Blackfriar: There’ll be a lot of pain before UK Coal can be king again

“It’s a story of woeful and sustained underperformance that’s been tolerated for far too long,” was the scathing summary by UK Coal’s new executive chairman, Jonson Cox.

The UK’s biggest coal miner is “over-financed with debt, encumbered with production costs which are too high and over-exposed to the market for brownfield property”.

As a result, the Doncaster-based company slumped to its third annual loss in a row. Pre-tax losses of £124.6m for 2010 bring cumulative losses over the past three years to £269.3m.

Mr Cox’s analysis of the business makes painful reading for shareholders and staff.

Costs per employee have ballooned from £44,000 in 2006 to £61,000 in 2010. Over that period deep mine operating costs doubled to £56 per tonne.

Compare those costs to the price UK Coal makes selling the black stuff and it’s clear the company’s current model is unsustainable: it makes only £47 per tonne compared with a market price of around £60 per tonne.

From safety standards to production, Mr Cox said the group is underperforming badly.

Last year, its Daw Mill deep mine in the West Midlands suffered a four-month “face gap”, as a new panel of coal was not ready before the old panel was exhausted. This was not an isolated incident: each of its three deep mines has underperformed at some point over the past three years, said Mr Cox.

The group’s property blueprint – codenamed Project Worth – is hardly worth the paper it’s written on, added Mr Cox. The plan, which aimed to boost the value of the group’s huge portfolio of agricultural and brownfield land from £615m to £820m by 2014 is “neither realistic or deliverable”.

Net debt, which stood at £94m in 2006, had surged to £242.2m by the end of 2010, placing it at the mercy of creditors and customers.

Four months into the job and Mr Cox, the former managing director of Yorkshire Water, appears to have left no stone unturned.

His remedy will be painful, and comes with no guarantees of success. “It’s not a job for the faint-hearted,” he admitted.

The group is closing its final salary pension schemes, cutting 200 jobs, and negotiating with unions about getting the mines working around the clock.

UK Coal ought to be in a far better place. With coal selling for record prices as Australia’s floods and Chinese demand tips the supply/demand balance firmly in favour of coal producers, the group’s shareholders should be enjoying a surging share price and hefty dividends.

Neither appear imminent. On the day Mr Cox exposed the extent of UK Coal’s problems, its shares sank 11 per cent to 34.5p. They changed hands for more than 500p in 2008.

“Our shareholders have been patient and long-suffering,” said Mr Cox. “They’ve given me support and we’re determined to repay that support.”

Can a viable company be salvaged from this? UK Coal was given breathing space by its lenders Lloyds Banking Group when it agreed to extend its facilities until July 2012. Owing up to its problems is a crucial first step, but the path will not be easy.

n BIG is not necessarily better, as Iain Cornish readily admitted yesterday.

The Yorkshire Building Society chief executive was speaking as the mutual confirmed plans to merge with the UK’s ninth-biggest building society, Norwich and Peterborough, in a deal that will bolster its position as the market’s number two.

The merger will create a society with 224 branches, three million customers and assets of about £34bn. After rescuing Barnsley and Chelsea building society, Yorkshire has once again demonstrated its appetite to lead consolidation in the mutual sector. But with enhanced scale comes risks. Building societies are built on their mutuality, which means being close to their customers and driven by more than just profit.

Mr Cornish insisted its third merger in as many years does not conflict with its mutual ethos.

“In our industry you need to have sufficient scale to bear all the fixed costs of being a financial services company,” he said. “But when you get too big I think you can lose the kind of personal touch and the ability to treat members as individuals. You lose the ability to engage with your own staff.

“However, the Yorkshire is a long way from being an organisation which is too big, and while this will make us about 10 per cent bigger, it will still enable us to retain the family nature of the organisation.”

The merger is a rare opportunity for Yorkshire to grow. Even so, it will by no means be a financial giant. In terms of branches, Yorkshire will still only be about a third of the size of Nationwide Building Society. However, this enhanced scale will give it crucial firepower in its fight against the big banks.