ATH Resources warns over profits as oil price rockets

The Doncaster-based group, which operates surface mines in Scotland, said its full-year earnings are likely to come in below market expectations.

House broker Seymour Pierce cut its full-year profits forecast from £4.1m to £2.5m.

Shares in the group eventually regained some of their losses to close down 3.5p at 59p, a 5.6 per cent fall.

ATH chief executive Alistair Black said output from its Glenmuckloch mine will be about 100,000 tonnes lower than previously expected after the group was forced to reassess production at the site, resulting in a £2m writedown. ATH now expects the site to be completely mined out by the August.

“We’ve had difficulty trying to assess what coal is viable to excavate at Glenmuckloch,” said Mr Black. “The coal has been swept vertical – when a seam sweeps vertical that’s a difficult proposition.”

Some of the coal has turned to shale and some has disappeared, added Mr Black. The group now expects to mine about 1.8m tonnes of coal in total this year.

“It’s disappointing, but had gas oil not have risen we would not be issuing a profits warning,” said Mr Black.

Gas oil, which makes up about a quarter of the group’s costs and is used to power its diggers and excavators, has risen by 35 per cent since October, said the group. Even with a fuel hedging strategy which has protected the group in the first half of its financial year, the group has been unable to shield itself from surging prices later this year.

ATH has been unable to capitalise on surging coal prices in recent years, after locking itself into supplying coal at much lower prices, based on projections in 2005-6.

This year, 40 per cent of ATH’s output will go to supplying these loss-making contracts. ATH produced 1.8m tonnes of coal in 2010; it still has 2.3m tonnes of legacy contracts to supply. However, the first of these legacy contracts falls away in March next year. Six months later, the next legacy deal also ends. “The group remains on track to complete the first of its fixed price legacy contracts in March 2012, after which access to significantly higher priced coal, linked to market prices, should provide a natural hedge for gas oil price movements going forward,” it said.

“Demand for ATH’s products remains strong in a market buoyed by positive projected dynamics for coal prices and the board believes the steep rise in all energy commodities will only serve further to boost margins once the group is free of its legacy contract positions.

“The board remains confident that the medium and long-term prospects for the group are strong.” ATH added it has made good progress opening up its new site at Netherton in East Ayrshire. It has invested more than £8m in its development and expects the mine to become “the cornerstone of future group production”. ATH expects output will progressively increase until the site achieves its full rate of production during the final quarter of its financial year, from July to September.

The group expects its revenue forecast to remain unchanged, after mitigating some of the mining shortfall by pushing up prices on other contracts.

Seymour Pierce analyst Asa Bridle said: “The major issue in the profit downgrade is the rise in gas oil prices, which has been flagged for a number of months.

“Fuel prices have risen by about 35 per cent in the past six months, and despite the company’s fuel hedging policy this level of cost inflation cannot be absorbed while the revenue line is so constrained by the legacy price contracts.

“Perhaps more importantly the company remains profitable and dividend paying, despite the restraints on revenue and moves ever closer to a major improvement in operating margin.”

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