Coal is formed from plant remains that have been covered by a layer of sediment and are subjected to geological forces over time. The forces of the sediment overlaying the plant material cause chemical changes that create a carbon rich substance know as coal. Coal is a readily combustible black or brownish-black sedimentary rock that is composed primarily of carbon, along with variable quantities of other elements such as sulphur, hydrogen, oxygen and nitrogen. Based on its properties, coal can be classified by rank, from lowest to highest, into the categories of lignite, sub-bituminous, bituminous and anthracite. Lower rank coals contain less carbon, more moisture and have lower calorific values.

In general terms, based on the rank, coal can be classified as either “thermal” coal or “metallurgical” coal. Thermal coal is lower in carbon content and calorific value, higher in moisture value, is the world’s most abundant fossil fuel and is primarily used to produce energy. Metallurgical coal is less abundant than thermal coal and is primarily used in the production of coke which is an important part of the integrated steel mill process.

Metallurgical coal is primarily sold to steel mills and used in the integrated steel mill process.

When making steel, two of the key raw ingredients are iron ore and coke. Coke is used to convert the iron ore into molten iron. Coke is made by heating coking coal to about 2000°F (1100°C) in the absence of oxygen in a coke oven. The lack of oxygen prevents the coal from burning. The coking process drives off various liquids, gases and volatile matter. The remaining solid matter forms coke, a solid mass of nearly pure carbon. Approximately 1.5 tonnes of metallurgical coal are needed to produce one tonne of coke. Only certain types of metallurgical coal have the necessary characteristics required to make coke. These characteristics include caking properties (the ability to melt, swell and re-solidify when heated) and low impurity levels (e.g. moisture, ash, sulphur, etc.).

There are three main categories of metallurgical coal: (i) hard coking coal that forms high-strength coke; (ii) semi-soft coking coal that produces coke of lesser quality; and (iii) PCI coal. PCI coal is generally not considered to be a coking coal, rather it is used primarily for its heat value and is injected into a blast furnace to replace expensive coke. Semi-soft and PCI coals normally have lower sales values compared to hard coking coal due to the relative availability of these products. Integrated steel mills will optimize the use of semi-soft and PCI coals in order to reduce overall costs. However, there are technical limits to the ability of integrated steel mills to substitute semi-soft and PCI coals for hard coking coal in their coking coal blend. During periods of high steel demand, high productivity and high PCI-rate furnaces require higher coke quality, for which more high quality hard coking coal is required.

The following schematic outlines how steel is produced in an integrated steel mill.

The principal market for Grande Cache Coal's hard coking coal is the seaborne hard coking coal market. The seaborne hard coking coal market is defined by the global nature of international steel-making, the relative concentration of quality metallurgical coal deposits in Australia, Canada and the United States and the relative low cost of seaborne transportation. Total worldwide production of higher quality metallurgical coal was reported to be 170 million tonnes in 2010 and expected to increase to 203 million tonnes in 2013. Australia was the largest exporter at 62% while Canada followed at 13%. Australia, Canada and the United States account for 94% of total world seaborne trade.

Trade in the seaborne hard coking coal market is influenced by crude steel production that, in turn, is largely dependent on the overall state of regional and global economic conditions. The global trade of steel products is very large and fluctuations in supply and demand in various regions throughout the world are common. Although there are fluctuations in the total amount of steel produced worldwide, the amount of steel produced by the integrated steel mill process has been steadily increasing, until very recently. In turn, the volume of hard coking coal used in this process has not experienced the same variability as total steel production; however, recent price stratification has, in the short term, resulted in increased volume volatility of hard coking coal used in the process. Canadian hard coking coal is competitive in the seaborne market due to its high quality, its suitability for blending with coking coals from other countries and the desire of steel producers to diversify their supplier base in order to create competition and security of supply.