UK Coal raises output to capitalise on higher prices

UK Coal is seeking to cash in on rising energy prices through higher production and the end of long-term, low-priced legacy contracts. The company is already investing £55m each in its collieries at Thoresby in Nottinghamshire and Kellingley in West Yorkshire to open up new reserves and is expected to decide within the next six months whether to reopen the Harworth mine near Doncaster, which has been mothballed for more than two years.

Chief executive Jon Lloyd said he believed it was accepted that in the face of higher energy prices, and despite the impact of the large combustion plants directive, which limits power station emissions, coal would play a "significant and perhaps major part in the UK's energy mix over the next two decades".

"There will be environmental challenges but frankly it's a political must to keep the lights on," Lloyd said. He said the company would decide on Harworth either late this year or in the first quarter of 2009. If it was reopened, at a cost of up to £175m, it would eventually provide another 2.2 m to 2.3 m tonnes of coal a year. The key factors would be the geology, which would determine the cost of accessing the reserves, and their size — thought to be 25m to 40m tonnes.

Although the UK Coal chief executive is bullish about the outlook for the industry, he said it was unlikely that Britain would see any new coal mines. "To start from scratch, to drive shafts would cost about £1bn and take eight or nine years — even if you find the people who know how to drive shafts any more."

Yesterday UK Coal reported an interim pre-tax loss of £9.9m against a profit of £40.6m in the same period last year. However, the company, which operates a property portfolio, said it was confident of meeting expectations for the full year. City analysts have pencilled in profits of around £70m.

UK Coal said first half coal production had been lower than expected and it was more committed to meeting long-standing lower-priced contracts, so the benefits of the 45% increase in prices had been muted. However it said the second half would see "significantly higher production at a significantly higher sales price."

Lloyd said UK Coal was committed to delivering 10m tonnes of coal on lower - priced legacy contracts but by the end of 2009 that would have fallen to between 3m and 3.5m tonnes.

UK Coal said that despite the problems facing the property sector in the face of the credit crunch, the like-for-like value of its property portfolio had risen by 5% to £438.4m and that it expected to see a further increase in the second half.

Lloyd said the company's portfolio had benefited from its holdings of agricultural land, where values had risen, and because many of its developments were at an early stage and thus less vulnerable to the impact of the downturn. While an upturn could be some way off , Lloyd said the company would be well-positioned to take advantage of the eventual rebound in demand.

(By Mark Milner, The Guardian, 29/08/2008)