UK Coal turned in its first profit since 2007 as an overhaul of the struggling coal miner started to bear fruit.

UK Coal first-half results to June 25
SalesPre-tax profitEarnings per shareDividend
£256m£22m7.4p
↑82%£93m loss30.7p loss

The UK’s biggest coal producer overcame production stoppages at its deep-level Daw Mill mine in the first six months of the year to increase coal production from 2.7m tonnes to 4.1m tonnes.

The company also achieved higher prices for its coal, as it continued to wind down legacy contracts that are favourable to its power-producing customers but unfavourable to UK Coal.

Average coal sales prices were 20 per cent higher in the interim period than 2010 prices. By 2012 most of the economically unfavourable coal contracts will have been filled, analysts say.

For the six months ending on June 25, the group reported a pre-tax profit of £22m ($36m) compared with a loss of £93m previously and a full-year loss of £125m for 2010. As UK Coal returned to the black after years of losses exceeding £100m, the shares rose 1.3 per cent to 39p despite a fall in the FTSE mining index.

Jonson Cox, the company’s executive chairman, said: “Despite this relatively good half year, the group still remains in a challenging financial position. Losses of around £270m over the last three years have left net debt levels over £200m.”

After last year’s annual loss Mr Cox, a former Anglian Water chief executive, called for a “fundamental overhaul” that included accelerating the sale of UK Coal’s landholdings, the value of which has propped up its finances during three lossmaking years.

UK Coal gained £54m from land sales in the first half, with proceeds helping to pay down net debt, which fell from £242m at the end of 2010 to £207m.

Mr Cox warned that the Daw Mill mine’s problems were not necessarily over, as geologically complex expansion works continue.

“The greatest risk to group output this year is at Daw Mill as a result of the operational consequences of the change of face, mining through the fault and the impact of discussions surrounding labour terms and conditions,” he said.

Group revenues rose from £141m to £256m and earnings per share were 7.4p, against a loss per share of 30.7p last time. There was no interim dividend.

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FT Comment

Deep-level problems remain at UK Coal, despite the company celebrating its return to profit. Net debt remains 10 times higher than Numis Securities’ £20m annual pre-tax profit forecast and its pension deficit widened to £156m. Nonetheless, long-predicted structural improvements are coming to pass including higher coal sales prices and better output. For anyone who thinks these trends may continue, the current multiple of 1.6 times 2012 forecast earnings represents a buying opportunity.

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