Teck Resources Ltd (TECK) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Fording Canadian Coal Trust 2003 third quarter results conference call.

At this time, all participants are in a listen-only mode. Following management's prepared remarks, there will be an opportunity for analysts and unitholders to ask question. If anyone has trouble hearing the conference please lift your handset and press star zero for operator assistance at any time.

I advise participants that this conference call is being recorded on Thursday, October 23rd, 2003. This call is also being web cast and an archive will be available on the Trust website at Fording.ca. I will now turn the conference over to Mr. Jim Gardiner, President of Fording Canadian Coal Trust. Please go ahead, Mr. Gardiner.

Thank you, operator and thank you everyone for joining us today.

With me on today's call are Jim Popowich, Executive Vice President and Ron Millos, our Chief Financial Officer. We released our financial results through the third quarter yesterday and, hopefully, you've all had a chance to read the news release.

I want to focus my remarks today in three areas, the positive impact of our integration and optimization efforts, the outlook for metallurgical coal markets and our expectations for the Trust in the fourth quarter and into 2004.

But before I continue, Ron Millos will read the cautionary statement. Ron, please.

Thank you, Jim.

I remind participants that certain statements made in today's call are forward-looking. By their nature, forward-looking information is subject to known and unknown risks as well as uncertainties and other factors that could cause actual results to differ materially from those suggested today. Some of the risks, uncertainties and other factors that could cause actual results to differ materially from those suggested today.

Some of the risks, uncertainties and other factors that affect the reliability of our forward-looking information are discussed in our public filings with the Securities and Regulatory Authorities in Canada and in the United States. The media may monitor this call in listen-only mode. They are free to quote any member of management but I ask them not to quote remarks from other participants without that participant's permission. Thank you very much and I'll turn it back to Jim.

OK. Thank you Ron. Let me begin by saying that we were very pleased with the operational performance of our mines and with the ongoing integration and optimization of our operations. The benefits of the production rationalization program announced earlier this year are already evidence in the improved cost performance at our mines this quarter.

The six mines are not operating as a single entity rather than as three separate competing companies. We have developed a five year integrated mine plan to maximize cash flow over the longer term. This, in turn, will translate into value for our unitholders.

Current cost reduction trends signal that we are ahead of schedule in terms of meeting our costs and synergy goals. We have had good success with spot and tender sales this past quarter and believe coal sales for the fourth quarter will see us meet our guidance for the year of about 24 million ton sales in the partnership on a pro forma basis.

In fact, there's the potential to exceed our target, largely depending on the ability of rail and port facilities to meet scheduled loading requirements of nominated vessels. As a result of these factors, we now expect to exceed our previous estimates of distributable cash for 2003. We anticipate that we will pay out to unitholders at least $1 per unit for the fourth quarter.

I'm not going to detail all of our third quarter results, but I would like to highlight a couple of key points. Bare in mind that the formation of the Trust on February 28th resulted in significant asset changes that continue to affect the comparability of our prior period results. We gained the Elkview, Line Creek and Luscar Mines while the Prairie assets were sold as part of the transaction.

In the third quarter, higher coal sales, hedging gains on foreign exchange and lower income taxes under the Income Trust structure drove improvements in revenue, net income and income from operations despite lower average U.S. dollar coal prices.

Distributable cash of the Trust was 74 cents per unit for the third quarter. Cash paid to unitholders of $1 per unit included 33 cents resulting from the benefit of the drawdown of inventories during the quarter. The 7 cent difference offset the overpayment of distributable cash at the end of the second quarter.

For the seven months since the formation of the Trust, distributions paid total $3.49 per unit. This was made up of regular payments of distributable cash of $1.56, the special distribution totaling $1.50 and a 33 cent benefit associated with inventory reductions in the third quarter.

Good operating productivities, manpower reductions and declining strip ratios at the Luscar and Line Creek mines have contributed to improve cost performance. The third quarter results for these mines demonstrate that our rationalization initiatives are taking effect.

Coal sales for the third quarter were in line with our expectations and our marketing efforts are yielding positive results. We are experiencing a strong spot and tender market compared to 2002. For example, we recently completed a manual tender with Turkey steel mills to sell more than one million tons of coal, 650,000 tons of which would be the Trust's share, most of which will be leveraged in 2004.

On the pricing front, we've had good success with prices moving up. As a result, our coal prices should average close to U.S. $43 per ton for both the fourth quarter and the full year, a little higher than our previous estimate of U.S. $42 a ton.

As indicated in our second quarter report, one of our goals in 2003 was to reduce our inventory levels to more normal operating levels. In the third quarter, our mines took scheduled vacation and maintenance shut down. With solid sales volume and lower production, we were able to significantly draw down their inventory levels which had a positive impact on cash flows and distributions for the quarter.

In the fourth quarter, we expect production levels will reflect our mines being shutdown for annual Christmas vacation. This, and expected strong sales, will result in further inventory reductions. Our target by the end of this year is to have no more than three to four weeks of clean coal in inventory which, we believe, is an appropriate level going forward.

While spot prices for coal have been moving higher, the rise in the Canadian dollar continues to have a dampening effect on our results since substantially all of our revenues are in US dollars while our costs are largely in Canadian dollars.

Turning briefly now to the industrial minerals operations, our results benefited from

unit costs and lower depreciation along with an improved product mix resulting in higher US dollar prices. These factors were offset, to some extent by lower sales volumes and a higher Canadian dollar.

We expect to maintain our strong market share in higher value products but will continue to exit unprofitable markets in the low value product group. As a result, average sales prices are expected to be higher in 2003 and sales volumes will be below 2002 levels.

Moving now to the ongoing integration of our coal mining operations, it's important to note that our costs are starting to come down. In the third quarter, our cost of sales was nearly the same as last year, despite the addition of the higher cost Line Creek mine. The Luscar mine costs are coming down dramatically as the principal stripping activities are behind us.

As a result of the combined effect of our cost control measures, falling strip ratios and, to a lesser extent, our product rationalization initiatives, we are seeing improvements in our cost structure more rapidly than earlier anticipated.

Our guidance given with our second quarter earnings release indicated we expected to reduce costs by some $4 per ton over the next four years and a $1 decrease has already been achieved this year. The independent mine engineering firm we retained to assess, measure and document the attainment of synergies over the next four years is currently collecting information, cutting costs and reviewing preliminary calculations.

We do not anticipate a change in Teck Cominco's interest in the partnership as of March 2004. But we are confident that at least 75 million in synergies will be realized by March 2006. This would bring Teck Cominco's ownership up to the maximum of 40%. It's important to note that while Teck Cominco's interest in the partnership will increase, at the same time the synergies will be accretive to our distributable cash.

Before we open the line for questions, I'd like to talk about the trends we're seeing in the metallurgical coal markets and the potential impact for Fording.

We pay close attention to the global crude steel markets, as this is a key driver in the supply-and-demand for our primary products, hard coking coal. We believe crude steel production will remain strong overall through the balance of the year and into 2004.

We are seeing significant strength in Asia. This is largely due to the China factor. Steel production in Japan, Korea and Taiwan is running near capacity to satisfy in part, demand from China. In China itself, industry forecasts are that steel productions will continue to grow by about 20 million tons per year for the next several years.

In Europe, while some steel mills may reduce steel production to better master sales projections, reductions are not expected to impact on hard coking coal requirements.

In the U.S. the steel industry seems to be largely holding its own, that is not moving up or down.

The steel markets have translated into fairly robust global demand for metallurgical coal, and this has been reflected in higher price settlements for recent spot in tender sales.

In China, it's becoming widely anticipated that domestic coal supply will not be sufficient to fuel the forecast growth in steel production, and that China will become significant net importer of hard coking coal.

This year we sold our coal into China and we continue to see opportunities for additional sales into this growing market. Our coal year sales into China are anticipated to be around one million tons and we are currently concluding longer-term contracts.

On the supply side, we believe that hard coking coal will be in tight supply in the coming months, while new coal production from Australia is not coming on stream, this should be offset by supply issues in other areas, including mind closures in Canada, including our Luscar Mine that's anticipated to close in 2004, operating problems in underground mines in Australia, China and the United States, lower domestic production in Europe and decreasing availability of finished coke and higher quality coal from China and by China's emergence as an importer of hard coking coal.

The China factor is having an impact in the marketplace too, in areas that aren't so obvious. Recently there's been extremely strong demand for ocean-going vessels, especially to transport iron ore to Chinese steel mills.

The diversion of vessels to iron ore hauling has increased spot freight rates considerably and may have an adverse impact on vessel availability for coal hauling. While this unprecedented demand for vessels may affect the timing of coal sales that is difficult to predict, the potential effect is expected to be minor. Our own freight obligations, which are relatively minor, are fully covered.

Indications are that the substantial majority of our customers as well have also adequately covered their shipping requirements.

To meet anticipated fourth quarter sales, volumes and shipping requirements, we are also looking to Canadian Pacific railway for a strong efficient performance to move our coal from the mine sites to the court. Any rail service problem can result in delayed sales and additional costs for slow loading of vessels.

So to sum up, we're seeing good market fundamentals and all indications point to firming prices and demand. Our recent marketing efforts indicate that we are improving the value and demand for our brand of coal.

We are very encouraged by the positive results of our initiatives to optimize our coal operation and our mines are expected to be running flat out in 2004, which is good for efficient operations and costs.

As well, our inventories are anticipated to be in line with or below normal levels as we go into 2004.

We look forward to continuing to demonstrate our ability to generate meaningful value for our unit holders.

With that, Operator, we can now open the lines for questions.

Thank you. One moment please. Ladies and gentlemen we will now conduct the questions-and-answer session. If you have a question, please press star-one on your touch-tone phone.

You will hear a three-tone prompt acknowledging your request.

Your questions will be polled in the order they are received. If you would like to decline from the polling process, please press star, followed by the two.

Please insure you lift the handset if using a speakerphone for pressing any keys.

One moment please for your first question.

The first question comes from Greg Barnes, Canaccord Capital. Please go ahead.

Yes, good morning, just wondering Jim, looking at China, if you're at one million tons now for the 2003 coal year, how far do you think this can go?

I would say that we're, we're looking to doing between one and two million tons in the next coal year would be an estimate of our expectations at this time. And how far I could go beyond that is a good question, but if you take the steel industry growing there at 20 million tons a year and if they're coming up short now, I mean that would infer a growth in demand of hard coking coal of something I would estimate around 15 million tons a year.

In fact the growth this past year's been 40 million tons I'm told. So it's a big, big issue.

Do you think there's some stockpiling potentially going on here as they take advantage of lower prices this year in anticipation of higher prices next year?

I don't think there's a lot of stockpiling going on right now, no I think things are getting pretty tight by the amount of calls that we're getting for coal availability.

And you are you diverting coals sales then away from other areas of the world into China, and is that, I guess, is a pricing equivalent depending on where you sell this stuff to.

Well we had a large inventory position, as you know Greg, and so you know, we're meeting all of our contracts, but these sales are obviously sales into new areas, and so you know, we'll be proportioning our production next year into the areas where we can get the best value.

OK. One other question, you're looking at coal sales for the trust in Q4 of 4.5 million tons, if I'm reading the press release correctly. The 3.7 million tons from the mind production and 650,000 tons of inventory reduction, I couldn't get the numbers to add up to the 4.5.

I believe our, the number that we've indicated for the fourth quarter in total is about seven million tons, so the trust share would be proportional to that.

The inventory drawdown that we're expecting in that number about matches the inventory drawdown in this past quarter, which was approximately one million tons.

And so one million ton draw down in Q4 as well?

That's anticipated, yes.

OK.

And that is the amount that we've estimated or that we will adjust our distributions for, after which there'll be no further changes in distributions if you like on a common inventory change, it's either up or down. That will bring an inventory to about two million tons, which is what we consider to be about normal.

So Q1, '04, there won't be any inventory impact?

No longer, well inventories will move up or down, but will not impact distributable.

Right.

Yes.

OK, thank you.

The next question comes from Terence Ortslan, TSO & Associates. Please go ahead.

Thanks. Jim, the sustaining cap ex in the quarter was about three million, what are we looking for in the next quarter and also next year, please, if there are any changes we'd like to know.

For next year we're looking at, I think, well, first of all the guidance for the fourth quarter, I think we said is about eight million tons, the trust share, or $8 million I should say, I've tons on my mind. And for the 2004, the trust share, we're indicating something around $30 million, $27 million.

Not much of a change. Jim, going back to the China factor, I think last quarter we were talking about 300,000 tons to half a million tons, now it became a million ton, the numbers are still small, but nevertheless, meaningful. That number has happened in the quarter, in the fourth quarter?

Well the numbers moved to one million tons by deals that we've made through the third quarter, and the one million tons that I referenced is for the coal year ending April 1.

Sure. And you also referred again that and it's very visible with respect to the freight trade. What percent of your, would you say, of your overall coal shipments going to be subject to you, our procurement of freight, next year, coal year.

I'm not sure I understand the question.

The question Terry is where we're responsible for lining up the vessels, what percentage of total shipments is that number?

Correct.

Oh that we're responsible for on the vessels. Less than 10%.

It's volume that you ship.

Yes, that we are responsible for the vessels, is less than 10% of our shipments. In other words, the customers look after, around 90% of our vessel requirements.

Do you think that will shift that the onus is going to be more on you in the future, because

getting cargo space?

I don't think so, because it's just not something we really want to go too involved in. We find our customers have better alliances, if you like with shippers and even many of them own their own vessels and are in a better position to manage that than we are.

Jim, with respect to the currency of movements, I mean there are two strategies you can pursue for the next coal year, either trust to

entirely, or do partially. Which do you think makes more business sense for the pricing?

Well right now, I wish we were 100% heads to 65 cents.

I agree.

But we're not. And you know, we started to do some hedging again, and the dollar kind of moved through our targets here recently. So we're sitting around 40% I believe it is for next year, hedged, and something in the same area the following year. Recurring year we were bout 50% hedged. But our policy, if you like, allowed us to go to 100% hedging out two years. In previous days we were that high, and I guess it's a matter of discussion for our trustees to make a decision about how far to go on that.

But certainly, you know, at the current levels, it's, it's not levels of dollar value that we'd be too anxious to be hedging that longer term.

Your competitors in Australia are not really that well hedged as well, so do you, would you foresee that next coal year negotiations will be more upon the currency factor rather than the demand, and do you think people are going to be, it would be aggressive to try to capture the currency factor?

Well I find that you know, both, both suppliers and customers try to maximize on their profitability's and margins, not, but I think the marketplace will be the key deterrent of pricing in the market next year.

And final question on China, you had some anecdotal evidence last time about the deeper coal mines and the ground commissions and all, can you add some more color on that, with respect to what your observations have been through your contacts and visits?

Well the mines in China have you know, a very tough safety record, if you like. They are deep underground mines. The good quality coking coal are deep underground mines, and are subject to a lot of accidents and incidents.

I suppose in some ways it's a little bit of characteristic of underground, there's just a lot more risk to them than open pit mines.

So I think what we're seeing in China with the deep underground mines there and gassy conditions, there's lots of potential for disruptions and certainly that's remained the case here this past year, as well there's been problems in underground mines in the U.S. and Australia as well.

Thanks.

The next question comes from David Gagliano, Credit Suisse, please go ahead.

Hi, just a couple of quick questions. Just in terms of the dynamics with your sales running well ahead of your production at this point, what should we expect in terms of the impact, if any, on unit costs when sales and production, you know, sort of get back into line beginning, I guess, in 2004? Is there any impact there?

Yes, there's definitely an impact Dave when we get to fuller operation, now. I mean especially in the case of the farm reporting mines, which for the past couple of years have been held back, because of our inventory position. They will be now running flat out and certainly their costs will improve.

So we're looking at certainly an improved cost performance next year over this year.

OK, and then just briefly, on the sensitivities, in the press release for the fourth quarter, is it fair to assume that those sensitivities are comparable or applicable or 2004, and particularly I'm thinking about the foreign exchange sensitivity?

Let me give you some numbers Dave. The sensitivity on foreign exchange for next year, if we're just considering current pricing if you like, for one-cent change in the U.S. dollar rate it would be about 12 cents on distributions. OK.

OK.

For the year, for next year.

OK.

That is with the hedges in place.

With hedges, OK.

With hedges in place.

And then on the rest of it, just to complete the picture, a dollar a ton on price, if you like, U.S., a dollar US would impact us by 41 cents on distribution. A reduction in costs of a dollar Canadian is 34 cents and a change of a million tons of production is 18 cents on distribution. That gives you a pretty good picture for next year.

Yeah, that's perfect. That's very helpful. And then just lastly, I just want to clarify, I just want to make sure I'm thinking about this correctly, one the inventory drawdown is completed, I guess, in the fourth quarter, we should expect to see cash payments, basically, pretty close to the - you know, the distributions generated by operations; is that - is that fair to assume?

Yes, that's a good assumption.

OK. Perfect. Thanks very much.

The next question comes from

,

& Associates. Please go ahead.

My one question here is that capacity previously has been about 25 million tons a year, what's your - you're predicting what, 24 million tons this year; what is your new capacity? What are we looking at here for - you know, and growth?

OK. Well the mines as they're sitting today, George, can produce, for sale, we're saying between 24 and 25 million tons next year. Now, that changes somewhat, for example, at Elk View as strip ratios go down in years to come. We'd be putting out another million tons a year from Elk View without doing anything, just with their existing fleet and what not.

We do estimate that our plants at all of our operations could produce another 5 million tons of coal annually from that - from that amount. But we'd have to add mining equipment or put some - some amount of capital into the operations either in developing pit areas - new pit areas, for example, the

mine, if you like, we're looking at the potential of using the existing Cardinal River Plant and running that mine. If we did that we could probably get something like two, two and a half million tons by just developing the

mine and not having to do a lot in any of the rest of the infrastructure.

And then we assess that against opportunities to improve plant performance at some of the operations or get into some new mining areas to feed the capacity of the existing plants. So we say that we have the potential brown field to produce at least another 5 million tons and then, of course, we have potential in the northeast area as well where we have the

Plant which is the 5 million ton capacity plant and we do have the former

Reserves that we feel could feed that operation. As well as the existing reserves at

itself. So, you know, we have quite a range of potential to expand and what I've just described could take us another five to 10 million tons.

Very good. Thank you.

Welcome.

Ladies and gentlemen, if there are any additional questions at this time, please press star one. As a reminder, if you're using a speakerphone please lift the handset before pressing the keys.

The next question comes from Jay Turner, BMO Nesbitt Burns. Please go ahead.

Yes, good morning, gentlemen. Just had a quick question on the hedging. In the back you've started to bring break it out such that you've got the partnership and the Trust's total and I'm assuming that the blended rate that you're showing there for the average exchange rate incorporates the two?

I notice that for the remaining for fourth quarter you've gone from 1.54 to 1.56 and you've gone from 1.51 I believe, down to 1.50 in 2005; is that correct? Is that a blend or which side of the ledger does that

?

It is a blend on - on the Trust's total, Jay.

OK. You haven't changed the absolute amount on the partnership side but you've added on the Trust side, do you have the individual rates for the Trust because I've got it built in for the - at the Partnership level but I really don't want to have to go back through and try and figure out what the weighted average and bring it down to those levels if you ...

The amounts of the Trust are around the 70 cent range, Jay.

OK. That was one thing and then ...

That's for the Trust column; right?

Yeah. For the six, the eight and the sixteen?

Yeah. Yeah.

OK. And then I guess just a follow up on the inventory reduction comment, you did 16 million this quarter. The guidance back in June or it was back in July was that you were going to do 40 million at the Trust level for the rest of the year and you've just said that you expect the inventory drawdowns to be similar to the third quarter, this quarter; does that mean that you're only going to do a total of around 32 in drawdowns or what number should we look out for on an absolute basis?

Yeah, you should use the previous number we gave which, if it was 40 million, that's the number.

So you're going to get a 50% bump by selling the same number of tons approximately out of inventory?

Yes.

OK.

Expect 24 for Q4 if we achieve the reductions that we're hoping to get.

OK. All right. Thank you.

The next question comes from Michael Fowler, Desjardins Securities. Please go ahead.

Hi, I've got a number of

Jim, you're guiding us to about 24, 25 million tons for next year, when can you - we see more certainty in that figure? I guess, you start to negotiate contracts in the '04?

Yeah, the first quarter, of course, is sold. That's done. So, you know, the first three or four months is pretty well looked after and then deals for the next whole year, you know, negotiations for that could be starting any time. You know, even some deals are in place for next year.

So, you know, the certainty of it, I guess, comes absolutely when the main negotiations are done with the Asian and European Mills which is typically before April 1st and usually in the first quarter. Although last year it - yeah, it dragged on and it was sometime in March, I guess, was when the first negotiations finished and dragged into the new coal year. So, somewhere in there.

OK. Next question on costs, your costs declined as you said, is that - that's mostly due to Luscar and Line Creek; is that right or is there any other areas?

That's the main areas, yes, in this quarter as a result of, you know, the stripping ratios coming down and the productivities, especially at Line Creek, improving from earlier in the year. Those were the major reasons.

Are there other areas in which you are going to attack in the near term?

Every one we can. You know, it's a constant - it's a constant process but, you know, as we've pointed out before, there will be some automatic improvements from declining strip ratios that take place over the next two to three years. But, you know, we're continuing to work hard at synergies and getting the value out of putting all these operations under one team.

I wonder if you could just explain, sort of differences between synergies which I understand meaning cost reductions, essentially, and actual cost reductions associated with operations? Is there a quandary? Which can be attributed to synergies and which can be attributed to

cost reductions?

Yeah, that's a very good question. Synergy, when we're talking about synergies as we're defining it is where it will impact Teck's share - ownership share of the partnership. So, that's what we're saying is the synergy.

Now, other areas where there's a cost improvement or what we consider to be a value improvement, it would have happened with or without the transaction, that's the distinction. As, for example, if the strip ration at the Greenhills Mine was going to come down in 2004 with or without the transaction, that would give a cost improvement that would not be a synergy. So that would be the simplest way I could describe that.

What about labor reductions, as an example? Let's say labor and

I guess, as a result of the transaction.

Yes, you know, and there's been some large savings in labor in moving to lower cost production versus higher cost production. And, I guess, my interpretation of that would be a synergy. But, you know, we have a consultant who's independent who will, you know, give all the judgment to that ultimately.

The last question, capital expenditures were fairly low this quarter; do you expect them to be in that range of $2.8 million in the fourth quarter and is that, kind of, a good ongoing capital requirement?

They were a bit on the low side, around 6 million. We're saying for the fourth quarter we're looking at 8 million and for next year we're indicating 27 million as the Trust's share. So it's in the ballpark.

Now, that does not include your - what you - you talked about in terms of Elk - sorry, your plant - increasing your plant capacities?

No. It does not. Those would be - those would be considered capital improvements and wouldn't be considered sustaining so those would be investments that wouldn't impact distribution.

Thank you very much.

Welcome.

The next question comes from John Hughes, Scotia Capital. Please go ahead.

Thank you, operator. Just a couple of quick ones to ask. One, in terms of the third quarter distribution - the cash distribution, what was generated was the 74 cents, what was paid was 67 or about 90% of 74; should we assume as we do our calculations going forward of that distributable cash number we should be using, again, about 90% of whatever is generated?

No. That difference was because we overpaid the previous quarter. I think that's the 7 cents difference you're referring to there or thereabouts. But our run rate through this year has been about 25 cents a month or 75 cents a quarter. You know, that's approximately what we've been achieving with current pricing and costs.

OK. So going forward we should be using that 74 versus the 67 as a base to measure from going forward?

Or your estimate of earnings from operations, basically, would be the better way of putting it.

OK. Just in terms of the rail and the port, going to 7 million tons in terms of shipments through the course of the fourth quarter, are there any constraints, either at the rail side or at the port side or any concerns thereof?

No big concerns with the port other than 10 inches of rain and that type of stuff. You know it certainly sets up back but over any longer period of time, no concerns at the port.

The rail is going to be pushed. There's no concerns with the rail keeping up with our production rates as they are but we've got inventory at our mines, especially at Fording River that built up through last year and the early part of this year that's got to get out to the - to the ports. And so the rail is going to be stretched but they're making moves and adding train sets and what not, improving efficiency to - to make that happen. But that's going to be a bit of a challenge.

OK. So they can do six and maybe seven; is that the type of range?

Yeah, depending on - on where you're talking about but certainly - certainly the six is not a stretch

OK. Downtime through December, what are we - is there going to be a, sort of, traditional one week to two week type of down - like downtime at the mine site?

The traditional, yes. And the traditional is the - the stats and the week between Christmas and New Year's no. If we need to run to fill out sales and to make sure trains are running, we'll certainly be doing that. But we have enough inventory to be able to, you know, meet out commitments and still take the stats and a few days down.

The main thing is going to be to keep the rail moving and to complete moving our inventory to the port during that time. But if we need to operate plants for a few days beyond that to meet requirements, we'll certainly be doing so.

All right. And you do - there's been a lot of discussion on China. There was a question on price, what are they buying or what are they paying for. As opposed to absolutes, can you - is there any trend in pricing over the course of the last several quarters that you've been working your way into that new market, either out of Australia or worldwide on the seaborne market, you can comment on? I mean, price is going up, going in China because of demand or are they, sort of, hard nosing in terms of their discussions?

I would - I'd answer the question generally by saying that the spot pricing, you know, started out in the year, kind of, in the area of pricing in the current coal year. But, more lately, they're moving to the levels of pricing from last year. So they're moving through the pricing this year to levels of last year.

The sales into China, you know, we're trying to make them strategic because we're coming up tight in terms of our own ability to supply so we're - we're tending to sell the coal to customers who will take coal long-term. And in that sense, it's a bit strategic and, in some cases, it's priced that way to make it happen. In other words, the first sale might be at a more attractive price as a trial, after which, you know, our pricing expectations move up. So that should give you, I think, the general direction of things.

All right. Two quick last ones. There was a question with regards to the run rate as experienced in Q3 and, you know, you noted to certainly - in terms of the hedge position or the inventory impact going forward into '04 that use the run rate and adjust accordingly type of thing in terms of individual perspectives. The biggest impact, short of pricing, I suppose, would be where your FX hedge goes through the course of next year.

I just want to check, is that spread evenly over each quarter or is it all going to happen in the first half of next year?

The hedging?

Yeah.

Is spread.

OK. So the largest impact to your run rate distribution in Q3 would be whatever assumptions are going to be had on the FX side going forward?

In Q3, I'm not sure I understand?

In other words, it's going to be a relatively large impact of your changing hedge position over '04 versus '03 if the numbers you quote are as what you may realize? I think there was a 12 cents

Yeah, we're saying a 1 cent change in exchange, you know, from where we have been around 74 cents or so is about 12 cents in distributions for next year.

OK. Last one, negotiation with Europe and Japan for '04, have they been initiated yet?

Not really, no.

OK. Thank you very much.

OK.

There's a follow up question from Jay Turner, BMO Nesbitt Burns. Please go ahead.

Thanks. It just occurred to me. I mean, as you push all this inventory through West Shore and, you know, run the new train sets into the valley, how is this going to impact your blending?

Usually when you're doing blending at a port or, you know, if you're sending rail cars to different mines to fill up it reduces capacity and I was just wondering if you could give us a sense as to how that works?

Yeah, you're a good operator, Jay. You know, the more - the more pressed you get, I mean, obviously the blending kind of slows things down so you try to find ways to - to keep the efficiencies up. So if you can, you know, make a sale and make a product that doesn't need blending that can help.

But the blending then we need to do to make the quality requirement for our customers, we fully plan, you know, on doing and keeping the quality of our coal consistent as it has been.

I see, so is this all based around the four brands that have been talked about previously and are those now in place and it's pretty straightforward to put those into the market?

Yes, essentially.

OK. All right. Thank you.

Mr. Gardiner, there are no further questions at this time, please continue.

OK. Well, thank you, operator, I think we've covered most of the ground today and thank you everyone for your attendance.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating and please disconnect your line.