UK Coal digging its way out of trouble

UK Coal appears to have turned the corner as it begins to reap the benefits of fully invested mines and higher coal prices, according to a leading mining analyst.

The Doncaster-based group, Britain's biggest coal miner, yesterday said its total production for 2010 ticked up to 7.2m tonnes from 7m a year earlier, thanks in part to a "strong fourth quarter".

That was despite the closure of Welbeck deep mine in May, which left UK Coal with three operating deep mines.

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Charles Kernot, mining analyst at house broker Evolution Securities, said assuming problem-free production, its outlook for the year is "considerably better".

UK Coal's deep mines produced 5.8m tonnes in 2010, while 1.5m tonnes was produced from its surface mines.

Daw Mill, in the West Midlands, produced one million tonnes between September and December, double the same period a year earlier. Production at Thoresby, in Nottinghamshire, more than doubled to about 500,000 tonnes in the fourth quarter of 2010, set against about 200,000 tonnes a year earlier. Kellingley, near Knottingley, in West Yorkshire, produced about 300,000 tonnes, level with a year earlier.

"UK Coal can look forward to a new chapter now that the problems of 2010 and previous years are behind the group," said Mr Kernot. "It has successfully negotiated its way through the issues of low coal prices and a collapsing property market.

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"While this leaves it with high levels of debt and a significant pension liability, the group is now in a position to generate enough cash to repay borrowings and fund the pension before its deep mine reserves are exhausted.

"Spot coal prices are significantly higher than contracted levels and may yield additional benefits in 2011."

Shares in the group shed 3.25p to close at 52p yesterday but have climbed in recent weeks as mining problems in Australia and South Africa sent global prices soaring.

The group has spent 150m over the past two-and-a-half years to move to new seams at Thoresby and Kellingley.

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The group's strong fourth-quarter production came despite a setback in November when the group was forced to suspend mining at Kellingley after a methane leak caused an underground fire. UK Coal resumed production at Kellingley ahead of forecast, on December 9, and mitigated the shortfall by continuing mining and dispatching coal at its deep mines through most of Christmas.

New executive chairman Jonson Cox, who was appointed in November, has started a deep strategic review, which includes a pay freeze across the company, affecting all of its 3,000 staff.

The group has also been whittling away at its debt pile, reducing it from 265m at the end of September, to 243m at the end of December.

"The level of debt that the business has is unacceptable," said Mr Cox, the former managing director of Yorkshire Water. "We have got to reduce the level of debt in this company.

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"We are progressively working our way into better-priced contracts. We've got a good team here. They are up for the challenge and our job is to turn this business around."

UK Coal is making "good progress" on selling around 8,000 acres of surplus agricultural land, and sold land worth 28.5m in 2010, equating to 26.3m after costs.

The group added a non-cash property revaluation will knock about 30m off profits.

Mr Kernot sees UK Coal's pre-tax loss for 2010 widening to 97m from its previous forecast of 55m, after the property loss.

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However, he said the outlook for 2011 is "considerably better, albeit assuming there are no further production problems".

He added that with preparatory work to ensure trouble-free transition to new mining faces,

"costs and efficiency should improve".

He sees the miner earning an average price of 2.01 per Gigajoule for 2010, rising to 2.21 per G/j in 2011.

UK Coal is progressively working through legacy contracts to benefit from high coal prices.

The men behind the company

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Turnaround expert Jonson Cox was appointed new executive chairman in November to replace both its chief executive and chairman.

Mr Cox was chief executive of Anglian Water Group from January 2004 until March 2010.

He also ran Yorkshire Water in the late 1990s.

Two divisional managing directors report to Mr Cox and sit on the board. Former Anglo American executive Gareth Williams heads its mining arm, and Owen Michaelson, Peel Holdings' former representative on UK Coal's board, leads its property division.

Peel is UK Coal's largest shareholder.

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