Back to black – UK Coal turns in a profit

The UK’s biggest coal miner posted pre-tax profits of £22.1m for the first six months of the year, compared with £93.2m losses a year earlier.

It was boosted by more reliable mining production and achieving higher prices for its coal. The group’s revenues surged more than 80 per cent to £256.1m.

The debt-laden miner sold coal at an average price of £2.36 per giga joule in the first half, compared with £1.97/GJ a year earlier. It mined 4.1m tonnes in the first half, up from 2.7m tonnes.

“It’s a good start to what’s going to be a long march to recovery for UK Coal,” said executive chairman Jonson Cox. “We need fundamental reform.”

The Doncaster-based group produced 3.1m tonnes from its three active deep mines, in line with management expectations and up from 2.2m tonnes a year ago.

Its surface mines doubled output to one million tonnes, a result slightly ahead of the group’s expectations after six months of relatively good weather.

But UK Coal repeated its warning of challenges ahead, as it battles tough geology at Daw Mill in the West Midlands.

In early 2010 the group endured a costly four-month face gap at the deep mine. To prevent this happening again, it has extended the life of the current panel at Daw Mill by several months to offset the risk of a delayed start on its new panel. This will mean both faces can operate simultaneously.

Mr Cox, a former managing director of Yorkshire Water, said reform of working practices is key to the group’s survival. He replaced former chief executive Jon Lloyd in November, and earlier this year implemented a three-year recovery plan.

He wants to change employment terms and conditions to deliver “more flexible and efficient” working practices.

“We’ve had robust and difficult negotiations,” said Mr Cox. “The emphasis of the programme we’re driving is not a big cost reduction.

“The real change is making sure we can operate a mine for more minutes a week than we are currently operating it.

“Fundamentally our workforce and our unions know just how serious our predicament is.”

Mr Cox said all but one of the unions have indicated their support for its proposals, but the group is still awaiting a response from one union, representing a quarter of its workforce.

“We will just have to do it – and there are ways that companies in recovery can do it,” said Mr Cox.

The group continued selling property to reduce its debt burden. It sold £53.8m of property in the first half, helping to cut net debt to £207.3m at the end of June, versus £242.4m at the end of 2010. However, without the benefit of land sales, its net debt actually increased marginally, as a result of an increase in working capital.

“The priority remains for the business to generate cash,” said the company.

“Although property does, and will, remain an important part of the business it is neither a panacea nor an excuse to ignore the issues within the underlying mining business.”

The bulk of UK Coal’s bank facilities expire in July 2012 and Mr Cox said he expects to resume talks with its lenders later this year, with a view to securing long-term facilities.

Last year the UK generated almost 30 per cent of its electricity from coal. UK Coal supplies coal used to generate around five per cent of the UK’s electricity, and Mr Cox said the company demonstrated its value last winter, helping keep the UK’s lights on.

“As long as it’s 30 per cent and we supply half of this indigenous coal there’s a fight worth fighting for,” he said. “(Last December) ports were frozen. Certain very large power stations in Yorkshire would not have been burning if UK Coal has not kept the trains running to supply them with coal.”

The group is working through legacy contracts to sell coal at better prices. It said forward prices remain firm and coal traded at roughly $115-$130 per tonne during the first half, a significant improvement on $83 per tonne a year earlier. International pricing is expressed in dollars

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