was made public in 1996. It covered the period 1996-97 through 2000-2001. It contained your forecasts for output, inventory, sales, revenue and so forth. Obviously, you will have updated those forecasts for the period 1998-99 through to 2000-2001. As soon as it is convenient, will you let us have the revisions that you have made to that original five-year plan? You can do that.
Mr. White: I think we can. I do not know if we can or not.
The Chairman: Is there a revised plan available now? If I understand you correctly, the revisions have been made only for the first two years of the plan and the last three years have not been revised; is that right?
Mr. Buchanan: No.
Mr. White: We do our mine planning on a five-year cycle. Once a year, we revise the main plan, the five-year cycle. As Senator Murray indicates, everything is dependent upon everything else. If you make a change in year one, then it will affect years two, three, four and five. That is our normal planning cycle. Based on our operations during that year, we do a revision in the fall so that our owners understand what changes have taken place.
The Chairman: In your planning cycle now do you go from 1997-98 out five years?
Mr. White: Yes.
The Chairman: Can we have a copy of that plan, then?
Mr. White: I would have to ask the corporate secretary if that has to be tabled or if there is some rule or something that I do not know of which applies.
Mr. Buchanan: The document that has to be tabled is the corporate plan summary, which is the document referred to earlier.
Senator Murray: I will come to the corporate plan summary in a minute. However, let me repeat that in 1996 you gave us a five-year plan. It is revised every year. Would you please give us the revised five-year plan for 1997-98 through the five years? It would be important for us to have that information, which is actually the same information that you gave us last year.
Mr. White: Senator, there were a number of items and documents that were asked for prior to your hearing today. I think we supplied all of the documents for which we were asked.
As president of the company, I can look into that and see whether or not there is anything that would militate against our presenting you with that information.
The Chairman: I have just been reminded that in 1999 you will be renegotiating prices and so on with your principal customer. So there may be some sensitive areas on which you will have to place an asterisk.
Senator Murray: I understand that. I am not asking for any information except in the format in which you gave it to us in 1996.
Mr. White: The document is a living document. It exists in our operation and is in the hands of all our general managers who have to operate the company based on that plan. As such, it is something with which we are very familiar.
Senator Murray: When you appeared before the committee on March 20, which was 11 days before the close of fiscal 1996-97, we were told that you expected inventory to fall by 198,000 tonnes in that year. In fact, it increased by 23,000 tonnes. Why the difference between the forecast and actual change in inventory?
Mr. Buchanan: The comparison in the corporate plan projected that our inventory would be reduced by 14,000 tonnes when, in fact, it went up by 14,000. I believe we had a difference of 23,000.
Senator Murray: That is right, Mr. Buchanan. When you appeared before us on March 20, you gave us a summary forecast for the year that was then almost at a close. At that time, you collectively thought that your inventory would fall in that fiscal year, which was almost over, by 198,000 tonnes. The table is contained on page 5 of our report. I am wondering why you were so far off. Do you know what happened a few days before the end of the fiscal year that made you think that your inventory would fall by 198,000 tonnes when it now appears that it increased by 23,000 tonnes?
Mr. White: I suspect that the report you had was prepared a reasonable period prior to your getting it. The other thing that happened at the end of last year was that our Prince mine had an absolute stellar performance in the last month and one-half of the year. It produced 202,000 tonnes of coal in the last six weeks of the last fiscal year. That made a big difference for us.
I think that that, combined with the phasing associated with the preparation of those numbers that you were using, might account for the difference.
Senator Murray: For 1996-97, the annual report at page 16 records a net loss of $30.1 million. The government appropriation, which is found at page 11, works out to $34.2 million for that same fiscal year. It appears that the cash requirement is $34.6 million. Can you explain the difference between these numbers? Where will the additional money come from?
Mr. Buchanan: Senator, the number to which you refer on page 16 is a loss for accounting purposes; it is not on a cash basis. There are a number of non-cash items included in the statement of operations. The most significant one of those would be amortization, which amounts to $25.9 million. That is a non-cash item, and there are other non-cash charges included in the pension categories, accruals that have to be made for accounting purposes that do not represent cash.
When you look at the reference to the cash requirement of $34.6 million, you would have to back out the non-cash items in the $30.1 million loss and add in expenditures of a cash nature, such as capital expenditures and expenditures for pensions that had been accrued in earlier years that had to be paid out. When those adjustments are made it amounts to the $34.1 million cash requirement for the year. It is shown better in the year-end quarterly report. A reconciliation of the cash is included in that document.
Senator Murray: I have $34.6 million here as the cash requirement, which is somewhat more than you had anticipated.
Mr. Buchanan: It is $34.1 million, plus the $9.4 million from the previous year.
Senator Murray: Where is the other $500,000 coming from, or does that pose a problem?
Mr. Buchanan: That would be represented in year-end working capital adjustments. We did not have any of the working capital advances drawn down at the end of the year. So it is represented by all our working capital changes.
Senator Murray: According to your corporate plan for the period 1996-97 to 2000-2001, expenditures of some $23 million were projected in each of the years 1996-97, 1997-98 and 1998-99 to remove the unfunded liability in the non-contributory pension plan. However, according to note 7, which is on page 24 of the annual report for 1996-97, there was a $416,000 surplus in the pension plan at the end of 1996-97. What is the explanation for this early success? Who is your investment advisor?
Mr. Buchanan: The number shown in the pension note represents a calculation done as at March 31. The two pension plans are done on an annual basis, or a calendar-year basis. You are referencing the non-contributory plan.
Based on that, an actuarial study was done as at December 31, 1996. At that time, the plan had an unfunded liability of approximately $8.2 million. The gain in plan value during the final three months of the corporation's fiscal year accounts for the $8 million in the actuarial report, which comes to $400,000.
Senator Murray: The gain in value of what?
Mr. Buchanan: The gain in value of the assets during that period.
Senator Murray: Explain that, please.
Mr. Buchanan: The note shows pension fund assets of $255 million. Those assets are invested in both the bond and equity markets, and they gained during that period.
Senator Murray: How did they do in the recent shake-out in the markets? You have a surplus in the non-contributory plan now.
Mr. Buchanan: That is based on one formula for calculation, which is for financial statement and accounting purposes, but when the funding schedule was struck in 1990 for the non-contributory plan, a program was put in place to fund it, which is the $23 million per year you referred to. It was less than that in the earlier years. That would bring it to a fully funded basis.
Two tests must be met as to whether the plan would be fully funded. One is the going-concern valuation, which is used for purposes of note reporting referred to in note 7. There is also a solvency basis. We are also required to overcome the solvency valuation, which had a slightly larger unfunded situation when it was calculated that way. Both those valuations must be in a positive situation to fully satisfy the regulatory agency that monitors our pension plan.
The Chairman: I find this confusing as well. In 1996, you had a shortfall of $36 million on the actuarial calculations.
Mr. Buchanan: Yes.
The Chairman: In 1997, you have a surplus of half a million dollars, so you have had a gain of about $35 million.
Mr. Buchanan: That is correct.
The Chairman: At what point on this scale would you be in a position to revise your plan and not have to put the $28 million up in order to remain actuarially sound or solvent.
Mr. Buchanan: It would be done on the basis of an actuarial valuation as at December 31, 1997. The year-end of the pension plans is December. They are on a calendar year. We will have, as we have had each year, a valuation done as at year-end. The results of 1997 will be taken into the next actuarial valuation, and that will tell us whether both tests of a fully funded plan have been met.
The Chairman: How much do you need to meet the solvency test?
Mr. Buchanan: I do not have the solvency deficiency. At December 31, 1996, that plan, which at March 31 is showing $400,000, was in a deficiency of about $8.2 million. I could get you the exact number on that.
Senator Murray: What was the deficiency?
Mr. Buchanan: The plan was underfunded as at December 31.
The Chairman: By how much?
Mr. Buchanan: On a going-concern basis, it was $8.2 million. The number on a solvency-deficiency basis was somewhat higher, but I do not have the number.
The Chairman: Can you provide us with that number?
Mr. Buchanan: Yes.
The Chairman: At what point are you in a position to take a premium holiday? You have a surplus. If that surplus is still there when you get to your business year-end, do you revise your requirement so that you might not have to set aside $28 million on a P&L basis for that purpose?
Mr. Buchanan: In terms of the non-contributory plan, the obligation is to bring the plan to a fully funded basis. Yes, when we have the next actuarial valuation, that would determine what level of funding, if any, the plan needed for future years.
The Chairman: For the purpose of determining the amount of money that the federal government puts in, instead of showing a $34-million cash requirement and by reason of not having had to fund this pension plan because you are already solvent and actuarially sound, you save $20 million on a P&L basis. Do you still get the $34 million?
Mr. Buchanan: No. Whatever the amount is, and the budgeted amount is the $23 million mentioned earlier, that expenditure forms part of the our corporate plan funding requirement. To the extent that there is relief on that, it would relieve the funding requirement corporately.
The Chairman: Is there any restriction as to what you do other than managing the business in a good and proper manner with that federal contribution? Is it not tied to the actuarial soundness of the pension plan? Could you spend it on capital improvements, as long as you are showing about a $30-million loss.
Mr. Buchanan: The funding requirement for the current year was identified as $22.1 million. That is the funding available for the 1997-98 fiscal year.
Senator Murray: As a result of the information you are giving us about the non-contributory plan and the surplus therein, do you expect to revise downward that cash requirement number for the current fiscal year?
Mr. Buchanan: With the progress of the plan this far, there is certainly potential into the year for some relief. However, we have spent time as well discussing difficulties we are encountering elsewhere in the corporation, which may lead to a larger cash requirement than forecast.
Senator Murray: You have not yet incorporated into your corporate plan this change to a surplus position, have you?
Mr. Buchanan: No. There is an element of uncertainty with this number until after December 31. Someone referenced the difficulty we experienced in the month of October in terms of investment return. Until we know what the year will do for us in that regard, we would not be prepared to finalize that.
The Chairman: On your balance sheet, you have deferred pension costs of $62 million listed as an asset. That grew by approximately $12 million from 1996 to 1997. Is there a point at which you stop growing that?
Mr. Buchanan: Yes. That asset is built up, and it has been since 1990. The amount of funding that we were obliged to put into the pension plan was more than what could be "expensed" from an accounting point of view. Whenever we are at the point of not having to further fund the plan, we will still have pension expense, and that asset will begin to reduce. We will bring the reduction onto the P&L under the statement of operations and thereby reduce the asset.
The Chairman: If, on an actuarial basis, the situation remains the same at the end of December, as is shown in the note, and in fact the fund is in surplus, how does that affect your plan for next year as far as what you set aside for unfunded pension liability?
Mr. Buchanan: If the plan at December 31 is in a fully funded position on both of the tests that I mentioned earlier, there will still be a current-service component, and, as well, there is a compassionate disabilities provision under this plan. Those two items represent about $4 million per year. We would still have that as a cash cost to the plan, but the unfunded aspect would be gone.
The Chairman: Would you save approximately $15 million?
Mr. Buchanan: The business plan took into account that beyond 1998-99 we would not have a funding requirement, because the schedule was set back in 1990. The positive cash position that you saw in those numbers for the outer three years of the plan took into account that we would not have funding of $23 million per year.
The Chairman: You might hit that early.
Mr. Buchanan: There could be some benefit come from it early, yes.
Senator Murray: That is helpful, Mr. Chairman.
I have a few questions about 1997-98 and beyond. In the corporate plan summary tabled on October 9, on page 3 you forecast a total surplus of $45.3 million for the three fiscal years 1999-2000 through 2001-02. This projection is $3.9 million less than the surplus for the period 1996-97 through 2000-01 as forecast in the corporate plan. Why is the projection lower, given the assumption that a surplus is generated in 2001-02?
Mr. Buchanan: In terms of the numbers, it would simply reflect the revised mine plan and the sales and cost structure on which the plan for 1997-98 and forward years is based. No one particular item would account for that. Each time we go through and revise the plan, the year-by-year projections will change, taking into account the circumstances of where we were when that mine plan was put together.
Senator Murray: It does not seem to add up to me, Mr. Buchanan, but I will study your answer.
As between the corporate plan published in the spring of 1996 and the corporate plan summary tabled on October 9, you have revised total sales downward by 471,000 tonnes, revenue downward by $17 million, costs downward by $21 million, and you have revised inventory figures from a 25,000-tonne reduction to a 620,000 increase. Do you still intend to increase inventory by 620,000 tonnes this year, Mr. White?
Mr. White: Right now, senator, we are more than 400,000 tonnes below our projected figures for the year because of the problems we have had at Phalen. If we had produced consistently since the end of our vacation period until now, we would not have the kinds of inventory problems that we have. It is not likely we can achieve that. However, we do have the potential to bring our 3 Centre Wall face at Phalen on in the middle of December, and that would give us 14 or 15 weeks of good production from that face. We also have the potential to do some operating on our 8 East Wall face, which is being set up and developed now. It is scheduled to go before the end of this fiscal year. We do have some potential to build inventories. That to me has been one of the biggest problems that we have had. We have not been able to build inventory significantly this summer, and that has caused us pain in last several months.
Senator Murray: Where do you now expect to end up at the end of this fiscal year in terms of inventory? Clearly you do not expect to increase it by 620,000 tonnes, as you had hoped and forecast.
Mr. Buchanan: I want to go back to the question on the numbers, the $45 million that you totalled up. Because we had done a draw on the repayable appropriation for the $43.5 million, we were obliged to include in the 1997-98 corporate plan a repayment schedule for that, and that repayment schedule will start in the year 1999, the year after we do our final draw on the repayable appropriation. That will decrease the cash flow projection from the original corporate plan.
Senator Murray: That is interesting too, because the last time I asked I was told that the repayment schedule and the interest and so on were still being negotiated. I take it that that has been done now.
Mr. Buchanan: No. We have included in the corporate plan, though, a repayment of the money that had been drawn down.
Senator Murray: Of the principal?
Mr. Buchanan: Both principal and interest. There is an interest provision as well as the repayment of the principal.
Senator Murray: But you have just put in a guesstimate. Well, it is not a guesstimate on the principal, but the schedule and the interest are still being negotiated, are they not?
Mr. Buchanan: That is correct.
Senator Murray: Is this under active negotiation, or is it just up there in limbo?
Mr. Shannon: Do you mean today?
Senator Murray: This decision to lend you this money was made more than a year ago, I think. Are they just turning a benign blind eye on this?
Mr. White: There is some recognition in the corporate plan that that money has to be paid back.
Senator Murray: I will ask the minister, I guess. I just find it peculiar that you have not come to any conclusion as to the rate of interest and the repayment schedule.
Mr. Buchanan: Not all the appropriation has been drawn down at this point. We have made provision for repayment of the portion that we had drawn to that year-end.
Senator Murray: But you put a guesstimate in, really.
Mr. Buchanan: Yes.
Senator Murray: I think I asked you where you expected to end up in terms of inventory this year. You did not tell me. You are clearly not going to make the 620,000 target.
Mr. White: No. Because of our inventory situation today, there is some movement to and fro with the customers in regard to their take; so the amount of coal taken by Nova Scotia Power over the same period of time will probably be different from what is in the plan; the production will be different from what is in the plan, and the inventory we projected to have today is different from what is in the plan. However, between now and the end of the year we could produce another 800,000 tonnes of coal from our Phalen colliery, if we brought the mine back up.
Senator Murray: You would be adding to inventory?
Mr. White: Yes.
Senator Murray: So you do not expect Nova Scotia Power to have to import coal this year?
Mr. White: That is a possibility.
Senator Murray: Even if you produce 800,000 tonnes from Phalen?
Mr. White: We are not producing from Phalen now, so there is a concern. They always have a concern about the total inventory that exists in the province. They are heading into the winter season, so they are concerned about that.
Senator Murray: When I was preparing for this meeting, I had five documents before me. One was the five-year corporate plan that you gave us in 1996. The next was a summary forecast that you gave us for 1996-97 when you were here last March. There were then three other documents that were tabled within days of each other last month. One was a performance report for 1996-97; the second was a corporate plan summary for 1997-98 to 2000-2001; and the third was the annual report, which was tabled on October 3.
Trying to get your mind around these numbers is quite an exercise. There are inconsistencies in these numbers, some of which are just small and irritating, while others are more substantial. Even in the three documents that were tabled in October, it is very difficult to get your mind around some of these things when the numbers do not seem to jibe. At the same time, there are small but significant changes in formatting from time to time, even in your quarterly performance reports. The same information is there, but you have to look for it under another heading.
I am wondering, first, whether the people who attest to these performance reports have ever spoken to you about the problem of consistency in reporting, and, second, whether you can give us some assurance that your reporting can be more consistent?
Mr. White: We have made a commitment to the stakeholders. A number of different groups read these reports -- for example, our employees, people in the community, and the owners. You raised a point about consistency. We have now published a number of these reports, and I can tell you that we receive comments from people in the community, people who read the reports; they will say, "Could you clarify this? Could you make it a little easier to read? Could you do this and that?" Within reason, we have tried to respond to some of those comments. We have not changed the format other than to try to improve the readability of the report.
We only started doing that in July of last year. We knew that there would be some period of time required to get a report. Actually, we had to have some training programs and we intend to do that for our employees too, so that they can read these reports and understand a balance sheet and an income statement, and so on. Your question was: "Could you make them consistent?" We have.
Senator Murray: As I said, I had five documents before me, Mr. White. I spent a lot of time going over these numbers.
Mr. White: If you compare one annual report with the next annual report, or if you compare the annual reports for the last 10 years, you will find that consistency.
Senator Murray: You would or would not?
Mr. White: I think you should. They are all audited.
Senator Murray: I have examined them for the last 18 years and it is difficult. We will come back to this another time, perhaps with some assistance from our researchers. Maybe I should address something in writing to you. I make a plea for some more consistency that would make it easier for laymen, including not only your stakeholders but also honourable senators, to understand these numbers.
The Chairman: I found some of the same difficulty. It would be very helpful if the same line items that you highlight in your corporate plans and in your revisions to your plans were the same line items that you use in your reports. For example, you have an "operating profit" in one document, but when you are trying to measure the results in another document it is called an "operating surplus." Are those the same thing? Not necessarily.
I join Senator Murray in his plea for consistency. There are only about seven or eight lines involved. If you could identify what those lines should be, then it would be possible to determine that they hit a target or missed it, and then the explanation could be given.
Senator Moore: I wonder if I could have some of the details that were not provided in the responses to questions from Senator Murray?
With respect to the pension plan, when is the actuarial solvency-deficiency test done? Is it done on an annual basis?
Mr. Buchanan: Yes. It is done at the same time as all the actuarial work; it is done at year-end, December 31.
Senator Moore: Is that the year-end of the plan or the fiscal year-end of Devco?
Mr. Buchanan: It is done at the year-end of the plan.
Senator Moore: Since the plan is such a large financial item here, why would it not be in step and have the same fiscal year-end as Devco? It would make it easier for us to fathom these things and easier to ascertain the values and give us better guidance concerning what the funding requirements would be.
Mr. Buchanan: As far as I know, the pension plans have always been doneon the basis of a December 31 year-end. That was the original year-end of the corporation. It was somewhere in the late seventies or early eighties that the corporation switched to the fiscal year of the government.
Senator Moore: Why would the plan not have been switched at the same time?
Mr. Buchanan: I have no idea.
Senator Moore: Could you consider switching it now?
Mr. Shannon: It is something we could look at.
Senator Moore: It would make things a lot more decipherable. We are trying to apply a value to a period of time, and it would be a little tidier if it was consistent and had the same year-end as the corporation, which is March 31.
What is the inventory now, Mr. White?
Mr. White: Right now it is around 120,000 tonnes.
Senator Moore: You think that at March 31 you will have had 800,000 tonnes from Phalen; is that right?
Mr. White: Yes, that is the expected production from Phalen. That number is achievable if things go the way we want them to go.
Senator Murray: The goal was 620,000 tonnes.
Senator Moore: You said they were off 400,000 tonnes.
Mr. White: We were off 400,000 tonnes before we had the production problems with 3 Centre. This goes up and down. Typically around this time of the year, Nova Scotia Power takes about 75,000 tonnes of coal a week. They build inventories at this time of the year and then reduce their take in January, because that is when they start a new year. They usually load up before the end of their fiscal year. We have potential at Prince colliery as well. That mine produces 25,000 to 30,000 tonnes a week. If we continue to operate it the same way, there is another 14 or 15 weeks of production there at 30,000 tonnes a week, which represents another 450,000 tonnes.
Senator Moore: Last year Prince produced 200,000 tonnes; in how many weeks, did you say?
Mr. Shannon: It was six weeks. Last year in Prince they completed their producing wall and the mine was only doing development work from November until the middle of February; but in the last two weeks of February and in March they produced enough coal to break even for that entire period.
Mr. White: We worked with the employees at Prince to get the development in place and they worked with us to get the production to cover the cost of that period of time. We did not make any money on that deal. Basically they demonstrated that they could produce the coal to cover the costs and that is what they did.
Senator Moore: Given the recent roof problems at Phalen, is the 800,000 tonne production still achievable?
Mr. White: When we operate 3 Centre Wall face we are doing around 60,000 tonnes a week. There would be 14 weeks available, so that is 840,000 tonnes of coal.
Senator Moore: Do you not have to clear out the rock and everything that fell before you can get back to that production level?
Mr. White: I am projecting that on December 15 that job will be cleaned up. This is November 18. One month from now the cleanup should be complete and we will go back into operation. Even with vacations and things like that, we will have 14 weeks of continuous production at 3 Centre at 60,000 tonnes a week, which is 840,000 tonnes.
Senator Moore: Is that really achievable? Do you really think you are going to do that?
Mr. White: We produced 60,000 tonnes a week for the two and one-half months prior to having the problem.
Senator Moore: I have been following the press and I listened to your comments earlier to the effect that with every fall it seems to get worse. I am thinking about the men and their safety. Will the next one be worse? Will that delay you too much?
Mr. White: We understand why we had the roof fall. The other thing we have going for us is that we will have a secondary source of production in place at the mine in the same period of time. So if we do have a roof fall on 3 Centre, we can move the equipment and the people to 8 East, which is a new wall face. So we are in better shape than we were at this time last year, when we did not have that.
Those are the kinds of projections we make. We are basing them on the fact that we have achieved those kinds of numbers over a reasonable period of time. As the chairman mentioned in his opening remarks, in situations that have been manageable we have been able to achieve our production.
As well, the conditions on these faces change relative to their location. As we continue to move forward with the wall face we move into areas that are either more prone or less prone to these kinds of roof conditions. As we mine 3 Centre we will continue, for the first period, in conditions like we have today, but as it gets closer to the end, there will be less tendency for these roof problems to occur.
Senator Forrestall: I would like to go back to your pension fund and the earnings. Who manages your surplus cash? Do you call for tenders and award it?
Mr. Buchanan: The pension plans of the corporation are managed by four pension fund managers. They manage the two funds together, the non-contributory plan and the contributory plan.
Senator Forrestall: You do not farm out your surplus cash? You do it in-house?
Mr. Buchanan: No. It is reinvested with the fund managers.
Senator Forrestall: Could you tell me who the fund managers are?
Mr. Buchanan: There are four fund managers: Perigee Investment, Montrusco, Seamark Asset Management and Conner, Clark, Lund.
Senator Forrestall: How do you select the fund managers?
Mr. Buchanan: We do an investment manager search with the assistance of our actuarial consultant.
Senator Forrestall: You do not invite bids or proposals?
Mr. Buchanan: We have proposals from a long list. We short list from that and we have a pension fund investment committee which interviews the short list of fund managers.
Senator Forrestall: How often do you normally do this?
Mr. Buchanan: One fund manager was changed in 1996. Up to 1984 there had been one fund manager. Keep in mind that as the fund grew it was necessary to divide it up. Up to that 1984 there had been one. From 1984 to about 1990 there were two fund managers. Then in 1990 or 1991 we went to four fund managers. Since 1991 there have been four, and there was one change among the four in 1996.
Senator Forrestall: Do you have any data that you could leave with us on their performance in the last two or three years?
Mr. Buchanan: I do not have that with me, but we do have performance information.
Senator Murray: It is a pretty sensational issue.
Senator Forrestall: I would like to see it. Someone did a fairly good job.
Mr. Buchanan: It has been good the last three years.
Senator Forrestall: Are you satisfied with the performance?
Mr. Shannon: I am not on the pension committee, but I sat in on part of the last meeting prior to a board meeting. I cannot remember which company it was, but I think that one of them was not performing up to par. I cannot remember the numbers, but one was a little lower than the rest. There was some discussion of that. The chairman was going to have them in for an interview to find out what was going on.
Mr. Buchanan: According to the numbers for 1995 and 1996, the four managers together were at or slightly above the industry's average. Those numbers were in the order of 17- to 18-per-cent rates of return.
Senator Forrestall: That is not bad. If you had said 12 or 13 per cent, I might have raised an eyebrow, but that is not bad at all.
Do you still have some more early retirements to deal with, or have you caught up with your early retirement program?
Mr. Buchanan: In the program that was included in the five-year plan that was approved last year, there were early retirements for all five years. Over the next three years there are probably about 120 left to take early retirement.
Senator Forrestall: Over what period of time will they be phased out?
Mr. Buchanan: Over the next three years, starting in January, we will start them on the calendar year. There would be some from January 1998 through to the year 2000.
Senator Forrestall: You do not see any possibility of reversing that and being able to keep some of these people on or bring others back? You have some temporary lay-offs as well in your mix. What are the prospects there, generally, in the two categories? Any chance of saving some of those early retirees?
Mr. White: It is safe to say that many of our employees are looking forward to their retirement. There is more interest in retirement.
Senator Forrestall: Anyone will retire in Nova Scotia on September 30, because the deer season is just around the corner.
Mr. White: Seriously, we do not have as many problems as we used to; we are starting to improve these kinds of things. We have been pretty consistent with the overall plan, which we call an HR transition plan, because we are making a transition from a larger work force down to a work force of around 1,420 people. We have been pretty consistent with those numbers. They are coming down at the rates we predicted.
Of course, we are retiring those people early and there is a cost associated with doing that, but the difference between the regular wages and that cost is essentially a contribution to our productivity. That is why, for example, we have our quality management program; we have to make sure that as the people are going out of the work force, the work is readjusted to ensure that we maintain our production levels during the same period of time.
Senator Forrestall: Do you have an apprenticeship program for younger men and women?
Mr. White: No we do not, senator. Right now we have a large number of tradespeople, however. We have mechanics and electricians who work in our operation. We have miners who are trained. The average age of our work force right now is 46. Almost 1,300 of our employees over the next six years will reach the age of 50 with 30 years of service. That is an issue on the productivity side of things.
Senator MacDonald: Mr. Chairman, everyone I know approves of the development of the Donkin mine, or at least the feasibility of or the possibility of developing the mine. The problem is simply money. It is not in the corporate plan.
The then premier of Nova Scotia, Dr. Savage, said that there would be no money from the Province of Nova Scotia. The federal minister at that time, Anne McLellan, said there was no federal money for a new mine.
As you recall, you appeared before this committee on March 20. Neither you nor Minister McLellan indicated that the Devco board of directors had been in negotiation with Donkin Resources Limited to enter into a letter of agreement to sell the land and transfer the leases related to the Donkin mine site on the coal reserve.
Mr. Shannon: We did not have any discussions at that time. I never heard tell of Donkin Resources at the last committee meeting.
Senator MacDonald: That answers my second question. When did you first become aware of the intentions of Donkin Resources Limited?
Mr. Shannon: It would have been some time in April.
Senator MacDonald: Do you remember when in April?
Mr. Shannon: I do not know. What day did we sign the letter of intent? I will guess and say the tenth to the seventeenth.
Senator MacDonald: Did Donkin Resources Limited approach you?
Mr. Shannon: We received a copy of a proposal that they had forwarded to the Department of Natural Resources. It was forwarded to the Cape Breton Development Corporation.
Senator MacDonald: The proposal was forwarded to the federal bureaucrats here?
Mr. Shannon: That is my understanding.
Senator MacDonald: Did you get a copy of that proposal?
Mr. Shannon: Yes.
Senator MacDonald: These questions, of course, could be asked of Mr. Farrell, but did you know that they had gone to Ottawa or had seen the minister or the minister's people?
Mr. Shannon: You mean do I know whether they physically did that or whether they said so? I do not know if they physically went. I have no idea how it developed.
Senator MacDonald: That is a question which should wait for Mr. Farrell.
The letter of intent which your board entered into with Donkin Resources is dated April 16. That was three weeks after that meeting of March 20 in Ottawa. This was a regular meeting of your board at that time, not a special meeting.
Mr. Shannon: As I understand it, it was a regular meeting, yes. We did not have a special meeting.
Senator MacDonald: It was a regular meeting. Did you send out any information to your board about the subject matter of the meeting on April 16 at which this letter of intent was entered into? Was there an agenda sent out?
Mr. Shannon: Was a draft letter sent?
Mr. Buchanan: A draft letter of intent was provided to the board. There would have been an agenda for the meeting.
Senator MacDonald: That was sent to all directors?
Mr. Buchanan: Yes.
Senator MacDonald: Did it take the form of an agenda? Did it outline what would be discussed on April 16, saying, "Here is the proposal"?
Mr. Buchanan: There would have been an agenda for the April 16 meeting.
Senator MacDonald: Do you remember when it was sent out? The meeting was April 16; would it have been three or four days before that, or five days?
Mr. Buchanan: The notice for the April meeting was dated April 4, I believe.
Senator MacDonald: April 4.
Senator Forrestall: You had better straighten that one out.
Mr. White: For our board meetings we typically send a "Notice of Meeting," which just indicates to the board of directors that a meeting is going to be held. Subsequent to that, information which is pertinent to the meeting, including the agenda, goes out to all board members as well. We do that for all of our board meetings, and this one would not have been any different.
Mr. Shannon: Senator, what are you asking? I am getting confused about this.
Senator MacDonald: I am getting curious. We met here on March 20 and 17 days later you entered into a letter of intent to sell the land and transfer the leases related to the Donkin mine site coal reserve. It is the indecent haste that makes me curious. I am not suggesting anything irregular, but I am trying to figure out how you do business.
Mr. Shannon: You had a question about the agenda and the notice of the meeting. What was the question about the agenda? I am getting confused.
Senator MacDonald: How prepared were your directors to give an informed opinion on the matter that was placed before them? They had only this proposal, you say, that was sent out?
Mr. Shannon: The letter of intent, senator, apparently was sent out to the board of directors either the day of or the day before the board meeting.
Senator MacDonald: Yes. The board met in Sydney?
Mr. Shannon: Glace Bay.
Senator MacDonald: All the directors were physically present at that meeting?
Mr. Buchanan: No. Some of the board participated by teleconference.
Senator MacDonald: Yes. I can understand the telephone conference for a director. How many were there physically present? How many were connected by phone?
Mr. Buchanan: Four of the directors were physically present in Glace Bay. The other two directors were connected by phone.
Senator MacDonald: I see. A representative of the Ministry of Natural Resources was also connected to the meeting by phone as an observer, not as a director.
Mr. Shannon: That is correct.
Senator MacDonald: That was Mr. Lomas, I believe.
Mr. Shannon: Yes.
Senator MacDonald: When were you, as chairman, instructed to enter into negotiations with Donkin Resources Limited?
Mr. Shannon: When was I instructed? No one instructed me.
Senator MacDonald: Then the answer is never?
Mr. Shannon: Nobody instructed me to enter into negotiations with Donkin Resources.
Senator MacDonald: In that intervening three weeks between March 20 and April 16, did you discuss the proposal with anyone representing the principal shareholder?
Mr. Shannon: No.
Senator MacDonald: At our last committee meeting on March 20, Minister McLellan said:
...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.
She says she is more than willing to discuss that. So she had no participation whatsoever?
Mr. Shannon: In what?
Senator MacDonald: In the decision which culminated in the letter of intent? Neither she nor her people were involved?
Mr. Shannon: No. Maybe it would be simpler, senator, if I took you back to the beginning and went through this thing in the order that it happened, and I can give you exactly where that project is today.
Would it be easier for us, Mr. Chairman, to do that?
The Chairman: That might be helpful.
Mr. Shannon: On some of the issues you might not be asking exactly the right question. I am trying not to get in trouble and I am trying to answer your questions, but it seems that your questions will not get us through this thing easily, so I will just go to the beginning.
I will take you back to the original plan for this company where we went out for the consultation process. We had a series of options to develop a plan to operate the company.
One of the options in that original discussion was a sum of $750,000 to update all of the information that we had in the Donkin mine. That was one of the options that was discussed. That option did not survive. It did not make it into the five-year plan.
In our five-year plan, there was no provision, no money, for Donkin mine. We told you that on the first day we met with you. We talked to you about it the last time we met. We mentioned it to you when we met on other occasions with you and Senator Murray. Our position has been consistent from day one.
Senator Murray: That is not quite so.
Mr. Shannon: Where was it different, senator?
Senator Murray: You asked for $750,000 to do the study. Your position was consistent when the government took it off the table. You were in favour of it at one point.
Mr. Shannon: Senator, I am saying to you that that option, along with several other options that were discussed at the time, did not make it into the five-year plan.
Senator Murray: That is right.
Mr. Shannon: So our position has been exactly the same. The five-year plan did not have any provision for money for development of the Donkin mine.
Senator Murray: That is day one, is it? Day one is when the five-year plan was approved?
Mr. Shannon: What do you mean by "day one"?
Senator Murray: You said your position has been consistent from day one. I am simply saying, for the record, that you were quite interested and positive about Donkin in the fall of 1995, when you were talking about getting $750,000 to do a study to update the information you had. You were quite positive about it at that time.
Mr. Shannon: That was one of the options that we had on the table at the time.
Senator Murray: The government took Donkin off the table, right?
Mr. Shannon: I do not know who took it off the table. There was a whole series of events that happened.
Senator Murray: You did not get your money?
Mr. Shannon: The Donkin project did not survive to the five-year plan. From that day forward, our position has been clear.
Senator Murray: It has been consistent, yes.
Mr. Shannon: It was an option, senator, along with several other options that we were discussing at the time that you are talking about. There was no money and, as a matter of fact, the position that we took -- and I did a little bit of history on this -- was exactly the same position as that taken by Mr. Hawkins when he was the minister of Devco. His position at that time was to focus on the development of the Prince and Phalen mines. That is exactly what we are doing. We have to try to stabilize the company.
I think I told you when I started, for the benefit of those who did not know the difference or for some of you who might have forgotten, that the company was not in really good shape. We had to try to stabilize this company. There was pressure from the Senate to develop the Donkin mine. The union representatives and leadership were pressing us to develop the Donkin mine.
Senator MacDonald has referred to a discussion that went on at your last Senate hearing. Well, following that, we got a proposal from a local company, three guys who are familiar with the industry, to develop the Donkin mine. We sat down with them and we said that we were interested in talking. In our view, the only way the Donkin mine would be developed was through the private sector. We sat down with them and they indicated to us that they were interested in taking all of the information that we had so that they could study it and see if there was an opportunity to develop a coal mine at Donkin. We entered into a letter of intent with them at the time.
Senator MacDonald, you know what a letter of intent is. It means you have an intention to negotiate an agreement. That is what we signed with those people. We said we would enter into a discussion with them with the intent of concluding an agreement if everything worked out to allow them to develop the Donkin mine.
That project today has three things going on. They took all of our information and they hired consultants and they did three studies. They did a study on the quality of the coal based on the information that was available; they did a market analysis and they did a preliminary mine plan. We asked for and we received that information last week. At the same time, we are negotiating an agreement with them, and we are probably in the second draft of that agreement right now.
The third thing that is going on is that Donkin Resources will be hiring John T. Boyd Limited to try to establish a value of the asset and to make some suggestions on how that asset should be paid for. Those are the three things that are happening.
Senator MacDonald: On April 16, when the board of directors met physically and by telephone, did you suggest to them that this plan was "pie in the sky"? Did you ask them where the money was coming from? Was that question ever asked by any of your directors?
Mr. Shannon: Yes, I asked the three proponents and their accountant. They said they would put in the money. They would go to the market. When they got into Phase 1, it would cost about $400,000. The next phase would cost $1 million plus; they would go to the market and try to raise the money on the street. Then, if the thing survived to the next stage where they would need $80 million, $90 million or $150 million, or whatever, to develop the mine, then they would go further.
Senator MacDonald: They told the directors they had $400,000?
Mr. Shannon: They did not tell the directors that. They were not at the meeting. They told us that was the program.
Senator MacDonald: That was in the proposal?
Mr. Shannon: Yes. I do not think the proposal said that they had $400,000. When we asked them where the money was going to come from to start this thing up, they said they were going to put the money in.
Senator MacDonald: They were going to put the money in?
Mr. Shannon: Yes. They told the three of us when we were discussing it with them. I think I asked the question and they said they would put the money in.
Senator MacDonald: I am just a bit curious. If these fellows walked in, for all practical purposes off the street, and submitted a proposal, your board must have asked a lot of questions about where the money was coming from. I mean I know Steve Farrell, who is a very able mining man. Did it show in the proposal?
Mr. Shannon: Are you talking about the $400,000 to do the initial study?
Senator MacDonald: I am talking about the initial study. I am talking about studying the existing data.
Mr. Shannon: I told you once, senator, and I will tell you once again that we asked those fellows where the money was going to come from. They said they were going to put it in. They said it was coming from them. That is what they told us.
Senator Murray: Mr. Shannon, if I may say so, on that quite incomplete and flimsy information, you and your board were prepared to dispose of that major asset of Devco. I find that incredible.
Mr. Shannon: Do you want me to finish my story, senator?
Senator Murray: Please do. While you are about it, try to answer some of Senator MacDonald's questions.
Mr. Shannon: That is what I am trying to do.
The Chairman: I know it is getting late. However, it would be useful if we could at least get the outline from the witnesses' point of view of what happened and then ask as many questions as we possibly can.
Mr. Shannon: I would like to finish with this Donkin issue and tell you where we are. There seems to be a lot of concern about it, and I really do not know what the concern is. Perhaps we could get deeper into it. As Senator Murray said, we should get to the bottom of it. I do not know what bottom we are looking for. However, I would like to get to the bottom of it, too, to get it settled.
We have the three things going on. At the board level, we are going to satisfy ourselves that the information that they have given us in the study has a reasonable chance of making the coal mine go forward; that the mine design is such that it will provide a long-term future for the mine; that there is a market for the coal and that the coal is of a sufficient quality that it will be in the marketplace. That is what we have to satisfy ourselves of first.
Second, we have to satisfy ourselves and reach agreement on the value of the assets. I am not talking about the dollars that we said we were going to transfer. One of the things we told these people was that we would not put road blocks in their way. We could have said that we wanted $50 million or $100 million for the project up front; if we had done that, we would never have got past square one. We would never get the information which everyone wants so badly to find out what is going on at Donkin. For the purpose of their raising some money and to help them out, we would transfer the ownership of the land to them under certain conditions at a certain point.
As I said, we would also have Boyd come in to do an evaluation of the asset. We would have to reach an agreement with them on how much we would be paid for the asset, once the mine got up and running.
Senator MacDonald: Who would bring in Boyd?
Mr. Shannon: Donkin Resources would hire John T. Boyd to establish the value of the asset and to make some suggestions as to how the corporation should get compensated for that asset.
Senator Murray: As we all know, John T. Boyd is on the record with their views about Donkin. I presume this comes from the $400,000 that they have.
Mr. Shannon: That is correct.
Senator MacDonald: The $400,000 you didn't know they had on the sixteenth day.
Mr. Shannon: I will come back to that in a minute. May I finish with where I am going so I will not get lost with the sequence of events?
The board of directors now has to agree on the market and the mine design that the project would have a reasonable chance of going forward. We are going to try to reach agreement on the value of the asset and how we would be compensated for that value. Once we do those two things, then we will go back to the agreement about which I told you earlier, which is probably in its second draft, and we will try to conclude that agreement. If we conclude that agreement, then it will go to the board of directors of the corporation for approval or not.
If it is approved by the board of directors, it will become part of the corporate plan. As you know, and as we discussed earlier today, the corporate plan goes to Ottawa in the spring of the year for approval. That plan has to go through three or four various departments in Ottawa. If the corporate plan is approved as submitted, and the Donkin project survives and goes forward, it will go to the next stage. They will then have to go out and raise the $1 million or $2 million that will be required to harden up all of the information that they would have.
At the end of that stage, it would have to come back to the board of directors of the corporation. If it was approved at that point and the board was satisfied that the project had a reasonable chance of surviving, then that would become part of the corporate plan at that time. It would go forward, as the corporate plan always does, to Ottawa for approval in the various departments of government.
If it survived that, then Donkin Resources would have approval to go forward to the next stage, which would be the stage of raising the $100 million, or whatever was required, in order to get the project going. That is the process. That is where we are.
Senator MacDonald: You have given me the impression that at the meeting of April 16 your directors said, "What the hell; we have nothing to lose. We will catch them in the next phase, when they have exhausted their money, or they have not come up with what we want, et cetera, in the various phases that they have to go through. Sign the letter of intent."
Mr. Shannon: Generally, I think all of the directors recognized that the Cape Breton Development Corporation was not going to go forward with the development of the mine. However, there was pressure on in the community to get the mine project going, and we probably felt that this was the only way to do it.
Senator MacDonald: I see. You did not know how much money they had, and they did not tell you. It was on April 16 that you had this meeting. You issued a press release on April 17.
Mr. Shannon: Yes. We had a choice there, too, senator. We could have continued to have a discussion in the back room with these guys to move the project farther along. However, because it was a major departure in the way the company was doing business, that is, discussing the possibility of the private sector developing one of the assets of the corporation, we felt it was important to put a press release out to tell people what we were doing. Maybe where we made the mistake was in telling people what we were doing.
Senator MacDonald: You met on April 16 and you made your announcement on April 17. There was a short, quick meeting. Suddenly, on April 17, an application was received by ACOA. That was the day after you requested a $300,000 grant. I have the application before me. It is a series of blank pages on which it says, "We want $300,000." It is signed by the Cape Breton Economic Development Authority.
Mr. Shannon: I know absolutely nothing about that at all.
Senator MacDonald: It is obvious that the development authority makes the application for $300,000. The idea of developing Cape Breton, diversifying it, and so on, has been discussed for years. There is no reference to DRL in that thing. However, suddenly, the board approved the DRL proposal, the letter of intent. The economic development authority then goes to ACOA, or its subsidiary the ECBC, and makes an application for $300,000. It is a blank page. There is no information on it, nothing at all, just the $300,000, and it is signed by the authority. Presumably $100,000 is to be put up by the three principals of Donkin Resources Limited. Now they have $400,000. That is $400,000 that you did not know they had on April 16.
However, there is no problem with Devco. Devco still has lots of checks and balances to protect itself if it cannot measure up.
I do not want to rain on the parade of these fellows, but is this just a cavalier, mythical pursuit of some fantasy?
Mr. Shannon: Senator, I do not care if you rain on their parade or not. It does not bother me one way or the other. If it works out, people will go to work; if it does not work out, it does not make any difference to me.
Senator MacDonald: You are quoted as saying:
History will prove if it is a mistake, and sometimes I think it was.
Mr. Shannon: Senator, you are quoting again from the media, and you should double check the quote. That was certainly a misquote. As I have said here today, if I made a mistake, it was in making the document public. That was the mistake. I had a choice.
Senator MacDonald: What?
Senator Murray: What are you talking about, Mr. Shannon? You people have been appointed as directors. Despite our differences, I appreciate the fact that you have come forward to serve in this capacity. It is a part-time appointment. I understand that. This is not what puts bread on your table. I know you put a lot of time and effort into the company. However, you and your directors have been appointed by the Crown -- by the government, the shareholder -- to look after Devco, to manage it, and to see to its corporate policy. If I understand your testimony today correctly, you proceeded to enter into a letter of intent, the purpose of which will be to dispose of the company's major asset, without any reference to the shareholder. You received no instruction. You had no discussion with the minister or anyone in Ottawa. I find it incomprehensible that this could be the case.
We will get at the policy when the minister is here. It is the government that will have a decision to make. I think we all understand that.
Mr. Shannon: Senator, you are going back to the quote in the Cape Breton Post.
Senator MacDonald: We will forget that if you say you were misquoted.
Mr. Shannon: I was.
Senator MacDonald: I also have a quote from a letter written by Steve Drake. I do not think he was misquoted. The last line of the letter states:
Selling Donkin makes as much common sense as buying shares in Bre-X.
This is really part of what I am trying to get at.
Mr. Buchanan, I asked you, through your secretary, if this committee could have a copy of the minutes of the meeting of April 16. Did you receive that message?
Mr. Buchanan: I received that message, yes.
Senator MacDonald: Did you bring the minutes?
Mr. Buchanan: I will have to seek advice in terms of what requests the committee has made, how we can fulfil them, and what authority I have to disclose the records of the corporation.
Senator MacDonald: These are the powers of a parliamentary committee. I want to read them to you:
What these grants of power mean, of course, is that, provided a committee's inquiry is related to a subject-matter within Parliament's competence and is also within the committee's own orders of reference, Committees have virtually unlimited power to compel the attendance of witnesses and to order the production of documents.
On behalf of this committee, I ask you to give this committee a copy of the proposal you sent to the board prior to your meeting on April 16, and a copy of the minutes of the meeting. You can fax them to us tomorrow, if you wish.
If you have some reason not to give us those minutes, you are compelled to tell us why. For instance, if there is anything in this material which interferes with or prejudices the commercial operation of the company, or gives away any of its trade secrets, or things of that type, we can accept that and excise that from the particular document. However, I do not think in this case you have any trouble in that regard.
The Chairman: With all due respect, Senator MacDonald, it is not quite as simple as it reads there, as you and I well know. I believe the witness is perfectly right to say he can take counsel and determine whether there are reasons why he should or should not provide that information.
Senator MacDonald: I thought I made that clear a minute ago.
The Chairman: He cannot do it now.
Senator MacDonald: I am not talking about tonight. You have to get good advice.
I will give you a copy of the powers of the committee, just in case your lawyer does not know. Not everyone knows this. With regard to a couple of people who did not know, we had to bring them before the committee in leg irons.
Mr. Buchanan: I have said that I need to seek counsel.
The Chairman: We also had the experience that a witness can simply say, "I will not answer that," and it was Senator MacDonald asking the question. It is not quite as clear as that.
I believe it is fair to ask for the information. It is also fair for to you take counsel, but we would expect you to get back to us as soon as possible.
Mr. Buchanan: Thank you, Mr. Chairman.
Senator MacDonald: That is fair enough.
Mr. Shannon: I would like to come back to the application to ACOA. I guess I do not want to leave any misunderstanding. That application to ACOA had absolutely nothing to do with the Cape Breton Development Corporation or any of the boards of directors of the company.
Senator MacDonald: I accept that. You told us that before.
Mr. Shannon: I want to make it very clear. You left it hanging out there that people might interpret that we were involved in that process, but we were not.
Senator MacDonald: When I called the president of ACOA, David Nicholson, he was curious about this and said he was aware of the powers of the committee. He sent an entire file this thick. We have the whole file on the events leading up to the $300,000 and the things that went with it.
I accept your word without qualification that you did not know about the ACOA grant. It happened immediately following your meeting of the directors.
Mr. Shannon: If you think there is something amiss about this project, or if you think we are doing something illegal, or if you think we are doing something wrong, or if you think for any reason --
The Chairman: I should like to avoid a debate. It might be very interesting and go on for a long time, but nothing would be decided. We are here to gather information.
Mr. Shannon: With all due respect, if senators, either as a group or individually, have information that there is anything amiss about this project or that we did anything wrong, I can only say I do not know if we did. I have put the information forward as I know it and as it happened. If there is something we did, or if senators know of shenanigans going on anywhere, I think they should tell us.
Senator MacDonald: Let me make it clear that I have no reason to believe, no suspicions and no evidence, that there were any shenanigans with regard to the boards of directors of Devco. If anything comes up, you and your directors will be the first to find it. I am simply trying to point out that as soon as that $400,000 runs out, this deal is all over.
Mr. Shannon: There is nothing I can do about that.
Senator Butts: Does the Province of Nova Scotia have any say in the disposal of this resource?
Mr. Shannon: The Province of Nova Scotia would have control over the lease of the coal.
Senator Butts: At some stage, if this continues, they will be in on it. Is that safe to assume?
Mr. Shannon: Yes.
Senator Butts: Is Donkin mine seen by your board to be more profitable as a private corporation? That is a hypothetical question, but I would like to have an opinion on it.
Mr. Shannon: It is always dangerous when you start trying to answer a hypothetical question.
Senator Butts: I know, but the politicians always ask them.
Mr. Shannon: Our position on Donkin mine is that it is not in our corporate plan, that it is not our intention to develop it, and that we are focusing all of our energy on stabilizing the company through the development of the Prince and the Phalen mines.
Senator Butts: So it is not a question of whether or not Donkin might be profitable.
Mr. Shannon: No.
Senator Butts: I have heard about Donkin mine for ages, and I have heard that it is possible to do selective mining there. Do you know if the technology is there to put into effect to mine Donkin?
Mr. White: Selective mining is a technique that we have used in our mines. We have used it at Prince.
Senator Butts: There is supposed to be very particular machinery that they were bringing into Donkin at one time.
Mr. White: That machinery uses some very high-tech equipment, gamma-rays and things like that that are present in the coal which differentiate between the good coal and poor coal. Like everything else we do in our mines, we would have to work with the development of that technology in order to make it work in our existing operation. I could only assume that if it were applied to the Donkin situation, there would be some process of development that would have to take place before it would work.
Senator Butts: Have you any sense of the expense of that kind of plan? Is it exorbitant to think of that new kind of technology?
Mr. White: The technology itself I do not believe would be that expensive, but the process of getting it to work and the benefits that you would receive from it could be. Obviously, if it did not work 100 per cent, then there would be some cost associated with that, because you would produce coal which had higher sulphur than you had planned and you would have to deal with that.
Senator Butts: So it is questionable?
Mr. White: Yes. Based on reduction of sulphur, I would think so.
Senator Forrestall: If you had to do further exploratory work, would you confine that exploratory work to Phalen?
Mr. White: We would do exploratory work at both collieries, at Phalen and Prince.
Senator Forrestall: I do not know that I have ever heard anyone ask this question over the years, but I am sure there is an answer to it. I just do not know it. Are there any areas of potential new deposits that people suspect might be there?
Mr. White: Most of the easily available reserves in the Sydney coal field are in the seams in the Donkin area. There are a number of seams there. There are several very good quality surface opportunities in Cape Breton which have been overlooked in the past because of environmental concerns and things like that.
Senator Forrestall: Where are they located?
Mr. White: There is an area in Florence on the north side. Basically, you find it wherever the coal fields have an outcrop; we have not had a large amount, but there has been a lot of illegal mining in Cape Breton over the years, and people --
Senator Forrestall: It is not illegal at all.
Mr. White: There has been bootleg mining, and that happens for a reason. That coal is relatively close to the surface.
Senator Forrestall: You must understand that bootlegging is not illegal.
Mr. White: There is some out in Dominion. There is some out in the Donkin area itself. We have been approached about those things in the past by the people who own the property to see if they could be developed.
Senator Forrestall: These would be open face mines?
Mr. White: There is not millions of tonnes in those areas.
Senator Forrestall: That is it for the coal area? On a windy day, you could holler from one end to the other.
Senator Buchanan: Is it not true that the Donkin seams and the Sydney coal fields are probably the best coal left in Cape Breton and comprise the largest quantity of that coal?
Mr. White: That is true.
Senator Forrestall: At Donkin?
Senator Buchanan: Donkin.
Mr. White: That does not say much for the coal we are mining now.
Senator Buchanan: I am sorry. I am talking about new coal.
Mr. White: Yes.
Senator Forrestall: What happens in 20 years? Is that the end of it?
Mr. White: Some of the good news is that we have just done a reassessment of the life of Prince mine. We have done some work in the last two months or so, and we think there are about 44 million tonnes at Prince that are minable, which would give that mine a very long life.
Senator Forrestall: Is that 44 million new tonnes?
Mr. White: Our plan for Prince was 15 years at 1.3 million tonnes a year. As a part of this whole exercise, I asked some experts to come into Prince and look at all of the contingency coal that might be available. The question I was asking was whether there was any coal in Prince underground that we could mine easily to make up for some of the shortfalls at Phalen. That preliminary study indicated that there are about 44 million tonnes of coal in total at Prince, which is probably double what we had thought, but we would need to use a number of different mining methods in order to get that coal.
One of the things we were concerned about, and I will mention it here, was that our customer was not that happy about the fact that we were going to mine Prince out at the rate of 1 million tonnes a year over a 15-year period. They have built a power plant right next door with a life expectancy of about 35 or 40 years. The question they had was what they would do after 15 years. Would they have to truck in coal?We wanted to take a look at this.
The other real opportunity for us would be to develop some "room and pillar" operations at Prince and develop them in a way that would enable us to take the waste from that power plant, the ash that has to be stored in surface landfills, and place that back in the mine as a value-added feature, so that we could connect ourselves almost totally to that customer and provide a service that no other company could provide. From a marketing perspective, that would ensure our market in that area for years to come. That looks promising, and we are talking to the power company about those things.
Senator Moore: Is Nova Scotia Power legally bound to purchase a minimum amount of coal from Devco each year over the long-term contract?
Mr. Shannon: We have a 30-year contract with the Nova Scotia Power Corporation. Every five years that contract can be opened, and there are then three issues to be discussed: the price, the quantity of coal and the variance on the quantity of coal, plus or minus 5 or 10 per cent.
Senator Moore: When is the next round of discussions?
Mr. Shannon: I believe it is the year 2000. The arrangement is that if you cannot agree on a price, there is a provision in the contract to go to arbitration and settle the price. If you cannot agree on the quantity or the variance in that quantity, there is a provision in the contract that says that you can give two years' notice to quit the contract. Either party has that option. That is what we got into with the Nova Scotia Power Corporation before. They gave us a two-year notice to quit the contract in 1995. Those are the three things that can be discussed even though we have a 30-year contract.
Senator Moore: They gave you two years' notice as required by the agreement?
Mr. Shannon: Yes. They gave us that in 1995. I said in my opening remarks that, if that had been allowed to stand and we had not reached the agreement with them that we did, the contract with the Nova Scotia Power Corporation would have been cancelled in the spring of 1997, which is this year.
Senator Moore:Do you know which plants Nova Scotia Power intends to convert to gas?
Mr. White: I do not know for sure, but I know that some studies have been done in regard to the coal generating station in Dartmouth.
Senator Moore: Only at that one?
Mr. White: That is the one that is the most likely, and it is the only one that they have done work on. They do a lot of planning. I am sure they have things worked out for the next 15 or 20 years as far as load growth and all the rest is concerned.
Mr. Shannon: I would expect the next plant would be the Trenton plant.
Senator Moore: Is the core activity of Devco now and always to be mining coal?
Mr. Shannon: The core activity of Devco today is mining coal. I would not dare try to speculate too far beyond that with this Senate committee, because I keep getting my knuckles rapped around here. I am not going to project that anything will change or that we will do anything other than mine coal.
Senator Moore: The Nova Scotia Power Corporation has the mandate in Nova Scotia to generate electricity. They now want to have the distribution rights for gas. Would Devco look at possibly seeking the right to be a distributor of gas?
Mr. Shannon: Our act does not permit us to do anything except mine coal.
Senator Moore: I am thinking of the long term. Senator Forrestall says, "What happens in 20 years?" You have lots of able-bodied people. Are there other activities that you could be exploring? This is an economic situation involving the welfare of our province.
Mr. Shannon: That is something that should be discussed in the not too distant future. Someone should initiate that discussion.
Senator Murray, you probably have studied the act. Does the act permit us to do anything except mine coal?
Senator Murray: The original act certainly did.
Mr. Shannon: That was the ID division, not the coal mining division. That was cancelled.
The Chairman: Are there any further brief points?
Senator Murray: Before we adjourn, Mr. Chairman, I want again to make it clear for the record, as Senator MacDonald intimated, that on this side our concerns about Donkin have nothing to do with any deep, dark suspicion of impropriety or anything like it. Our concern is about the policy on the basis of the public knowledge, the public record. Our concern is that the policy is dubious and the process by which the board went about it without reference to the government is wrong, wrong, wrong. We disagree on this point and we will leave it at that.
When the minister comes here I hope to obtain from him -- especially in the present circumstances and with the problems that we heard concerning the Phalen Mine -- some assurance that the government will not countenance the sell-off of this resource. We will leave it at that.
Mr. Shannon: I should like to say something that has always concerned me as a Cape Bretoner, namely, the way in which, from time to time over the years, projects have been held out in Cape Breton for future development that were to be the saviour of the economy of the community. I am not saying that this project would be as big as that or that I could save the community.
One of the things I am concerned about is raising false hopes of our employees, of their families and of the community. When you are having your deliberations and you are making your recommendation, I hope that you will keep that in mind, recognizing the mandate that the Cape Breton Development Corporation has, the difficulties that we have trying to operate the two mines that we have, and the fiscal responsibility and regime in which we are working in 1997, which is significantly different from 1987 or 1977. I would ask you to have some consideration for all those people and try not to raise false hopes in an expectation that this corporation will go out and develop the Donkin mine in any early time frame.
Senator Murray: The witness has made that point perfectly clear.
Mr. White: I would like to reiterate that. A proposal was put forward a couple of months ago. We were looking at the possibility of perhaps bringing some new people into the organization to do a small job for us which would have lasted less than one year. Within a period of about three weeks, over 1,000 people showed up at our doors to fill out applications. We were inundated. We had young people who were 17, 18 and 19 years old. One fellow came to my office and asked me if I could get his son a job. I asked him how old his son was and he replied that he was 41 years old.
There are a lot of young people in Cape Breton who are hurting and who are looking for work. Some of them are moving away but some of them are still there. I do not know whether a project involving the coal mines is the only answer for those people. I would ask you to consider that in your deliberations.
Senator Forrestall: It has never occurred to me that this committee or any other committee that I have ever sat on would have deliberately set out to encourage false hopes. In fact, quite the opposite is true. It is a function of another arm of this process, not the function of committees and certainly not the function of Senate committees, Mr. Shannon.
Please do not confuse our concern for people with holding out false hopes. I understand the sensitivity with which you and Mr. White put that forward, but do not expect that course of action from us, because you will be disappointed. We just want to make sure that what can be done is done properly. We want to know how you have made out so far in your five-year plan and we want to monitor it. There are a few years to go yet and maybe there will be another five-year plan after that. We would like to know what the plans are all about and we want you to understand that.
Senator MacDonald: Do not caution us about raising false expectations.
All you need do is read the press release:
The Honourable David Dingwall, Minister of Health, on behalf of the Honourable Lawrence MacAulay, Secretary of State...today announced federal government assistance for a study to determine the commercial viability of opening a new mine in Donkin, Cape Breton. This study will be conducted in association with the Cape Breton County Economic Development Authority (CBCEDA). With the decision of the Cape Breton Development Corporation to enter into an agreement which could potentially result in the sale of the Donkin coal reserve, an examination of the mine's feasibility is crucial to its further development.
That is where the expectations were raised.
Senator Forrestall: That is what I was saying.
The Chairman: Just before we adjourn, I wish to indicate to the representatives of Devco that there are varying opinions on the committee as to whether the procedures that were followed would be appropriate. Those are matters of business judgment and so on. Those we can deal with.
On behalf of the committee I wish to thank you very much for being so candid and forthcoming, in my opinion, and for your patience. As time goes on, some of us become a little irascible.
The committee adjourned.