Inside Pike River: Black gold in the pipeline

Peter Whittall remains optimistic in spite of a number of setbacks. Photo / Greg Bowker

In 2008, Herald reporter Grant Bradley donned his helmet and headed underground into the Pike River coal mine just after the company listed on the NZX. His report is essential reading in the light of the mine blast which has trapped workers underground.

Deep underground, Pike River Coal's mines manager Peter Whittall turns to an old mining adage after running through the many challenges the $230 million project has faced.

"Mining's not like being in a chocolate factory."

The dank cavern around 100m underground and nearly 2km into the Paparoa Range is like no other workplace. At the mine's pit bottom, a coal processing and utility area, water drips from the ceiling, visitors must look out for huge vehicles that drill through rock five times harder than concrete and the air is heavy with the smell of cement and lime.

What is missing though is the smell of coal, which according to much company literature earlier this decade should have been feeding the world's steel mills by now.

But as Whittall says, mining is not predictable.

"You never know what you're going to get before you get there."

What the hard-driven Australian can be sure of is the mountain of coal is just around the corner and, given the project's history, there could be a few more curveballs to dodge before then.

The Pike River story is one of false starts in getting the company to the NZX, overambitious timetables and cost overruns. But also of huge promise.

Work on the 2.3km tunnel started in September 2006 and is 86 per cent complete. There's less than 400m separating the miners from a rich seam which could yield around 1 million tonnes a year over the next 18 years. And it's not just any coal - it's premium-grade hard coking coal which will rocket to fetch anything from US$130 ($161) a tonne to US$200 a tonne this year due to demand.

"If it's black they'll buy it," Whittall said last week.

The company hopes to start producing later this year and sell 200,000 tonnes before the middle of next year.

The coal is part of the Brunner Seam, discovered in 1846. Pike River has taken decades to get off the ground, in no small part because it's covered by ancient rimu trees on land owned by the Department of Conservation, the northern part of which is a national park.

It's clear environmental obligations are a priority once you reach Pike River's private road with its warnings not to trespass and not to litter.

As the road passes through department land, by law it twists around large rimu trees and must be restored to its natural state when mining ends. Every trace of the project, including seven bridges, power lines and buildings must go.

The budget for the restoration job is $2 million which Whittall hopefully suggests may be saved if the department chooses instead to convert the project headquarters near the tunnel portal into a training centre.

Pike River's road also passes through farmland which butts into the conservation estate and is clearly not subject to the same environmental constraints. The farmland is strewn with smouldering beech tree trunks and major earthworks. While the focus is on black gold in the looming Paparoa range, the land clearance is a sign of another West Coast boom industry, dairy conversion.

Whittall says demand for power in and around Greymouth from dairy processing and mining is putting increasing strain on the local power infrastructure. Pike built a 110kv feed from the national grid for $3.2 million but there have been been cuts and there was now lobbying of Transpower to double capacity along the coast.

About 8km from the tunnel portal the rush is on to finish the coal preparation plant where it will be washed and sorted before being trucked to the Midland Line. Solid Energy will transport the coal to Lyttelton under a new transport deal. Ditching the plan to ship coal up the coast from Greymouth to New Plymouth has proved unpopular locally, but it is acknowledged the $38 per tonne deal is a better one with less risk attached.

Whittall says contractors building the $20 million preparation plant are slightly behind schedule but he's confident it will be finished when the first coal starts blasting down slurry lines in July, two months behind a target set towards the end of last year.

Pike is dependent on water and is in the right place. Around 6m of rain a year falls at the summit of the Paparoa ranges and this will be captured to pump coal from the tunnel at high velocity down slurry pipelines to the preparation plant.

While big spending is evident above ground it's the tunnel that has gobbled up the budget and led to cost overruns.

Miners have used the drill and blast technique to bludgeon their way into the gneiss rock, so far using about 3 tonnes of explosive. It's been the fractured nature of the rock that has driven up costs because more work than expected has to be done on supporting and securing the tunnel walls and ceiling with fine mesh bolted into the rock, and in places lined with sprayed-on concrete 15cm thick.

In November the company advised it had run up $11 million more in additional tunnelling costs than previously advised and an additional $11 million contingency has been announced.

Miners have hit more water than expected and potentially explosive methane gas has also been found as the tunnel nears the Hawera fault, where more fractured rock is expected, before miners hit the final run to the coal seam.

Whittall is unperturbed by gas levels which he says fall well below thresholds. Vertical ventilation shafts will be bored down to the pit bottom and fans will pump air in.

The coal will initially be drilled out mainly by a $5 million road header machine equipped with tungsten tipped blades and later next year by hydraulic monitors. These are large water cannons that blast coal from the face with a jet pumping 9000 litres a minute - a garden-variety water blaster does about seven litres a minute.

Whittall, like others on the project, does not give the impression he's fazed by the technical challenges but he is worried about filling all of the 150 jobs when the mine is in full production.

"One of the key risks to the project is labour."

The company is now scrambling to recruit from the West Coast, expats in Australia, South Africa and in Germany where fields have closed and up to 30,000 miners will be laid off. Wages will start around $65,000 a year for underground workers, well below Australian rates.

Pike River is hovering just outside the NZX-50 and has arranged a $100 million funding package to finish the project, comprising of $60 million rights issue to shareholders and a $40 million bond issue to Liberty Harbor, part of Goldman Sachs Asset Management.

The issue document outlines other risks which still hang over the project including fluctuating coal prices, the impact of the high New Zealand dollar, development and operating cost increases, potential for lower than forecast coal production and variations to resource and reserve estimates.

In spite of this, Pike River Coal's chief executive Gordon Ward, a dabbler in endurance multisport events, has the air of someone in the home straight.

The 44-year-old has spent nearly a quarter of his life involved in the project, either through New Zealand Oil and Gas or directly.

He admits it has been a long haul.

"We'd have liked to have done it a bit quicker than this. We've got a third of the total project duration behind us and now's the good part where we'll be getting into production and mining

"Once we get some coal production I guess there'll be a sense of considerable satisfaction because what some people saw as being a challenging project has come to fruition at a time of very strong coal prices."

* Pike River Coal assisted with the Business Herald's travel costs to the project site.

THE OWNERS
Pike River Coal ownership:

* NZ Oil and Gas: 31 per cent
* Gujarat (India):10 per cent
* Saurashtra (India): 8.5 per cent
* Minorities: 7.9 per cent
* Initial public offering: 42.5 per cent

WHAT'S SO HOT ABOUT COAL?

Pike River's hard coking coal will be used in blast furnaces to make steel, primarily in Asia.

Mines general manager Peter Whittall says the qualities of the Pike product - high fluidity, low ash content and moderate sulphur content - are sought after by the coke-makers, those who blend a variety of coals to a recipe appropriate to the steel being produced.

Highly fluid coals are prized because they can be used in quantities as low as 10 per cent, to bind large quantities of other cheaper filler coals.

The price for coking coal and lower quality thermal coal will be set by April 1, after annual negotiations between miners from Australia and Japanese steel mills.

Citigroup global markets equity research forecasts out this month, which are being highlighted by Pike River Coal, paint a glowing outlook for coal, particularly the hard coking variety.