View from City Road: Pit predictions do not add up

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The Independent Online
Either the Government's preferred bidder for the three English coalfields, RJB Mining, knows something that the rest of us do not or its pounds 900m offer belongs more to cloud cuckoo land than the real world. To justify that sort of price, RJB has to expand by around 50 per cent a coal market that the world believes is in steady decline.

RJB is planning to raise pounds 1.1bn from bankers and investors on the back of such predictions so they clearly merit some analysis. Included is a forecast market by the end of the decade of about 45 million tonnes for coal used in power generation. That compares with the 30 million tonnes National Power and PowerGen buy from British Coal today and predictions by some in the electricity industry that coal sales to power stations could drop to 20 million tonnes.

The generators themselves tend not to be quite so gloomy but their prognosis for coal after the current contracts expire in 1998 is still poor. It therefore seems odd, to put it at its kindest, that BZW, the securities house advising RJB and its founder, Richard Budge, should also be advising the Government on the sale of its remaining 40 per cent stake in each of National Power and PowerGen. The future of RJB Mining and that of its main customers, National Power and PowerGen, are closely linked, yet their predictions for the likely future coal market are miles apart. How does BZW manage to marry them?

To have chosen Mr Budge as preferred bidder, the Government must presumably have satisfied itself that his offer is economically viable. The implication is that it, too, thinks a 45 million tonne market is achievable. Why then did ministers shrink the coal industry to the size it is now, selling only 30 million tonnes to the generators? Presumably because it thought this the maximum size of industry the market is capable of sustaining. Another contradiction.

Those backing Mr Budge should also ask why he deemed it necessary to offer pounds 900m for the English coalfields when the consensus is that they are worth nearer pounds 500m to pounds 600m. The premium, apparently, is offered as a way of securing a virtual monopoly of the English coal industry, but can it really be worth that much? Or is it his intention, now he is firmly in the driving seat, to haggle the price down in negotiation with the Government to a more economic level?

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