UK Coal sees light at end of the tunnel after tough six months

The Doncaster-based group, the UK's biggest coal miner, said its full-year deep mine production target is unchanged at 6m tonnes, ending a former trend of consistent production downgrades.

UK Coal fell to a 93.2m loss in the first six months of the year as production issues, costly face changes, refinancing costs, property losses and fees all took their toll. But with its mines now operating "more consistently", it made a small operating profit between July and September.

Excluding Welbeck mine in Nottinghamshire, which closed earlier this year, third-quarter deep mine production was 1.7m tonnes, up 40 per cent on the same period a year ago.

So far this year, it has mined 3.7m tonnes from its deep mines – Daw Mill in the West Midlands, Thoresby in Nottinghamshire and Kellingley, near Knottingley, in West Yorkshire.

Daw Mill and Thoresby continued to produce more coal than expected, while Kellingley is recovering from maintenance issues.

Shares in the group rose 3.8 per cent to 34p, valuing the company at about 102m.

"The moment we report boring news consistently in line with expectations the more the business's value will be recognised," said finance director David Brocksom. "The job is to run the company, not the market."

UK Coal said it is "cautiously optimistic" for the rest of this year and next.

The group's surface mining division increased output by two thirds to 0.5m tonnes, reflecting production from its new Potland Burn site in Northumberland and Park Wall North mine in County Durham

However, planning delays held back mining at its new Huntington Lane mine in Shropshire, so it expects total surface mine production to be 100,000 tonnes below expectations at 1.5m tonnes.

The group has been unable to capitalise on a recovery in coal prices because it is tied into 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, and now expects its average sales price for the full year to be "marginally below" its previous expectation of around 2/GJ.

The group is also trying to cut a mammoth debt pile, which had grown to 265m by the end of September, compared with 225m a year earlier.

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

However, with its capital investment programme largely complete, it expects to make headway on reducing its debt burden. It hopes second half profits, plus land sales, will also help drive down debt.

UK Coal is making "good progress" on selling around 8,000 acres of surplus agricultural land, from its 30,000 acre portfolio of farming land. UK Coal said it has accepted offers for more than 5,000 acres, which should raise 24m before the end of the year. Offers have also been made on another 2,000 acres.

Yesterday UK Coal also reported good planning progress at its property division. It recently won approval for 150 homes at Ball Hill in Derbyshire.

Its major planning application at Harworth, north Nottinghamshire, for almost 1,000 homes, a 2,044 sqm food store and 76,500 sqm of new industrial space is expected to be ruled on by a planning committee in December.

Evolution Securities expects a second half recovery to reduce full-year losses to 56.5m, before the effects of fully-invested coal mines lift it to 14.8m profits next year.

Evolution analyst Charles Kernot said land sales and consistent mining "positions the group well for an improved outturn in 2011." He reiterated a buy recommendation and a 75p target price.

"The key here... will be the higher prices that the group is set to receive in 2011 as a consequence of its new generator contracts," he said.

Executive shake-up nearly finalised

UK Coal is close to finalising a boardroom shake-up that will see it headed by an executive chairman.

The group said its search for an executive chairman is nearly over and it expects to announce the appointment soon.

In July it announced a major restructuring that will see chief executive Jon Lloyd and chairman David Jones stand down to be replaced by the single role.

Mr Lloyd, a property man by training, is thought to have paid the price for a costly and delayed face change at its Daw Mill deep mine, which drove it to a 93m first half loss.

Two divisional managing directors will report to the executive chairman 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.