Small Talk

December 9, 2012 7:59 pm

Investors and miners lose in coal plays

As the cold snap bites and the nights grow darker, spare a thought for the more than 5,000 miners that continue to dig out Britain’s single biggest source of winter electricity – coal.

Imports have largely replaced domestic coal since hundreds of pits closed in the 1980s. But the domestic output of the rest, which were privatised, accounts for around a third of UK supply. In total coal generates about half the electricity at this time of year.

When coal prices rose a couple of years ago, some misty eyed idealists were talking of reopening pits. Richard Budge, the man dubbed “King Coal” after buying the bulk of Britain’s deep mines in the 1990s, did reopen Hatfield in South Yorkshire in 2006 as part of his plan for a clean power station. It was rescued from administration in 2011 and the few other small-cap coal miners that staggered on post-privatisation are staggering even more.

ATH Resources, which has four open-cast mines in Scotland, finally succumbed to its debts last Thursday. The Doncaster-based business suffered from legacy contracts with power producers that priced its coal too low. Just as was renegotiating at market prices, those prices dropped because of cooling demand in China.

It could not sustain mounting losses. Its banks, HSBC and National Australia Bank sold their debt of about £15m in November at a discount to Becap Capital Coal, a fund controlled by Jon Moulton, the venture capitalist. On Thursday, Becap asked for full repayment, triggering the appointment of administrators and the suspension of its shares.

Will Wright, joint administrator at KPMG, said only the holding company was affected and the mines continued as normal. He is seeking a quick sale. That depends on bondholders, and local authorities, accepting to take on some of the costs of cleaning up the sites afterwards.

Now the poster child of the sector is in trouble. Hargreaves Services, based in a former mining village in Durham, had several years of robust growth with shares hitting a peak of £12.55 in April. In October, it announced record results, with £47.5m pre-tax profit on £688m in sales. But the sting in the tale was that it had encountered a geological fault in its Maltby deep mine.

Paul Jones, analyst at Panmure Gordon, says some saw it coming: “Investors didn’t like the Maltby buy because they didn’t know how to account for the geological risk. People thought it was an accident waiting to happen – and they were right.”

While Maltby, bought in 2007, threw off profit in the good times – about £13m annually – its closure and interruption in production will cost plenty too.

Gordon Banham, the chief executive who still owns 20 per cent of Hargreaves, knows the City does not like miners unless they are in far-flung places such as Indonesia and South Africa. A former coal delivery man, his main justification for investing in Maltby was that it ensured security of supply for Monkton, the UK’s only coke works nearby.

However, he now says it can find imports to meet that demand. Importing coal, moving it around and providing services to power stations is Hargreaves’ main business. But even that has taken a hit after it said it was investigating “irregularities” at its Belgian unit.

The company said there was “serious overstatement of stock values and credit notes due from major suppliers”. Two people with management contracts in Belgium have been suspended while investigations continue.

This issue only affects Belgium so far, which accounted for £2m of operating profit in the last financial year. But Mr Jones said that if similar outsourced arrangements were used in other continental operations, the damage could be worse. Shares fell from 790p to 605p after the announcement but rallied on Friday.

There should at least be some brighter news on Monday when UK Coal announces that it has agreed the terms of its restructuring to deal with a £430 pension deficit. It will split the property arm from its mines, do a “debt-for-equity” swap with the pension fund and ringfence each of its three remaining pits to avoid the possibility of problems at one dragging down the whole group.

Shares lost almost 90 per cent of their value between February and September. But anyone brave enough to buy in early September, gambling on the complicated deal being accepted, would be sitting on gains.

Nevertheless, UK Coal could mothball Daw Mill in 2014 unless workers agree to new shift patterns. And the rump of the once-mighty British coal industry is worth less than £20m, a fraction of the value of its reserves in the ground.

“Shareholders have lost in all these coal plays,” says Mr Jones. Not to mention the miners of Maltby and Daw Mill, who are facing possible redundancy after a decade of defying the odds.

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