Donkin Mine

Nova Scotia, Canada

Recent Events

On March 30, 2020, Kameron announced that it was ceasing production operations at the Donkin Mine due to adverse geologic conditions. The Mine will not be sealed and no mining equipment has been removed from site. The Mine is being maintained by a small staff to ventilate and keep the facility dewatered during an idled phase of care and maintenance for an indeterminate period of time.

Before idling the Mine, Kameron was in the Development Phase of the operation where two coal sections were actively developing the Mine’s main underground infrastructure and the first production panel to allow for the long-term and highly active Production Phase, which would incorporate retreat mining. For the retreat mining phase, Kameron was evaluating the viability of installing a longwall mining system which would have reduced Kameron’s operating costs and significantly increased production volumes.

During the Development Phase, Kameron occasionally experienced roof stability where material fell from the ceiling (roof) of certain sections of the tunnel operations. These occurrences are very common to underground coal mining operations. In Donkin’s case, all of the roof falls occurred in areas where the risk was already identified by Kameron, and precautionary measures had been taken. That is the primary reason why no one was ever injured from a roof fall at Donkin.

From 2016 when the Mine development and tunnel refurbishment started, to the end of 2018, Kameron’s mine injury rate was 75% less than the U.S. national underground coal mine injury rate, and none of those injuries were related to a roof fall. In 2018, Nova Scotia saw 5,314 Time Loss Claims across 19 sectors, with the Donkin operation only accounting or 0.06% of those claims.

When roof falls occur, best practices have the operator (Kameron) notify the local safety regulator, which in Nova Scotia’s case is the Nova Scotia Department of Labour and Advanced Education (“NS LAE”). Kameron and NS LAE work jointly to assess the cause and determine the appropriate remediation procedures.

However, as the Mine is the first underground coal mine to operate in Nova Scotia since 2001, NS LAE has been working with the outside assistance of experts from the U.S. Mining Safety and Health Administration (“MSHA”) to provide it with advanced expertise to properly assess any revisions to Kameron’s ground control procedures at the Mine. According to MSHA, who have toured the Mine in the past, Kameron’s previous roof control procedures at Donkin “exceeded industry best practices for safety.”

In February 2020, Kameron experienced two localized roof falls in one of the operating coal sections over an area where a localized zone of roof geology differed from the typical rock strata of the Mine in that it was weaker. As with all prior roof falls at Donkin, no one was injured. Following the last roof fall on February 13, 2020, a Kameron spokesman said – “the miners are trained to identify signs of [rock] stress. This wasn’t a sudden event. There were signs of this.”

Subsequent to the February roof falls, NS LAE issued stop work orders to Kameron, and following standard procedure, Kameron and NS LAE jointly commenced an assessment of the area of adverse geology with a plan to devise a remediation program for this specific zone and any other future similar occurrences.

However, as a result of COVID-19 related travel restrictions, MSHA consultants from the United States were not available to visit Nova Scotia to assess the geology in the area of the roof falls or to provide NS LAE with advice regarding Kameron’s ground control procedures. On March 30, 2020, when Kameron made the decision to idle the Mine, the operation was still under a stop work order for the affected coal section.

As mentioned above, the Mine has not been sealed and no mining equipment has been removed from the site. The Mine has been placed into an idled phase of care and maintenance for an indeterminate period of time. The Corporation is unaware of Kameron’s timeline to restart operations or if they will. The assessment and potential resolution of the adverse geology at Donkin will take substantial efforts by the NS LAE, MSHA experts, Kameron and other professionals in this field and will be contingent on Kameron’s resolve to recommence operations. This process will take some time as the utmost care, caution and expertise must be deployed. It would not be accurate to categorize the time to conduct these steps as short or to say that Donkin is temporarily suspended.

Description of Mine and Royalty Payment Potential

The Donkin Mine is currently permitted for run-of-mine annual production of 3.6 million tonnes, which would produce approximately 3.0 million saleable tonnes after being washed in the onsite coal handling and preparation plant. At 3.0 million saleable tonnes and using a wide range of coal pricing (C$60 to $140 per tonne), royalty payments to Morien, should the Donkin Mine recommence production, could be in the order of C$5 to $11 million annually. These values are only estimates based on assumptions that Morien management consider reasonable as of the date of this MD&A and would only be achieved if Donkin resumed operation and only if Donkin reached permitted production levels. Future results and royalties received, if any, subject primarily to production rates and coal pricing, may vary from those estimated by Morien (1).

Morien incurs general and administrative expenses in respect of the administration and preparation of regulatory filings as a public company, collection of revenues from the aforementioned royalties, and seeking and acquiring new mineral projects.

(1) The above technical disclosures are consistent with the information in the technical report titled “Technical Report, Donkin Coal Project, Cape Breton, Nova Scotia, Canada” dated November 2012, found on Morien’s SEDAR profile.

Description of Morien’s Royalty

Morien owns a gross production royalty on coal sales from the Donkin Mine. The royalty consists of 2.0% of the revenue from the first 500,000 tonnes of coal sales per calendar quarter, net of certain coal handling and transportation costs, and 4.0% of the revenue from coal sales from quarterly tonnage above 500,000 tonnes, net of certain coal handling and transportation costs. The royalty is payable to Morien on a quarterly basis over the anticipated 30+ year mine life. The royalty is binding on Kameron and its successors in interest in the Mine for the duration of the Mine’s lease.

Donkin’s Positive Attributes

  • The Mine has received over CAD $300 million in capital investment from Kameron since 2015;
  • Donkin coal has been marketable overseas and locally as both a low ash (3%), high energy (>14,000 BTU/lb) thermal coal, and overseas as a high-volatile, semi-soft B metallurgical coal (low ash, high vitrinite content, high fluidity, high crucible swell number);
  • The Mine is a short truck haul to a local power station and the Provincial Energy Ventures Ltd.’s (“PEV”) port facility in Sydney, Cape Breton, responsible for handling all of the exported coal from Donkin;
  • PEV recently dredged the sea floor around its dock to a depth of 16.5 metres in order to accommodate larger, Capesize vessels, which would significantly reduce the cost of transporting Donkin coal to overseas markets, particularly in Asia; and
  • Substantial coal resource (30+ year mine life) – production assumptions based on a Probable Mineable Reserve of 58 million tonnes. The Reserve estimate is based on an Indicated Resource of 174 million tonnes, which does not include an additional 172 million tonnes of Inferred Resources.
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