UK Coal banks on land sales and brighter outlook to wipe out debt

Production issues, old contracts, safety concerns and the recession sent it deep into the red for the first six months of the year, with sales slipping 12 per cent to 141.3m.

The group's debt pile has also ballooned to 257m from 181.9m a year ago.

But analysts believe the Doncaster-based firm in now on course to report a tale of two halves, with a profit expected in the second half of the year.

Shares in the group lifted 5.26 per cent or 2p to 40p, as it reaffirmed its full-year production target of 7.6m tonnes.

UK Coal owns the bulk of the former British Coal's coalfields, including Daw Mill deep mine in the West Midlands, Thoresby in Nottinghamshire and Kellingley, near Knottingley, in West Yorkshire.

After costly and longer-than-expected face changes, all three have now been fully ramped up, although production at Welbeck in Nottinghamshire ceased in May.

Asked if the worst is over, finance director David Brocksom replied: "It definitely is. It was a very difficult slog at the beginning of the year."

First quarter deep mine production of just 0.8m tonnes was the worst quarter, he said. Second quarter production, which leapt to 1.4m tonnes, showed the improving trend, he added.

The group has been unable to capitalise on a recovery in coal prices because of its legacy contracts, but expects to increasingly benefit from new long-term supply contracts in 2011 as these come to an end.

It sold coal at an average price of 1.97 per gigajoule in the first half, but expects this to rise to 2/Gj for the full year and even higher in 2011.

It also hopes to soon announce the sale of a significant chunk of its 28,000 acres of agricultural land. Analysts expect it to sell about a third of this land for between 30m to 40m, which should help to drive down debt.

UK Coal also hopes to seal joint ventures with housebuilders, logistics firms and waste-to-energy companies to develop its huge land estate.

However, the company must refinance some of its debt by July 2011, and said this casts doubt over its going concern status.

"We believe it (successful refinancing) is more than possible and we are confident," said Mr Brocksom, who added negotiations have yet to

start.

"It's not been an easy business to predict over the last year. But the banking side of things will have a fairly sizeable pay down based on the agricultural land sale."

The group's property portfolio valuation slipped by 2.6 per cent to 384m since December, but its land estate remained unchanged at 820m.

Analyst Charles Kernot at joint house broker Evolution Securities expects the firm to return to the black in the second half, although not enough to reverse the first half losses. He issued a "buy" recommendation and said the firm is "on the up".

He also expects 14.8m profits in 2011, as the group begins to reap the benefits of fully-invested mines.

"There can be little doubt that the second half of 2010 will be significantly better than the first half for UK Coal," he said. "We expect that the group will produce around 1.8m tonnes per quarter from these (deep) mines in the second half leading to a marked turnaround in financial performance. This should continue into 2011 when the group should also benefit from higher contract prices."

Board reshuffle is welcomed

UK Coal recently announced a board reshuffle which will see chief executive Jon Lloyd and chairman David Jones replaced by a full-time executive chairman.

Instead, the group split responsibility for its coal and property operations. Gareth Williams, group mining director, heads the mining division and Owen Michaelson, a former non-executive director and a representative of Peel Holdings, became full-time managing director of the property division.

"Where the company has had problems historically has been where the chief executive has not come from the mining industry," said Evolution Securities analyst Charles Kernot, welcoming the leadership change.

The group said its search for an executive chairman is underway.

It also appointed Steven Underwood as non-executive director to represent the group's biggest shareholder, Peel Holdings.