Western Canadian Coal Production Optimization and Risks Characterization

Abstract

The coal mining industry is an important sector of Canada\u27s economy. The cost of mining and haulage of coal in Western Canada is a major focal point when compared to inexpensive coal from Australia. Spot coal price volatility affect contractual price arrangements and this creates pressure on companies\u27 profit margins and their competitive edge. In order to alleviate this pressure, companies may have to take short-term drastic measures that may hurt their strategic positions in the long-term. Companies must also create a mix of their products to ensure effective maintenance of profit margins given various quantity and quality constraints. In this paper the authors provide extensive analysis based on detailed probabilistic production systems for coal extraction and haulage in Western Canada. An optimization model is formulated for typical coal mining operations, processing and haulage from mine sites to the Vancouver Ports using linear programming algorithm. A stochastic model is also formulated to analyze the associated risks and uncertainties. These models are validated using data from five operating mines in Western Canada with varying quantity and quality products and uncertainties. The results show that the five mines studied have to produce between 180,000 and 2.10 million tonnes of metallurgical coal and between 70,000 and 2.16 million tonnes of thermal coal to enhance their profitability given the underlying constraints. The average expected probability of success associated with production capacities from these mines is about 66%. This results in a failure probability of 36%, which is extremely high under contractual arrangements. The results also show that management\u27s profit expectation of $83 million can be achieved at a zero percent failure probability. With a higher risk of failure of 10$100.3 million