Preliminary Financial Results

RNS Number : 7438K

UK Coal PLC

26 April 2010

 



26 April, 2010

UK COAL PLC  ("UK COAL")

Preliminary Financial Results for Year Ended December 2009

·     Key strategic steps taken

·     New long-term supply contracts and new generator customer

·     Production profile of deep mining transitioned

·     New seams.  Substantially increased development driveage

·     Management team strengthened

·     Appointment of Group Director of Mining. Safety Director appointed

·     £100 million net equity issue

·     Continued good planning progress by Harworth Estates helped off-set property market conditions

·     RICS valuation of property portfolio £394m (2008: £422m). £12m increase in valuation in H2

·     Estimates of Project Worth value - 2012: £615m. 2014: £820m 

·     Financial results impacted by reduced Q4 production. Subdued market price for coal

·     2009 production 7.0mt (2008: 7.9mt)

·     Average coal sales price down 2.6% to £1.87/GJ (2008 £1.92/GJ)

·     2009 Financial results

·     Total revenue £316.0m (2008: £392.5m)

·     Operating loss before non-trading exceptional items and property revaluation decrease £67.4m (2008 £1.8m profit)

·     Non-cash property revaluation decrease £25.7m (2008: £-)

·     Loss before tax £129.1m (2008: £15.6m)

·     Net assets £152.8m (2008 £300.4m)

·     Net debt £181.9m (2008: £137.1m) including generator loans and prepayments

·     Net debt £114.3m (2008: £137.1m) excluding generator loans and prepayments

·     Continued production issues Q1 2010. Issues now addressed

·     Q1 2010 production 1.0mt (Q1 2009: 1.7mt)

·     Kellingley and Thoresby producing from new seams

·     Both able to return to at least historic production volumes

·     Daw Mill ramping-up on new face

·     Up to £30m increased financial facilities to increase headroom

·     Intention to dispose of non-core agricultural acreage and explore increased joint-venturing of property development

·      2010 production guidance of around 7.6m tonnes

Commenting, David Jones, Chairman said: 

"2009 has been an extremely challenging year for the Group.

"We took big strides in transitioning the production profile of our deep mining business, a transition which has been substantially completed in the current year with the commencement of production from the new seams at Kellingley and Thoresby. We put in place new long-term supply contracts on significantly improved terms with our electricity generator customers and added a major new customer, Scottish and Southern Energy. We also further strengthened our executive team with the appointment of a Board level Director of Mining, Gareth Williams, who brings considerable international mining experience to the Group. The positive effect of this appointment is already being felt. This followed the appointment of a dedicated, executive level, Safety Director. Together, these steps hold the potential to transform the safety, performance and profitability of our deep mining business, and we shall continue working hard to these ends during 2010 and beyond.

"In parallel, although the current market conditions have affected property valuations, our property business has continued to perform well in progressing planning and has the ability to deliver very considerable up-lifts in value. Our Project Worth central case estimates the worth of our property in 2012 at £615 million and in 2014 at £820 million, which compare to the RICS valuations at December 2009 of £394 million.

"With that background, we approached our shareholders, together with new institutional investors, last Autumn and secured a net £100 million capital raising, in order to finance the completion of the investment programmes in our mining business and to create a more stable financial position for the Group. 

"As we have previously reported, however, our financial results for last year have been substantially affected by geological issues in each of our deep mines, which significantly reduced production volumes and did so against the background of a subdued market price for coal in Europe. These difficulties were exacerbated in the last quarter by equipment unreliability and failures, noting in particular the incident leading to the loss of a life at Kellingley. These geological issues continued into the current year until the new seams at Kellingley and Thoresby, and the new face at Daw Mill, have been brought into production. This has inevitably reduced first quarter production compared to the same period last year.

"With Kellingley now in full production in its new seam, Thoresby ramping up in its new seam and with Daw Mill having started its ramp up, we believe that the particular difficulties which have affected us over the past months are now behind us. We therefore look forward to increasing production volumes, and for the business to see the benefit of an improved market price for coal.

"However, the lower production volumes to this point, and the consequential deferral of contract delivery commitments, have somewhat delayed the timing of when we will fully benefit from the new supply contracts that we have put in place. As a result, our cash performance has been significantly affected and our debt has increased with insufficient headroom for the Group, in particular over the next seven months' peak funding period.

"To address this, we have increased our loan facilities by up to a further £30 million and extended the term of these facilities. We consider our debt levels too high and therefore intend to take advantage of the current strong market values for agricultural land to pursue the disposal of a significant proportion of our agricultural estate and to explore joint-venturing the development of a larger part of our brownfield land portfolio with the objective of reducing the absolute levels of bank debt and associated costs.

"The financial results for 2009 are not those we planned for. We have, however, now completed the developments of the new seams at Kellingley and Thoresby, and the output rates from these faces are indicating that they should achieve their expected production levels. We have also commenced the ramp-up of the new face at Daw Mill, and we believe this mine too should return to its high historic production levels.  We expect to see all the ongoing deep mines increasing their production levels over the next month to full production, with an expectation of achieving production in 2010 of around 6 million tonnes from deep mines and a further 1.6 million tonnes from surface mines. 

"Our property business is performing in line with expectations and continues to hold the ability to deliver considerable shareholder value. The planned disposals of agricultural acreage are expected to help reduce the Group's indebtedness, while we also pursue our brownfield planning and joint venturing strategy.

"The combination of a modern, efficient mining business with the ability to access the terms of our improved supply contracts and generate substantial profits and cash flows, together with the potential of our property portfolio, has the ability to deliver considerable shareholder value, and we are determined to realise this"

Enquiries:

Media:

Citigate Dewe Rogerson            
Anthony Carlisle

Tel: [phone] / Mobile: [phone]

Laure Lagrange

Tel:  [phone] / Mobile: [phone]

Analysts and investors:

Jon Lloyd

Chief Executive, UK COAL PLC

Tel: [phone]

David Brocksom                        

Group Finance Director, UK COAL PLC

Tel: [phone]

Citigate Dewe Rogerson            
Nick Cox-Johnson

Tel: [phone] / Mobile [phone]

A copy of the Annual Report and Accounts will be issued shortly by RNS and on the Company's website, www.ukcoal.com.

Notes to Editors:

UK Coal is the largest producer of coal in the UK, and a significant supplier of energy to the UK's electricity industry. In the last year, we mined approximately 15% of the total amount of coal burned in the UK, which is equivalent to the energy needed to provide around 5% of the country's electricity requirements.

One of Britain's largest brownfield site property developers, UK COAL owns a substantial land portfolio, which has major potential for redevelopment.

Deep Mining: The Group operates four deep mines, located in Central and Northern England. The Group has reserves and resources of approximately 100 million tonnes at these mines and further mineral potential in addition.

Surface Mining: The Group has three active surface mines and planning committee approvals or consents to mine a further four sites. We have applied for planning consents for a further three mines and expect to make applications for a further three sites during 2010. Total surface mining reserves and resources, subject to planning, are estimated at over 50 million tonnes.

Harworth Estates: UK COAL owns approximately 43,500 acres (17,600 hectares) of predominantly agricultural land. Within this, around 4,500 acres (net) on 85 sites have been identified as offering the prospect for development into a mix of residential, business park, distribution, leisure and community developments over the medium to long term.

The Group's property interests, excluding the deep mine sites, at current open market value were valued at December 2009 at £394 million.

Financial Highlights 

	2009	2008
Income Statement
Total Group Revenue (£m) Average sales price per Gigajoule (£/GJ)	316.0 1.87	392.5 1.92
Operating (loss) / profit before non-trading exceptional items and property revaluation uplift	(67.4)	1.8
Non-cash property revaluation decrease (£m)	(25.7)	-
Operating (loss) / profit before non-trading exceptional items (£m)	(93.1)	1.8
Operating loss (£m)	(106.2)	(2.2)
Loss before tax  (£m)	(129.1)	(15.6)
Loss after tax £m	(127.5)	(15.7)
Loss per share (pence)	(72.9)	(10.0)
Balance Sheet
Net assets (£m)	152.8	300.4
Net assets value per share (£)	0.51	1.91
Year end gearing (%)	75	46
Year end total gearing (%)	119	46

RESULTS

Reflecting the operational difficulties and non-cash reductions in the valuations of our properties, UK COAL is reporting for 2009 an operating loss before exceptional items of £93.1 million, compared to an operating profit of £1.8 million in 2008 and a loss before tax of £129.1 million, compared to a loss before tax of £15.6 million the year before.

In the year, the deficit on the Group's retirement benefit obligations has increased from £104.0 million at December 2008 to £220.8 million at December 2009. Although the assets have appreciated in value during the year, this appreciation has been more than offset by an increase in liabilities primarily resulting from a change in the actuarial assumption used to discount the future liabilities. As a result of this and the results in the year noted above, and despite the equity issue in October last year, there has been a reduction in net assets per share, from 191p at December 2008 to 51p at December 2009. 

Our property business made good progress in planning during 2009 and benefited from the continued strength of agricultural land values. This helped offset the general market reductions in property values, which began to stabilise in the second half. Nonetheless, our property portfolio saw a £25.7 million reduction in its value, compared with a slight increase in 2008. While non-cash, this contributed to our operating loss, although the major impact was the movement of our mining business from a combined operating loss of £2.4 million in 2008 to a loss of £68.6 million in 2009.

Net bank debt, excluding restricted cash balances and generator loans/prepayments, at December 2009 was £114.3 million (2008: £137.1 million). Including generator loans/prepayments, but excluding restricted cash balances, net debt at December 2009 was £181.9 million (2008: £137.1 million). At the end of the first quarter 2010, net debt, including generator loans/prepayments but excluding restricted cash balances, was £236.0 million of which generator balances were £77.4 million. 

For the first quarter of 2010, our deep mine production has been 0.8 million tonnes compared to 1.4 million tonnes in the first quarter of 2009. Surface mine production was 0.2 million tonnes compared to 0.3 million tonnes in the first quarter of 2009.

Safety has to be at the heart of everything that we do and, throughout our employee team there is a thorough commitment to safety. It is therefore deeply regrettable that we have to report the loss of life of two of our colleagues last year, although overall reportable injuries fell to 22.8 per 100,000 manshifts compared to 24.0 in 2008. The addition of a dedicated Safety Director reflects this commitment, but in itself is only a small part of our work to improve our safety culture.

MINING

Deep Mining

The new seams at Kellingley and Thoresby, in which we have been investing over the last three years, are now producing coal and we can now start exiting the old seams at these mines, which have caused so much difficulty. At the same time, Daw Mill's new face has started its ramp up, after an exceptionally difficult installation. Meanwhile, Welbeck is continuing to mine out the last of its reserves and is now expected to cease production in May this year, with the majority of its employees being offered relocation to other mines.

This is resulting in a major and beneficial change in the profile of our deep mining operations. Together with the considerably increased development driveage designed to reduce the impact of future face changes and to improve the reliability of future production volumes, the key steps have now been put in place for a modern and efficient deep mining business - one with substantial and economically accessible reserves which is able to benefit fully from the significantly improved long-term supply contracts we have negotiated, once the old legacy contracts are exhausted.

We have already noted the appointment of Gareth Williams to the Board as Director of Mining, and the positive effect of his focus on furthering the process of turning the mining business around.

It has taken longer to get to this point than was originally planned and, as we have previously reported, production volumes in the last quarter of 2009 and this year to date have been impacted by the very difficult geology.

As we report below, we believe these difficulties are now being overcome.

Daw Mill

Daw Mill is the largest of our mines, delivering a production record of 3.2 million in 2008 and 2.9 million tonnes in 2009. It had a planned face change which was originally scheduled for January 2010, but is only now starting its ramp up. This was principally because of an unpredictable break in the rock strata above the new face line in December last year. Protecting the new face required a very significant amount of roof reinforcement - initially over 500 timber supports were positioned and ultimately over 1,200 additional cable bolts were inserted. Whilst this work was being undertaken, the geology continued to move and the floor rose by over 2 metres. This floor blow had to be removed before the powered roof supports could be put in place. All this work has now been safely and successfully completed.

With the start of production on its new 357 metres long face, which is expected to last circa 15 months, Daw Mill is expected to be able to return to, or exceed, its previous volumes of production from its former 295 metres long face.  

Kellingley

At Kellingley, production on the last of the old panels in the Silkstone seam was originally scheduled to cease at the end of 2009. In October 2009, however, we suffered a loss of a life on its production face when a powered roof support descended without instruction. Initial investigations were unable to identify the cause, and the Health and Safety Executive issued a prohibition notice that prevented us from continuing to operate the face until we had replaced certain components of the roof supports that might have contributed to the accident. When the old panel restarted in November, it did not return to its previous output levels, in part because of larger and longer than expected faulting in the seam.

We have now, however, completed the ramp up of the new face in the new Beeston seam, and the old face is now in its salvage phase. The new face is therefore able to run at full output levels, and production is now some 40,000 tonnes a week, in line with expectations and significantly above Kellingley's performance over the past two years.

Thoresby

Thoresby has also now started producing from the first of its new Deep Soft faces, only slightly behind the original March schedule, and is currently in the last week of its ramp-up period. Before this, Thoresby had been operating in very difficult conditions, producing from 57's panel in the old Parkgate seam, nearly 13km from the pit bottom. Aware of the risk of interference from previous mine workings, from which we had suffered in 2008, we "rehanded" this panel, moving the large equipment from the gate most likely to suffer the impact of the former workings to the other gate. This was complex and time consuming.  As we mined the panel back, we encountered a significantly larger than expected increase in the thickness of the dirt band which was present. This had a very significant impact on the saleable output from the old panel. It reduced the amount of coal extracted in a single cut as well as the speed of the cut, because of the greater density and weight of dirt than coal. Furthermore the dust generated by the dirt, given the inability to increase airflows to such a remote part of the mine, reduced the working time on the old face, to which the underground travelling time was already approaching 2 hours each way.

In contrast, the new Deep Soft panel now being mined at Thoresby is only around 3km from the pit bottom, dramatically reducing travelling times each way and significantly improving working temperatures. It also has only two coal conveyors to the pit bottom in contrast to the 57's nine coal conveyors. This is a marked change in environment and we look forward to seeing output rates from Thoresby going forwards return to at least historically achieved levels.

Welbeck

Welbeck is mining its final panel before closure during May 2010.  The first half of the year involved this final panel being developed, but once this was completed, operating costs have reduced as development costs were no longer being incurred.  As a result of this, production of 1.0 million tonnes has been achieved during 2009 compared to 0.9 million tonnes in the prior year with lower operating costs.

Surface Mining

Surface mining production in 2009 was 1.3 million tonnes, compared to 1.7 million tonnes in 2008, in particular because we deferred opening the consented mine at Park Wall North, Durham, reflecting levels of coal demand. Extraction costs, before depreciation, also rose sharply during the year to £1.75/GJ from £1.61/GJ in 2008, particularly because of the ratio of muck shifting to coal production in the first half. Overall surface mining made an operating profit of £1.9 million, compared to £10.4 million in 2008.

Planning applications and consents have continued to programme, and we look forward to the opening of 3 surface mines, Huntington Lane, Telford and Potland Burn, Northumberland, along with Park Wall North, Durham in 2010.

We have reviewed our Blair House, Fife site and, given its location and the nature of the coals in the site, coupled with our future plans and equipment availability, we are in the process of exploring the possible sale of this site.

Sales and Market

The international market price of coal was again very volatile last year. As the UK came out of the winter at the start of 2009, the impact of the recession showed in a 6.8 percent fall in electricity demand and a very significant fall in the price of gas, which encouraged generators to switch towards burning gas. Coal demand and the price for coal fell, albeit not to the historically low levels of our legacy contracts.

Our average selling price in 2009, therefore, while within the range we had guided to, was slightly lower than achieved in 2008 at £1.87/GJ, compared with £1.92/GJ.

The market price for coal has now risen from the lows it hit last year, and the forward price continues to reflect the long-term trend in increasing energy prices. Prices for delivery of coal in the rest of 2010 average around $80 per tonne, rising to $92 per tonne in 2011 and $104 per tonne in 2012, compared to an average of $70 in 2009. In the UK market, we continue to see the further benefit from the sterling dollar exchange rate.

Production sold from all mines in 2009 was 6.9 million tonnes compared to 7.9 million tonnes in 2008.  We had hoped to reduce our stocks over the year. However this was not achieved, notably because, at the end of its panel, Daw Mill encountered coal with a higher level of ash than is usual for this mine, whose coal preparation plant was not set up to deal with the particular impurities. These stocks are now being cleared, either through separation, washing at other mines or through blending away with production from the new panel.

With the re-phasing of some deliveries that we missed in late 2009 and at the start of 2010, we have a slightly larger volume of older contracts than was originally expected. At the end of 2009, an amount of 6.8 million tonnes, at an average sales price of circa £1.63 per gigajoule was left to be delivered, of which 4.2 million tonnes is due for delivery in 2010. We nevertheless have now started benefiting, at first in a small way, from the significantly improved sale price terms of some of the new contracts that we announced in April 2009, and we see a significantly increasing benefit into 2011.

Overall

Overall, our mining businesses produced an operating loss before non-trading exceptional items of £68.6 million (2008: £2.4 million) with an operating loss in the deep mines business of £70.5 million (2008: £12.8 million) and an operating profit in surface mines of £1.9 million (2008: £10.4 million).For the first quarter of this year, our deep mine production has been 0.8 million tonnes compared to 1.4 million tonnes in the first quarter of 2009. Surface mine production was 0.2 million tonnes compared to 0.3 million tonnes in the first quarter of 2009.

HARWORTH ESTATES

Harworth Estates has continued to make strong progress on its strategy of maturing planning consents for our 85 development sites. In 2009, we secured further planning approvals for around 330 homes, a golf course and hotel, and 4,600 sq m (50,000 sq ft) of business space.  New planning applications were additionally made for around 2,000 homes and 114,000 sq m (1,230,000 sq ft) of business space. 

Since the year end, we have received planning committee approval, subject to signing a Section 106 Planning Agreement and to not being called in by the Secretary of State, for our two applications at Waverley (off J33 M1, Rotherham). These are a new community of 3,890 homes including 15,000 sq m (165,000 sq ft) of associated leisure/retail/community, and a change of use on the Highfield Commercial area to allow a Government campus development of 60,000 sq m (645,000 sq ft) plus hotel and ancillary retail/leisure of 4,500 sq m (48,000 sq ft).

Property market values have clearly been affected by the financial crisis and recession. The strength of our planning progress has done much to offset this impact, and agricultural land values have continued to be strong. In the second half of the year, therefore, the RICS valuation of our portfolio increased by £11.6 million. For the year as a whole, however, as expected, the valuation fell and there was a £25.7 million reduction in valuation to £393.8 million at December 2009. This compared to £23,000 of unrealised gains and £3.7 million of realised gains in 2008 and more than accounted for Harworth Estates 2009 operating loss of £24.5 million, compared to an operating profit of £4.7 million in 2008.

Through Project Worth, our property portfolio has, the potential to contribute very substantial shareholder value. In line with last year, we have estimated the future worth of our properties using a number of cases - the central case, being an estimated worth of our property in 2012 at £615 million and in 2014 at £820 million (2008: £668 million and £886 million in 2012 and 2014 respectively).

Of our circa 43,500 acres of land, circa 28,000 acres is agricultural, much with little prospect of development potential even over the long term. While there are longer term coal resources under parts of this land, we do not believe the cost of holding those sites is warranted where the potential for coal extraction over the long term is more marginal. We, therefore now intend to realise some of this value by disposals of some of our surplus agricultural land, in doing so helping reduce our overall levels of debt.

We are also coming closer to the time when market conditions may become progressively more favourable for bringing larger portions of our brownfield estate into the development phase, and we are exploring a number of joint venture opportunities to optimise shareholder value whilst managing development risk and capital requirements.

GOING CONCERN

Your Board has always recognised that deep mining has a high operating risk compared to the majority of industries, and this has clearly been evident in the difficulties that our mines have experienced in recent times. We now have a consequentially higher level of bank borrowings and have needed to take into account the levels of working capital we require to finance our future operations. We have therefore held discussions with our financial providers and have increased our loan facilities by up to a further £30 million and extended the term of these facilities. The operating risks are set out in the Operating and Financial Review and we would also draw your attention to those matters which the Board has felt it appropriate to take into account in forming its conclusion on going concern, set out in the Directors' Report and in the Financial Statements.

CORPORATE ACTIVITY

On 9 March 2010, following press speculation, we announced that we had received a very preliminary approach regarding a potential merger transaction. The matter remains at a very early stage and we would continue to stress that there is no certainty that a transaction will result.

OUTLOOK

The start of 2010 has been difficult for the reasons given and has had a direct impact on first quarter revenues and levels of debt.

We have, however, now completed the developments of the new seams at Kellingley and Thoresby, and the output rates from these faces are indicating that they should achieve their expected production levels. We have also commenced the ramp-up of the new face at Daw Mill, and we believe this mine too should return to its high historic production levels.  We expect to see all the ongoing deep mines increasing their production levels over the next month to full production, with an expectation of achieving production in 2010 of around 6 million tonnes from deep mines and a further 1.6 million tonnes from surface mines. 

Our property business is performing in line with expectations and continues to hold the ability to deliver considerable shareholder value. The planned disposals of agricultural acreage are expected to help reduce the Group's indebtedness, while we also pursue our brownfield planning and joint venturing strategy.

It is the combination of a modern, efficient mining business with the ability to access the terms of our improved supply contracts and generate substantial profits and cash flows, together with the potential of our property portfolio, which we presented to our shareholders last Autumn. The difficulties in completing the transition of our deep mining business are clearly extremely unwelcome and there remain considerable challenges ahead, but we are determined to repay the trust placed in us by our shareholders.

 

END

 

 

FR EADLLASSEEFF