Friday, November 4, 2011

Clean coal in Canada – a look at the Goldsource and ZEEP project in North-Eastern Saskatchewan

The province of Saskatchewan has some of the best wind, solar, biomass and geothermal resources in Canada but Saskatchewan also has a significant coal resource. Goldsource Mines Inc. (Goldsource) has been developing the thermal coal resources in North-Eastern Saskatchewan near the town of Hudson Bay and has a 79.1 million tonnes indicated, 34.9 million tonnes inferred and 61.1 million tonnes speculative resource. The coal is well-suited to thermal generation of electricity but the very significant greenhouse gases (GHG) generated from thermal coal has significantly limited the demand for such coal. The federal government in Canada has also restricted any new coal electrical generation facilities in the country. There are some very limited opportunities for export abroad but countries like China and India, where demand for generation is increasing significantly, are firmly focused on renewable energy generation – not coal fired thermal generation which they are also shutting down.

Challenges with monetizing the value of coal assets

Goldsource clearly has a significant coal resource in Saskatchewan but in order to monetize the asset requires a method to manage or eliminate the GHGs generated – enter Zero Emission Energy Plants Ltd. (ZEEP). ZEEP commercializes and deploys gasification technologies to use coal or biomass to generate synthetic gas which can be converted to various end products, including electricity, with minimal or zero GHG emissions. Goldsource and ZEEP have proposed an arrangement whereby Goldsource becomes a wholly owned subsidiary of ZEEP. It appears Goldsource has found a suitable dance partner.

What are Goldsource and ZEEP up to in North-East Saskatchewan?

I suspect Goldsource and ZEEP have short-term plans to develop the coal resource, mid-term plans to develop a mine and long-term plans to finance, build and operate a large-scale clean energy facility in Saskatchewan. Saskatchewan is a vast and largely unpopulated province and a very mining-friendly jurisdiction with clearly articulated regulations and a long history of successfully developing mining projects with developers. Goldsource and ZEEP could develop an on-site coal to liquids facility or a clean coal electrical generation facility.

What are some of the challenges Goldsource and ZEEP are facing?

1. Push-back from the public. There will be push-back from the public in developing a new coal mine in the province which will make securing the necessary provincial government permits and approvals more difficult. When Goldsource and ZEEP sit down with the provincial government, they may need to negotiate and execute an agreement whereby Goldsource and ZEEP represent and warrant that any coal extracted from the mine will not contribute to GHG emissions in Saskatchewan. Depending on the push-back from the public, Goldsource and ZEEP may have to broaden this to Canada or possibly agree to a complete limitation on any GHG emissions from the coal extracted.

2. “proven project”. To agree to such representation and warranty regarding limitation of GHGs, it will be necessary to have “proven technology” which it seems ZEEP has, but ZEEP has not yet completed development of any similar large-scale gasification plants – the first would be in Saskatchewan. Securing financing for an unproven project which will require very significant amounts of capital may be difficult.

3. Location. This part of North-Eastern Saskatchewan North of Hudson Bay until the Carrot River Valley at The Pas, Manitoba is largely pristine, undeveloped boreal forest and there will be some opposition from the public and First Nations to developing a coal mine here. In addition, the provincial government is planning a new provincial park in North-East Saskatchewan which may also pose some challenges. That being said, assuming the aforementioned challenges can be surmounted, my view is that the location is very suitable as it is near a major highway, railway and service community.

4. First Nation Participation. There does not appear to be planning for or active First Nation participation or involvement in this project which will be a very significant challenge. The Red Earth First Nation and Shoal Lake Cree Nation are both located in close proximity to this project.

5. Power Purchase Agreement. If the aim is to generate electricity, this project is contingent on getting a PPA from SaskPower (the monopoly utility in Saskatchewan).

The Goldsource/ZEEP clean coal project is certainly one of many interesting clean energy projects in Saskatchewan. I am optimistic that Goldsource and ZEEP can overcome these, and the inevitable host of other, challenges which will arise and get this project built.

Goldsource announced this morning that they will extend the closing date of the business combination of Goldsource and ZEEP to December 31, 2011.

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