Appendix 3 - 20010525 BRC Evaluation (Norwest Mine Services).pdf

BERING RIVER

COALFIELD

EVALUATION

Submitted to:

EYAK PRESERVATION

COUNCIL

May 25, 2001

NORWEST MINE SERVICES, INC.

136 East South Temple 12th Floor Salt Lake City, Utah 84111

TEL (801) 539-0044

FAX (801) 539-0055

USA (800) 266-6351

www.norwestmines.com office@norwestmines.com

01-2537 EYAK PRESERVATION COUNCIL

BERING RIVER COALFIELD EVALUATION

TABLE OF CONTENTS

EXECUTIVE SUMMARY .......................................................E-1

GEOLOGY AND COAL RESOURCES.....................................E-1

COAL MINING AND TRANSPORTATION ............................E-2

ENVIRONMENTAL...................................................................E-2

ECONOMIC EVALUATION .....................................................E-3

SECTION 1 INTRODUCTION...................................................................... 1-1

SECTION 2 INFORMATION SOURCES .................................................... 2-1

SECTION 3 GEOLOGY AND RESOURCES.............................................. 3-1 GEOLOGICAL SETTING .......................................................... 3-3 Stratographic Setting........................................................ 3-4

KATALLA FORMATION.............................................. 3-5

STILLWATER FORMATION........................................ 3-5

KUSHTAKA FORMATION........................................... 3-6

TOKUN FORMATION................................................... 3-6

Igneous Rocks.................................................................. 3-7 Structural Setting ............................................................. 3-7 FOLDING........................................................................ 3-8 FAULTING...................................................................... 3-9 COAL QUALITY...................................................................... 3-10 COAL RESOURCES................................................................. 3-11

EXPLORATION REQUIREMENTS........................................ 3-14

SUMMARY AND CONCLUSIONS ........................................ 3-14

REFERENCES CITED.............................................................. 3-15

SECTION 4 MINING...................................................................................... 4-1 BASIS OF STUDY...................................................................... 4-1

COAL PRODUCTION RATE .................................................... 4-1

METHODOLOGY ...................................................................... 4-1 Coal Reserves................................................................... 4-2 Expected Mining Conditions ........................................... 4-2 Stripping Ratios ............................................................... 4-3 Coal Quality ..................................................................... 4-3

SECTION 5 COAL TRANSPORTATION ................................................... 5-1

SECTION 6 ENVIRONMENTAL ................................................................. 6-1 BACKGROUND ......................................................................... 6-1

ENVIRONMENTAL SETTING ................................................. 6-1

SECTION 7 PERMITTING ........................................................................... 7-1

U.S. FOREST SERVICE (USFS)................................................ 7-1

FEDERAL ENVIRONMENTAL PROTECTION

AGENCY (EPA).............................................................. 7-2

National Pollutant Discharge Elimination System (NPDES) Permit................................................... 7-2

U.S.ARMY CORPS OF ENGINEERS (COE)............................ 7-2

The 404 Permit................................................................. 7-2 Section 10 Permit............................................................. 7-2

U.S. FISH AND WILDLIFE SERVICE (FWS).......................... 7-3

Threatened and Endangered Species Clearnace .............. 7-3

ALASKA DEPARTMENT OF NATURAL

RESOURCES (DNR) ...................................................... 7-4

The Surface Mining Control and Reclamation Act (SMCRA) ...................................................... 7-4

ALASKA STATE COAL PERMITS (DIVISION OF

MINING, LAND AND WATER, (DNR)............ 7-4

Notice of Intent to Explore .............................................. 7-4 Coal Mine Exploration Permit ......................................... 7-4 Coal Mining Permit.......................................................... 7-4

OTHER ALASKA PERMITS ..................................................... 7-5

Certificate of Approval to Construct, Modify or Remove or Abandon a Dam................................. 7-5 Certificate of Approval to Operate a Dam....................... 7-5 Water Right Application and Water Conservations Fee.. 7-5 Air Quality Construction Permit ...................................... 7-6 Air Quality Operating Permit........................................... 7-6 Permit-By-Rule for Certain Small Storage Tanks ........... 7-7 Drilling Waste Storage Facility Plan ............................... 7-7 Archeological Clearance.................................................. 7-7 Spill Prevention Control and Countermeasures Plan....... 7-8

FEDERAL COMMUNICATIONS COMMISSION (FCC)........ 7-8

TREASURY DEPARTMENT (DEPARTMENT OF ALCOHOL,

TOBACCO AND FIREARMS........................................ 7-8

MINE SAFETY AND HEALTH

ADMINISTRATION (MSHA)........................................ 7-8

CONCLUSIONS.......................................................................... 7-9

SECTION 8 ECONOMIC EVALUATION................................................... 8-1 CAPITAL COSTS ....................................................................... 8-1 OPERATING COSTS ................................................................. 8-2 COAL SELLING PRICE............................................................. 8-3

ECONOMIC EVALUATION (BASE CASE) ............................ 8-3

Discount Rate................................................................... 8-3 No Present Value ............................................................. 8-4

ECONOMIC EVALUATION (OPTIMUM CASE) ................... 8-4

SECTION 9 TRANSPORTATION ALTERNATIVES ............................... 9-1

List of Tables

3.1 Early Version of Stratigraphic Column of Bering River Coal

Field ....................................................................................... 3-4

3.2 More Recent Interpretation of Stratigraphic Column, Bearing

River Coal Field..................................................................... 3-4

3.3 summary of Selected Coal Quality Parameters, As Received

Basis..................................................................................... 3-11

3.4 Summary of Estimated Resource by MIRL (1987); Assumes

Coal Density of 1.3 gm/cc ................................................... 3-12

8.1 Economic Evalution............................................................... 8-5

List of Figures

1.1 Location Map......................................................................... 1-2

3.1 Bearing River Coal Field ....................................................... 3-2

5.1 Coal Transportation Routes ................................................... 5-2

E-1

EXECUTIVE SUMMARY

NorWest Mine Services Inc. (NorWest) was retained by the Eyak Preservation Council (EPC) to prepare an independent valuation or assessment of an undeveloped coal property in Alaska’s Bering River Coal Field. The property is controlled by the Korean Alaska Development Corporation (KADCO). KADCO has expressed a desire to develop a coal mine on this coal property.

KADCO acquired the coal resources from Chugach Alaska Corporation (CAC) but retained surface, timber and water rights to the land, which had been deeded to them as part of the Alaska Native Claims Settlement Act (ANCSA) of 1971.

This report is principally based on information placed in the public domain. Other information was obtained from telephone conversations with people who had first-hand experience with the geology of the area.

EPC requested from KADCO copies of technical information such as mining feasibility studies, geological studies, reserve and coal quality estimates etc. that would assist in developing the valuation of the property.

No such technical information has been provided by KADCO. NorWest also contacted certain staff members of the Alaska regulatory agencies to enquire whether KADCO had ever submitted technical information in support of their proposed mining activities. It was reported that no such information had ever been submitted.

GEOLOGY AND The geology of the Bering River Coal Field is extremely complex COAL RESOURCES including intense folding with attendant tectonic thickening and thinning, reverse and normal faulting and bedding plane faulting.

Correlation of coal beds is tenuous at best given the complex structural setting. The most recent exploration conducted in 1984 indicated good coal quality ranging from 11,700 to 15,400 Btu/lb with moderate to high sulfur content and generally low to moderate ash content.

Work performed by the Mineral Industry Research Laboratory (MIRL) has estimated a coal resource of approximately 59 million tonnes with a mineable coal reserve of 35 million tonnes.

In NorWest’s opinion, the resource is not adequately explored to derive an estimate of mineable coal reserves. Resource and reserve estimates are inferred and are unreliable because of the complex structural setting and the inadequate amount of exploration

E-2

COAL MINING AND After reviewing the available public domain information and TRANSPORTATION speaking to knowledgeable individuals, it became clear to

NorWest that the overall geological conditions of the Bering River Coal Field would make it very difficult for a coal mine to be economically viable in today’s competitive market. Therefore, in order to not unnecessarily prejudice the valuation, where there was a lack of clear evidence in the public domain to support certain critical geological issues, we gave the benefit of doubt to the project. In other words, we have presumed that future exploration efforts will result in the favorable geological conditions upon which the evaluation is based.

In selecting a coal production rate for this valuation, NorWest relied on a formal study of the transportation alternatives1 from the mine to an ocean terminal and their associated capital and operating costs. This document was based on a production build-up to three million tonnes per year over a period of seven years.

Scoping estimates of the likely capital and operating costs of a surface coal mine were prepared by NorWest. The mine is based on using conventional hydraulic shovels and rear-dump trucks.

Due to the non-availability of certain critical geological information, we were required to make assumptions about key factors which directly affect mining and overall project economics.

Accordingly, we cannot vouch for the reliability of the assumptions which cover:

!" The existence of an adequate reserve base assumed to be 35 million tonnes;

!" Expected mining conditions which are likely to be very difficult and costly to overcome;

!" The existence of reasonable stripping ratios assumed to be 10:1 in comparison to public domain information ranging from 16:1 to 40:1; and

!" Coal quality which is assumed to average 12,500 Btu/lb without washing.

ENVIRONMENTAL The CAC/KADCO land is entirely surrounded by the Chugach

National Forest, the second largest national forest in the United States. The high value of the area for existing natural resources mandates that the selection of mining and transportation methods

1 “Assessment of the Feasibility and Implementation of Port and Transportation System Alternatives for the Bering River Coal Field – Phase 1”, dated March 1983, and prepared for the City of Cordova, State of Alaska by Wheelabrator Coal Services Company.

E-3 for development of the coal will be strongly influenced by their environmental effects.

Various Federal, State and County agencies have jurisdiction over many of the activities necessary for the development of the Bering River Coal Field. At this stage it is not possible to predict which specific permits may be required. However, we estimate that the following major permits would be required to place the KADCO property into production:

!" Environmental Impact Study or Statement (EIS) from the U.S.

Forest Service;

!" National Pollutant Discharge Elimination System (NPDES)

Permit;

!" 404 Permit from the U.S. Army Corps of Engineers (COE);

!" Section 10 Permit from the COE;

!" Threatened and Endangered Species Clearance from U.S. Fish and Wildlife Service (FWS); and !" Mining Permit under terms of the Surface Mining Control and

Reclamation Act (SMCRA). The permit is issued by the Alaska Department of Natural Resources (DNR).

Numerous (at least ten) other permits from various State of Alaska and federal agencies will be required.

Our overall assessment of the permitting situation is as follows:

!" The State of Alaska and the US federal government will allow the development of the Bering River coal deposits;

!" The entire permitting process will require a minimum of three years, but more likely six years to as long as ten years to complete;

!" The overall cost of securing all necessary permits will likely range from $3 million to $8 million.

ECONOMIC EVALUATION The preparation of an economic analysis for the KADCO coal properties involves a year-by-year calculation of the life-of-mine capital and operating costs and revenues resulting from coal sales.

Total initial capital required to reach full production of three million tonnes per year is estimated to total $386 million. The total operating costs (at full production) of coal loaded on to ships is estimated to total $35 per tonne which is equal to the selling price.

This information was used to determine the Base Case value of the property.

E-4

The overall results of the economic evaluation of the Base Case, as determined by Net Present Value (NPV), is $(120.6) million pre-tax using the generally accepted discount rate of 10%. At a discount rate of 5% the NPV is $(73.8) million pre-tax. This indicates that the KADCO project is clearly uneconomic.

Due to the extremely negative value of the property, NorWest decided to evaluate the project using more optimistic estimates of capital and operating costs and coal selling price. Specifically, the following changes were made to the Base Case data:

Mining equipment and facilities capital 10% reduction

Mining costs 10% reduction Land transportation costs 10% reduction Coal selling price 9% increase

The net result of all of these changes is that the pre-tax NPV’s are $(29.6) million and $51.1 million at discount rates of 10% and 5% respectively. These numbers still indicate an unattractive project.

1-1

INTRODUCTION

Norwest Mine Services Inc. (NorWest) was retained by the Eyak Preservation Council (EPC) to prepare an independent valuation or assessment of an undeveloped coal property in Alaska’s Bering River Coal Field. The property is controlled by the Korean Alaska Development Corporation (KADCO). KADCO has expressed a desire to develop a coal mine on this coal property.

KADCO acquired the coal resources from Chugach Alaska Corporation (CAC) on December 11, 1987 as recorded in Book 64, Pages 743 through 747, Cordova Recording District. CAC has retained surface, timber and water rights to the land, which had been deeded to them as part of the Alaska Native Claims Settlement Act (ANCSA) of 1971. The general location of the project area and the CAC lands and the KADCO coal holdings are indicated on following Figure 1.1.

2-1

INFORMATION SOURCES

This report is principally based on information placed in the public domain and this information is referenced wherever used in the report. EPC has been most helpful in providing public domain information.

Other information was obtained from telephone conversations with people who had first-hand experience in conducting geological work in the Bering River Coal Field.

EPC requested from KADCO copies of technical information such as mining feasibility studies, geological studies, reserve and coal quality estimates etc. that would assist in developing the valuation of the property. No such technical information has been provided by KADCO. NorWest also contacted certain staff members2 of the Alaska regulatory agencies to enquire whether KADCO had ever submitted technical information in support of their proposed mining activities. It was reported that no such information had ever been submitted.

2 Telephone conversations with Ed Fogels, Large Mine Specialist, Alaska Division of Mining, Land and Water (the agency responsible for regulating mining activities), and Jim Clough of the Alaska Division of Geological and Geophysical Surveys on February 19 and 23, 2001 respectively.

3-1

GEOLOGY AND RESOURCES

The Bering River Coal Field is located in south central Alaska, geographically between the northern Pacific coast and the Chugach Mountains. The resources are situated entirely within the Chugach National Forest. The coal bearing rocks, exposed along a two to five mile wide belt, trend northeasterly for about 20 miles from the eastern shore of Bering Lake (Figure 3.1).

The Martin River Glacier on the northwest and the Bering or Stellar Glacier and the Bering River drainage basin on the southeast border the Coal Field. The topography and geomorphology of the area is varied, from densely forested lowlands and mountainsides with sharp to well-rounded ridges with precipitous sides of 45# to 70#. Elevations range from less than 100 feet along the Bering River to nearly 2700 feet on Monument Mountain.

The climate is mild and wet with an estimated annual precipitation of 150 to 200 inches. The lowlands are apparently subjected to heavy annual snowfall, perhaps as much as 12 to 20 feet. Snow accumulation in the upper parts of the mountains is restricted to the lee side of ridges and valleys, the crests and windward sides swept clean by winds.

There have been numerous geological, engineering and mining studies and investigations of the Bering River Coal Field dating back as early as 1896 in reports and publications of the United States Geological Survey. A number of governmental and private sector entities have conducted field investigations of the Coal Field including:

!" U.S. Geological Survey;

!" Bering River Coal Company;

!" Alaska Development Company;

!" Pacific Coal and Oil Company;

!" Cunningham “Group”;

!" U.S. Navy;

!" U.S. Bureau of Mines;

!" Jewell Ridge Coal Corporation;

!" Cortella Coal Corporation;

!" Mineral Industry Research Laboratory (MIRL), University of

Alaska; and !" Korea Alaska Development Corporation (KADCO).

In addition to the above list, several consulting companies have been involved with various investigations of the Coal Field.

3-3

Exploration and prospecting has included surface mapping, trenching, exploration adits and tunnels, drilling programs (open hole drilling, coring, geophysical logging) and various testing of the physical and chemical properties of the coal.

Most recently, from 1981 through 1984, KADCO drilled 60 holes (about 8000 linear meters), did physical and chemical laboratory testing on coal core and conducted an extensive mapping program.

KADCO did this work under the terms and conditions of an agreement with CAC.

This section of the report draws heavily from the three following references:

!" Barnes, F.F., 1951, Review of the Geology and Coal Resources of the Bering River Coal Field, Alaska: U.S. Geological Survey Circular 146, p1-11.

!" Sanders, R.B., 1976, Geology and Coal Resources of the Kushtaka Mountain Area of the Bering River Coal Field: U.S.

Geological Survey, Unedited and Unpublished Draft Report.

!" Smith, J.E., and Rao, P.D., 1987, Geology and Coal Resources of the Bering River Coal Field, in Rao, P.D., ed., Focus on Alaska’s Coal ’86, Proceedings of the Conference held at Anchorage, Alaska, October 27-30, 1986: University of Alaska Mineral Industry Research Laboratory Report 72, p 266-299.

GEOLOGICAL SETTING Rocks cropping out in the Bering River Coal Field are of two general classes: unconsolidated alluvial and glacial deposits, and indurated, complexly folded rocks. The indurated rocks are primarily Tertiary sediments with the exception of two areas of metamorphosed pre-Tertiary deposits and minor intrusive igneous rocks. The close-spaced folding and faulting that define the complex structural features of the region, increase in intensity in the northeast, especially in the Carbon Mountains district.

Interestingly, the number of intrusive sills and dikes increase in the Tertiary sediments to the northeast, as does the rank of coal (Barnes, 1951). Figure 3.1 illustrates the increase in coal rank from southwest to northeast.

3-4

Stratigraphic Setting Historically the stratigraphic models that describe the coal-bearing successions have been quite different. In the first one, which held sway for 80 years, the coal-bearing Kushtaka formation, is placed near the top of the Tertiary sequence and represents a freshwater origin sandwiched between two marine sequences: the Katalla and the Tokun formations.

Table 3.1, following, illustrates this early interpretation of the stratigraphic sequence:

Table 3.1 – Early Version of Stratigraphic Column of Bering River Coal Field

AGE FORMATION LITHOLOGY ENVIRONMENT

Quaternary NA Glacial, freshwater and marine deposits Tertiary/Post-Tertiary NA Diabase and basalt dikes and sills Igneous intrusives

Tokun Sandstone and shale Marine Kushtaka Arkose, sandstone, sandy shale, coal and coaly shale Freshwater

Stillwater Shale, sandstone, sandy shale Marine & freshwater

Tertiary

Katalla Conglomerate, sandstone, shale, glauconitic sandstone

Marine

Tertiary/Pre-Tertiary NA Greywacke slate, igneous rock Metamorphic & igneous

A more recent interpretation of the stratigraphic sequence is based on more fossil data and correlation with the Yakataga District rock succession. This interpretation of the stratigraphic sequence places the coal-bearing Kushtaka formation at the bottom of the Tertiary sequence succeeded by predominantly marine sequences of the Tokun, Katalla and Stillwater formations (Table 3.2).

Table 3.2 – More Recent Interpretation of Stratigraphic Column, Bering River Coal Field

AGE FORMATION LITHOLOGY

Quaternary NA Glacial moraine deposits, stream deposits, marine shoreline deposits

Stillwater Sandstone, siltstone, shale Katalla Conglomerates, sandstone, shale, glauconitic sandstone Tokun Sandstone, shale

Tertiary

Kushtaka Arkose, sandstone, siltstone, shale, coal beds Pre-Tertiary NA Greywacke, slate, igneous rocks

The uncertainty regarding the stratigraphic succession of Tertiary sediments is a reflection of the limited outcrop (less than 20 percent), the uncertainty of the nature of conformable and unconformable contacts between lithologic packages and the structural complexity.

Among the structural complexities that contribute to the uncertainty with the stratigraphic succession are:

!" intense folding with attendant tectonic thickening and thinning; and !" reverse and normal faulting and bedding plane faulting.

3-5

The Kushtaka Formation apparently was the focus of regional strain and exhibits the most intense deformation features resulting from crustal movement. Correlation of coal beds is tenuous at best given the complex structural setting.

After a hundred years of geologic observations, workers are still not confident in the exact nature of the stratigraphy, the age relationships between successive lithologies, or how much of the coal is stratigraphically positioned versus structurally emplaced.

KATALLA FORMATION: The rocks of the Katalla Formation outcrop in the upland area south of Bering Lake between Bering River and Katalla River. These rocks also occupy the low hills between the base of the steep eastern slope and the Katalla drainage basin.

A major portion of the formation consists of black argillaceous shale, with numerous limestone concretions and at least one bed of glauconitic sand. There are two massive sandstones located above and below the thickest, most prominent shale bed. Another shale bed of similar character underlies the bottom sandstone.

Conglomerates, sandstones and shales overlie the upper sandstone.

The conglomerates are discontinuous and grade into sandstones and shales (Martin, 1908).

STILLWATER FORMATION: The Stillwater Formation occupies the area west of Shepard Creek, along the west shoreline of Kushtaka Lake, all along the Shockum Mountains and the entire valley of Stillwater Creek, into the valleys of Trout and Clear creeks, and eastward to Canyon Creek (Martin, 1908).

The lower part of this formation consists of greenish gray fine sandstone and dark gray shale. The upper part of the formation consists of calcareous gray fine sandstone, dark gray fine sandstone, sandy shale, and dark-gray shale. The formation is of both marine and non-marine origin, and the thickness is thought to exceed 1,000 feet.

3-6

KUSHTAKA FORMATION: The Kushtaka Formation covers parts of the Kushtaka Ridge, the eastern slope and the western slope continuing on the Carbon Creek Valley and up the east side of Shepard Creek to Lake Charlotte. Another area extends from the south end of Lake Charlotte to the south end of Lake Tokun and continues south for two miles. A large area lies on the east shore of Bering Lake and extends between Dick Creek and Shepard Creek.

The largest known area is found on the east edge of Kushtaka Glacier and continuing in a northeasterly direction (Martin, 1908)

The Kushtaka Formation consists of an alternating sequence of sandstone, siltstone, shale, coaly shale and coal, and can be divided into upper, middle, and lower stratigraphic sections. The bottom of the Kushtaka Formation is made up of dark, fine-grained sandstones and siltstones. In general, the lower half of the formation includes thick, coarse-grained sandstones that demonstrate cross bedding, bioturbation and ripples. Some siltstones and coal beds are also present and are usually underlying the sandstones in a coarsening-upward sequence. Thin alternating layers of sandstone and siltstone containing thin coal beds are also found in the lower half of the Kushtaka Formation.

The middle to upper section of the Kushtaka Formation is composed of fining-upward sequences. Each sequence consists of a coarse to medium grained sandstone that gradually decreases in grain size and grades into a siltstone and then shale. Coal seams appear in the upper portion of the sequence, overlying the shale.

The upper portion of the Kushtaka Formation contains conglomerates and coarse- to medium-grained sandstones containing shale rip-up clasts. The presence of the clasts indicates the influence of a fluvial environment. There are also sequences of sandstones that fine upward and are occasionally overlain by coal beds.

The Kushtaka Formation is considered to be of non-marine origin and is thought to overlie the Stillwater formation. However, most of the contacts between the units are faults and the exact relationship between the two is unknown (Martin, 1908). The total thickness of the Kushtaka Formation is greater than 2,000 feet.

TOKUN FORMATION: The Tokun Formation outcrops on both shores of Lake Tokun and continues north and northeast to the edge of the Martin River Glacier and to Lake Charlotte. There are also outcrops along the crests and northwest slopes of Carbon and Charlotte ridges, on the west slope of Kushtaka Ridge, along the

3-7 ridge north of Mt. Hamilton, and on the northwest slope of Cunningham Ridge.

The Tokun Formation is conformably overlain by the Kushtaka Formation and represents a transition from freshwater to marine environment. The formation is probably greater than 2,500 feet thick and consists of siltstones and shales in the lower 2,000 feet that are overlain by a massive gray to green sandstone, possibly glauconitic, several hundred feet thick. The shales and siltstones are interbedded with calcareous concretions and thin layers of limestone. (Martin,1908).

Igneous Rocks According to Martin (1908), small basic dikes and sills are very abundant in the Tertiary rocks, north and east of Stillwater Creek.

Most of them are less than 1 or 2 feet thick, and none could be traced more than a short distance. Although basalt is the predominant rock, sills at least three localities were described as diabase. These include: three sills, interlayered with coke and ranging in thickness from two to eight feet, at the south end of Carbon Mountain; a sill of unspecified thickness a the base of the falls near the head of Clear Creek, which has coked the upper 12 inches of a 17 foot coal bed; and a 4-foot sill underlying a 4-foot coal bed on the east bank of Clear Creek about three miles above its mouth.

Other basic dikes are noted on his map on the east slope of Carbon Mountain. The largest dike in the Tertiary sequence, a basalt/diabase dike located on the hill between Katalla River and Clear Creek, is 20 feet wide and several hundred feet long (Smith and Rao, 1987).

Structural Setting The similarities between many of the Tertiary rocks with respect to their fine grain size and similar colors adds to the complications in trying to resolve the compressional structural history that impacted the coal. Because the Kushtaka formation is the only one in the region with economic significance, we will focus all of our structural observations on it.

The very earliest workers noted that the coal horizons were folded, faulted, compressed and boudinaged. Many fold styles have been observed including: isoclinal folds, chevron folds, and recumbent, similar folds. As a result, there are very few places where you can measure true thickness with any confidence and the persistence of individual coal horizons is tenuous. Fisher noted that a coal bed that Storr mapped as being 30 feet thick, upon excavation with

3-8 trenches, was only 6 feet thick. Similarly, a 30-foot bed on surface, upon opening was found to be only a 3-foot bed, faulted and badly crushed. (Fisher, 1915).

FOLDING: Detailed mapping during the 1983 program suggests that three separate phases of flexural folding occurred in the Carbon Creek area. The first two phases (F1 and F2) occurred nearly simultaneously and were followed by a third phase (F3).

The F1 folding determines the basic structural control for the development in the Carbon Creek area; of an anticlinorium-synclinorium pair with a northeast trend. The F2 folds occur as overturned, tight, asymmetrical to isoclinal synclinal-anticlinal pairs along the limbs of F1 folds.

These small-scale folds also influence the thickness and continuity of the coal seams within the area. The northeast trending folds included in the F1-F2 phases were affected by the crosscutting F3 folding that occurred later with a N700 W strike.

The Kushtaka Formation located along Carbon Creek consists of a series of tightly closed, isoclinal folds with near vertical axial planes. The axis of the predominant anticline has a N50#E strike and runs parallel to Carbon Creek. The degree of deformation appears to increase in a westerly fashion, and the possibility of these folds plunging both in the southwest and northeast directions would account for the discontinuity of the coal seams along the strike and the apparent “wrapping” of the coal seams around structures (Weir, 1969).

The Carbon Creek area is the most structurally deformed area in the Bering Coal Field, and the most highly deformed part of it is along the eastern flank of Carbon Ridge. The area consists of the rocks found in the upper Kushtaka Formation, and contains isoclinal to asymmetrical folds dipping to the northwest. The drilling by KADCO in 1984 confirmed this geometry in cross section. The coal seams have experienced a certain amount of thickening along the crests and troughs of the folds and an associate thinning along the limbs. Large portions of the anticlinal crests have been lost due to erosion but the synclinal troughs still remain.

Rocks of the Kushtaka Formation in the Monument Mountain area comprise the entire Kushtaka sequence with a general strike from N600E to N700E and dips varying from 250 to 500 northwest.

Several zones contain tight anticline-syncline pairs. In the Monument Cirque, relatively tight symmetrical anticlines and

3-9 synclines were found in middle Kushtaka rocks using the drilling data from the 1984 program.

In the area between Clear Creek and the western ridge of Canyon Ridge, there has been some evidence of chevron folding, and the area between Doughton Peak and the farthest east Carbon Mountain has shown recumbent folding with an east-west axis direction and a dip of less than 300 north.

Almost every style of folding has been documented in the Bering Coal field and affects the continuity and persistence of all of the coal horizons.

FAULTING: The physical displacement of lithologic and stratigraphic sequences relative to each other has been documented in the Bering Coal field from earliest workers. Some of the movements are as recent as 1964 when the major Alaskan earthquake uplifted portions of Bering Lake.

As with folding, the styles and nature of fault offsets in the Bering Coal area encompass most textbook examples. An initial and preliminary view of the Bering Coal areas may give an impression of uniformity since several noticeable sandstones seem to extend for great distances without any apparent change in trend. This appearance is illusory, however, because further investigation shows evidence of intense dynamic stresses in the form of faults, folds, and fracturing. Crushing is most apparent in the coal beds, which offer the least amount of resistance, and results in a finely crushed mass or foliated flakes of coal.

Martin’s work of 1908 showed four major northeast trending faults in the coal area. Fisher and Calvert’s work of 1914 reported “faults of lesser dimensions are exceedingly numerous, some representing a stratigraphic displacement of several hundred feet..” After examining many tunnels and outcrops, Fisher and Calvert concluded; “every part of the field…is traversed by an intricate system of fault lines, making underground development everywhere tedious and costly and in many places almost, if not quite, impracticable, except where the extraction of only a limited amount of coal is contemplated”. Fisher also noted that, “owing to the prevailing complexity of structure that exists in this field it is possible that some of the beds believed to be distinct are in reality duplications”. Roger Marion, a geologist, advising on the Cortella Coal Lease Application in 1975, made the following observation, “Several major faults cut the area of the coal outcrops and their presence further complicates the situation while making it more

3-10 probable that the coal one sees at the surface may have been faulted off at depth or moved to the surface at other locations where it was lost through erosion long ago.” Calvert’s work on observations underground for the US Navy made the following comment regarding a 400 foot tunnel driven in the Canyon Creek area on a steeply dipping 11 foot bed, “in examining the tunnel, six different places were noted where minor faulting had shifted the bed out off position or caused it to thin materially.” The advantage of the early twentieth century observations over more modern ones is that they were made while the tunnels were being excavated or shortly after. Subsequent work, because of poor ground conditions and collapsed workings, has been unable to examine the subsurface; except through diamond and rotary drillholes that are prone to considerable interpretation.

KADCO, based on work conducted from 1981 to 1984, which included the most intensive drilling campaign conducted on the Bering River property concluded:

!" Faults in the Bering River Coal Field can be classified as both normal and thrust faults;

!" Bedding faults and faults nearly parallel to bedding are the most common faults in the Carbon Creek area;

!" Most of these faults strike parallel to the regional structures within the area and maintain a northeast trend; and !" A number of faults crosscut the northeast-trending structures but they are small-scale faults of restricted length and displacement.

Faulting is well documented in the Bering River Coal Field and has greatly impacted coal seam thickness, persistence and continuity.

COAL QUALITY Many tests have been conducted on the Bering River coals since1900. A considerable amount of work and geologic investigation was done from 1906 to 1916 to support the interest of the Federal government in locating a fuel source for the US Navy.

More recent work by KADCO has benefited from improved analytical techniques and laboratories.

Table 3.3, following, summarizes the range of selected quality parameters reported from the US Navy testing in 1914 and the 1984 KADCO testing:

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Table 3.3 – Summary of Selected Coal Quality Parameters, As Received Basis

Quality Parameter US Navy (1914) KADCO (1984) % Moisture 1.3 to 6.0 1.3 to 3.1 % Volatile Matter 11.9 to 18.1 2.7 to 16.2 % Fixed Carbon 71.9 to 83.0 63.5 to 85.0 % Ash 1.6 to 9.5 1.1 to 22.5 % Sulfur Trace to 1.36 0.60 to 4.49 Btu/lb 14,074 to 15,574 11,715 to 15,430

The US Navy concluded that the Bering River coals would not make good coking coal, or a good source for a navy fuel.

The high reflectance values of the coals indicate their corresponding high rank and support the chemical analyses. These coals have been classified as medium to low volatile bituminous rank, grading into semi-anthracite and anthracite. The rank of the coals increases to the northeast as illustrated on Figure 3.1. The increase in rank apparently is related to both the tectonic history of the area and to the general west to east increase in igneous intrusions into the coal bearing Kushtaka formation.

The Bering River coals, based on the quality characteristics shown above, are very high in calorific value and contain moderate to high sulfur content and generally low to moderate ash content.

However, a surface mining operation should expect a substantial amount of out-of-seam dilution based on the complex and variable structural setting (steep dips, tectonic thickening and thinning, folding and faulting).

COAL RESOURCES All work to date is insufficient in detail to estimate mineable reserves. Numerous attempts have been made to determine global and district resource potential and, in NorWest’s opinion, each was burdened by a paucity of data.

The most recent publicly available estimate of the quantity of coal resource is contained in the 1987 publication authored by the MIRL (Smith and Rao, 1987). This estimate incorporates the drilling and mapping done by KADCO from 1981 through 1984.

MIRL estimated the Bering River coal resource by using the “end area” or cross section method. For each cross section, MIRL determined the average coal thickness, the “length” of coal in that section and the distance of influence given each section, all dimensions expressed in meters. The resource estimates are estimated to a depth of 300 meters. Metric tonnes influenced by each section are simply the product of thickness times length times distance of influence times a coal density of 1.3 gm/cc.

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Table 3.4, following, is a condensed summary of the MIRL resource estimate.

Table 3.4 – Summary of Estimated Resource by MIRL (1987);

Assumes Coal Density of 1.3 gm/cc

Area

Section

Coal Thickness (m)

Length (m)

Influence (m)

Metric Tonnes (000)

2700N 1.9 1420 300 1,052 2400N 20.3 1370 750 27,115

II-II’ 8.4 1170 600 7,665

900N 12.8 650 450 4,867 900N 1.0 400 450 269 600N 3.9 820 600 2,520

Carbon Creek

Sub-Total Carbon Creek 43,488 6 2.3 335 300 301 5 1.4 320 300 175 4 1.7 320 300 212 3 2.5 315 300 307 2 2.3 305 200 182 1 4.0 350 200 367 6A 2.3 500 350 523 5A 1.4 525 400 382 4A 1.7 515 400 455 3A 2.5 480 500 780 1A 4.0 615 800 2,578

Trout Creek

Sub-Total Trout Creek 6,262 6 1.4 365 920 598 5 1.8 390 920 835 4 1.0 400 805 419 4 1.5 400 1090 828 3 1.4 & 2.7 390 655 1,365 2 1.5 480 820 783 2 1.0 480 520 325 1 1.5 360 370 251 1 1.0 360 370 173 7 1.2 11 965 16 7 5.1 107 965 684 7 8.1 174 965 1,757 6A 1.0 335 920 401 5A 1.5 340 910 603

Monument Mountain

Sub-Total Monument Mountain 9,038

GRAND TOTAL – BERING RIVER 58,788

MINEABLE RESERVE @ 60% RECOVERY 35,273

MIRL estimated approximately 59 million tonnes of coal resource contained in the Bering River Coal Field. Furthermore, MIRL estimates a mineable coal reserve of 35 million tonnes assuming 60% recovery.

In NorWest’s opinion, the resource is not adequately explored to derive an estimate of mineable coal reserves. The average coal

3-13 thickness determined for each cross section cannot influence a very long distance, considering the well-documented tectonic thickening and thinning of the coal, the repetition and omission of coal beds due to faulting and the tenuous correlation of coal beds.

In addition, coal reserves ideally should be based on a mine plan that clearly delineates the reserve that can economically be extracted. For example, for a surface mine, the volume of burden (overburden and interburden) should be estimated together with the tonnes that could be extracted. Other authors have crudely estimated stripping ratios (volume of waste removed per tonne of coal extracted) in the order of 20:1 to 40:1 (bank cubic meters to 1 tonne of coal).

Note in Table 3.4, above, that Section 2400N in the Carbon Creek Area contains an estimated 27 million tonnes of coal resource or 46% of the estimated total Bering River resource. This section has an average coal thickness of 20.3 meters, by far the thickest coal reported in Table 3.4, influences 750 meters (0.5 miles) and has a coal “length” of 1370 meters (4500 feet). The resource influenced by Section 2400N is a good example of the danger in trying to estimate coal reserves, much less coal resource in a structural setting like the Bering River Coal Field without having an adequate amount of drilling. Among the characteristics of tectonic enhancement is that the thickening of a coal seam in one place is at the expense of tectonic thinning somewhere else. Chances are good that the coal thins rapidly away from Section 2400N, which could substantial reduce the quantity of coal resource reported for the Bering River Coal Field.

Another indicator of the difficulty in trying to estimate the coal resource is the number of holes drilled in the Bering River Coal Field that did not encounter any measurable coal. KADCO drilled 60 holes and 7,390 linear meters in the Bering River Coal Field.

Only 25 (42%) of the holes intercepted measurable coal intercepts, which means that 35 (58%) of the holes drilled in prospective ground did not encounter coal at all. The uncertainty of coal continuity is noted by MIRL (Smith and Rao, 1987) with their comment that in 1982, a total of 1,200 meters of diamond core was collected from 5 drill site locations and, “Due to the improper location of the drill sites, this program yielded little information as to the location and extent of the coal seams.”

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EXPLORATION The low rate of drilling success from the KADCO four-year REQUIREMENTS program with just 42% of the holes intersecting measurable coal, confirms that drilling holes spaced about 100 to 150 meters apart (on drill lines or cross section lines) is inadequate to delineate a mineable reserve in the geological conditions inherent in the Bering River Coal Field.

Work by Cortella Coal Company in 1968 and 1969 near an 8-foot coal seam at the abandoned Leeper Tunnel is perhaps the best example of the density and distribution of drilling necessary to adequately define a mineable resource. They drilled 6 core holes within a 60-meter radius of the tunnel and demonstrated that coal thickness and continuity was not likely to exceed 30 meters.

A program of drilling the Bering River Coal Field on a 30-meter grid or on a strict baseline system would be exceptionally expensive, but is the only reasonable approach to accurately delineate a mineable reserve.

SUMMARY AND The complex structural history of the Bering River Coal Field has CONCLUSIONS resulted in folded, faulted and crushed coal horizons. The degree of tectonic thickening of coal has been demonstrated, but the loss of coal from attenuation or thinning of the coal has also been noted.

The continuity of major stratigraphic units, much less correlative coal beds, is in question, as is their stratigraphic succession. There are very few areas where the true thickness of a coal seam can be measured because of the tectonic thinning and thickening exhibited by those seams.

Resource and reserve estimates are inferred for the most part and are highly suspicious, again because of the complex structural setting and the inadequate amount of exploration. The coal quality has been reasonably characterized, but detailed exploration on a grid or strict baseline system is required to develop mine plans, to estimate recoverable mineable reserves and to determine the economic viability of the Bering River Coal Field. An adequate exploration program would be very expensive, given the difficult access and logistics and the need for closely spaced drill holes on a grid or baseline system.

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REFERENCES CITED Following is a list of some of the references cited in the above discussion.

!" Barnes, F.F., 1951, Review of the Geology and Coal Resources of the Bering River Coal Field, Alaska: U.S. Geological Survey Circular 146, p1-11.

!" Fisher, C.A. and Calvert, W.R., 1914, Geology of the Bering River field and its relations to coal mining conditions, in Report on Coal in Alaska for use in United States Navy: 63rd Cong., 2nd sess., H. Doc, p. 29-50.

!" Korea Alaska Development Company (KADCO/Chugach Alaska Corporation (CAC), 1984, 1984 Project Report on Bering River Coal Field Exploration Project: p. 1-28.

!" Martin, G.C., 1908, Geology and mineral resources of the Controller Bay region, Alaska: U.S. Geol. Survey Bull. 335.

!" Navy Department, 1914, in Report on Coal in Alaska for use in United States Navy: 63rd Cong., 2nd sess., H. Doc. 876.

!" Sanders, R.B., 1976, Geology and Coal Resources of the Kushtaka Mountain Area of the Bering River Coal Field: U.S.

Geological Survey, Unedited and Unpublished Draft Report.

!" Smith, J.E., and Rao, P.D., 1987, Geology and Coal Resources of the Bering River Coal Field, in Rao, P.D., ed., Focus on Alaska’s Coal ’86, Proceedings of the Conference held at Anchorage, Alaska, October 27-30, 1986: University of Alaska Mineral Industry Research Laboratory Report 72, p 266-299.

!" Weir, P., 1969, Preliminary Exploration Program of Carbon Creek Area, Bering River Coal Field, Alaska: p. 1 – 17.

NorWest did not have all of these references at its disposal.

However, those references not in the possession of NorWest were cited in at least one of the three key references used to write this section (Barnes, 1951; Sanders, 1976 and Smith & Rao, 1987).

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MINING

BASIS OF STUDY After reviewing the available public domain information and speaking to knowledgeable individuals, it became clear to NorWest that the overall geological conditions of Bering River Coal Field would make it very difficult for a coal mine to be economically viable in today’s competitive market.

Therefore, in order to not unnecessarily prejudice the valuation, where there was a lack of clear evidence in the public domain to support certain critical geological issues, we gave the benefit of doubt to the project. In other words, we have presumed that future exploration efforts will result in the favorable geological conditions upon which the evaluation is based. In essence, what we have valued in this assignment is a Best Case. Where the benefit of the doubt has been given on these critical issues, it is so noted.

COAL PRODUCTION RATE In selecting a coal production rate for this valuation, NorWest relied on a formal study of the transportation alternatives3 for coal produced from the Bering River Coal Field. This document (referred to as the “Wheelabrator study”) was based on a production build-up to three million tonnes per year over a period of seven years. It also contains preliminary technical and cost information for a likely system to transport coal from the mine site to an ocean terminal for export. The production rates and build-up schedule are listed below:

Period Yearly Production Rate Year 1 500,000 tonnes Years 2 through 4 1,500,000 tonnes Years 5 through 7 2,000,000 tonnes Years 8 and beyond 3,000,000 tonnes

METHODOLOGY Using the coal production rate set forth in the Wheelabrator study, NorWest prepared a scoping estimate of the likely capital and operating costs of a surface coal mine. The mine is based on using conventional hydraulic shovels and rear-dump trucks. While we have assumed that year-round operation is possible, we have de-rated the maximum achievable operating hours to allow for severe

3 “Assessment of the Feasibility and Implementation of Port and Transportation System Alternatives for the Bering River Coal Field – Phase 1”, dated March 1983, and prepared for the City of Cordova, State of Alaska by Wheelabrator Coal Services Company.

4-2 and inclement weather. We have assumed that drilling and blasting will be required and that sufficient trained personnel will be available from the local area to adequately staff the mine. Based on our long history of preparing mining feasibility studies and due-diligence valuations, we believe that these mining-related assumptions are reasonable.

In addition to the mining-related assumptions listed above, customary input to a typical mining feasibility study includes critically important geological information relating to coal reserves, coal quality, stripping ratios etc. However, due to the non-availability of this geological information, we were required to make assumptions about these values and we cannot vouch for their reliability. Specifically:

Coal Reserves An article4 presenting the results and interpretations of the KADCO…