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Seaport: Westshore coal terminal's future uncertain amid lower Teck, PRB exports

Westshore Terminals Investment Corp.'s limited partner, Westshore Terminals LP, the largest Canadian coal export terminal, is facing an uncertain future given the potential loss of several large customers including Teck Resources Ltd. and Cloud Peak Energy Inc., a Seaport Global report said March 25.

Teck, the world's second-largest metallurgical coal producer and the terminal's largest customer with throughput of 17 million tonnes in 2018 out of 30.5 million tonnes in exports, will move much of its volume to Vancouver-based Neptune Bulk Terminals (Canada) Ltd. once its contract with Westshore, also in Vancouver, ends in the first quarter of 2021.

According to senior analyst Mark Levin and senior associate analyst Nathan Martin, Teck could increase its Neptune exports up to 16 million tonnes per year, from 7 million tonnes in 2018, with the producer's expansion plan, which should be completed in 2020.

"Expanding Neptune provides it with the wherewithal to take advantage of demand surges when they exist," the Seaport analysts wrote.

Additionally, the move is likely encouraged by cheaper rates at Neptune, increased negotiating leverage provided by an alternative terminal option and assurance Teck vessels will not have to wait behind other companies' coal vessels, the report said.

"Teck will almost certainly move tons away from [Westshore]; it's just a question of how much," Seaport wrote.

Although, "we think [Westshore] offers certain advantage that Neptune doesn't," they wrote, adding: "So, it's certainly possible that it will keep more tons than it might need at the facility."

Exports from PRB producers

Another potential loss for Westshore depends on the future of Cloud Peak and as the report said, "we think it's reasonable to assume [Westshore's] contract(s) with [Cloud Peak] may not survive a [potential Cloud Peak] bankruptcy."

Cloud Peak exported about 4.6 million tonnes through the terminal in 2018.

The company missed a loan payment earlier in March and is in talks with creditors about restructuring its balance sheet. But analysts are forecasting an April Cloud Peak request for protection from its creditors.

Based on Seaport estimates, the producer is likely losing money on exports without fixed-price contracts given its costs, including a $10 per ton to $11 per ton mining cost, a rail rate about $35 per ton, and a $10 per ton Westshore port fee, totaling $45 per ton to $46 per ton.

In a third quarter of 2018 earnings call, Cloud Peak CEO Colin Marshal said it is "not so good" for the producer when the Kalimantan 5,000 GAR price is $55 per tonne, and as of March 22, the price was $55.30 per tonne. According to Seaport, the Kalimantan price is expected to remain below $60 per tonne given accelerating Indonesian production and uncertainty around Chinese import policies and its overall economy.

Other Powder River Basin producers, such as Lighthouse Resources Inc. and Signal Peak Energy LLC, may pull back their export volumes, as well. Referencing a Doyle Trading Co. report published March 21, the Seaport analysts noted Lighthouse's Decker mine has already stopped exporting through Westshore.

Westshore's "best chances" to backfill any potential tonnage would be Riversdale Resources Ltd.'s Grassy Mountain coking coal mine in Alberta, which is expected to start production of 4.5 million tonnes per year in 2021, and CST Canada Co.'s No. 8 surface mine, which is in ramp-up mode to about 1.5 million tonnes per year, according to the Seaport report.

However, these additions would total about 6 million tonnes, compared with a total of about 13.1 million to 14.1 million tonnes that may be lost from Teck and Cloud Peak.

For 2019, Westshore provided export guidance of about 29 million to 30 million tonnes, with an average rate higher than in 2018.

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.