UK Coal to miss break-even target

Geological problems at its Daw Mill colliery and low coal and gas prices mean that UK Coal will not break-even this year, as previously planned.

Reporting interim results the company, formerly known as RJB Mining, yesterday warned that the problems encountered at Daw Mill would continue for the rest of the year. As a result of geological faults discovered at the mine, which was reckoned to be one of UK Coal's best prospects, it is currently only producing 5,000 tonnes a week, instead of 40,000 tonnes. Next year, Daw Mill should be up to its target level of output.

Gordon McPhie, chief executive, said: "Although Daw Mill will incur losses in the second half of the year, we are confident that it will emerge as one of the group's lowest cost producers."

For the six months to 30 June, the loss before tax was £12.5m. However, before exceptional redundancy costs of £13m incurred in the closure of the Prince of Wales colliery, there was a better-than-expected profit of £0.5m. The company said it had made progress on cutting the cost of production under its Project 105 efficiency drive.

Mr McPhie said: "Market conditions for coal have been adversely affected by several factors, including low gas prices, increased stocks at power stations and a recent drop in international coal prices."

Sales volumes in the first half were 9.6 million tonnes, down from 10.4 million tonnes for the period last year. But with increased output from UK Coal's deep and surface mines, there was a near doubling of stocks to 1 million tonnes.

In the past few months international coal prices have fallen to the low levels last experienced in August 1999, with the price per tonne into north-west Europe falling from $34 (£23) at the beginning of the year to below $26 during August. Adverse exchange rates have further weakened UK Coal's competitive position.

"Daw Mill's probably put us back about six months," said Mr McPhie, who did not rule out further pit closures after UK Coal's decision in July to wind down Britain's biggest colliery in Selby, north England.

"We've got to look at all of our operations to see which we feel will maintain long-term viability and we've got a tightening price in the international coal market which is making that more difficult."

The redundancy cost for Selby, which will be taken in the second half of this year, amount to £40m, of which £10m will be government funded.

Charles Kernot, analyst at BNP Paribas, said: "In a fortuitous move UK Coal had started building up stocks of coal ahead of the closure of the Selby colliery in 2004. These stocks can now be used to make up the shortfall from Daw Mill and means that cash flow will not be unduly impacted."