UK Coal puts merger plans on hold

UK Coal's merger talks with Hargreaves Services postponed after £129m loss for 2009 and debts exceeding its value
Tim Webb
guardian.co.uk, Monday 26 April 2010 20.56 BST
UK Coal has put merger talks with Hargreaves Services on hold after announcing a huge increase in losses for the year as a result of geological problems at its deep mines, lower property and coal prices.
The company said it had sold £8.6m of farm land to reduce its debts and was looking at more land sales to bolster its flagging balance sheet. New standby borrowing facilities of £30m have also been arranged to see it over the next few months.
Chief executive Jon Lloyd and finance director David Brocksom also saw their salaries frozen and bonuses cut because of the losses, and after two workers died in accidents last year.
It was not clear tonight when, or if, meaningful discussions would take place between UK Coal and resources and energy support services group Hargreaves Services. UK Coal announced last month that it had received a tentative merger approach from Hargreaves. But the company has not handed over detailed financial information requested by Hargreaves to allow it to begin due diligence.
UK Coal is interested in a tie-up, partly to reduce its reliance on its deep mines, which are very expensive to maintain and are unpredictable to run because of unforeseen geological problems like those experienced last year.
UK Coal endured a torrid 2009 in almost every respect. It posted pre-tax losses of £129.1m, up from £15.6m the previous year. Coal production was down by over a tenth, mainly because of collapsing shafts at its deep mines. Because of the recession, demand from coal plants, UK Coal's main customers, fell, as did coal prices. It also had to slash the value of its property division, made up of land reclaimed from former mines, by £25.7m.
The company admitted: "The financial results for 2009 are not those we planned for." It also said that its debts at the end of March stood at £236m, in excess of tonight's market value of the company of £177m.
UK Coal hopes production at its deep mines will increase significantly this year after opening new seams, and that coal and property prices will rise as the economy recovers. It will also open three new surface mines this year, which are cheaper to operate but are unpopular with local residents and planners. UK Coal is Britain's largest producer of coal. It said the UK burned around 43m tonnes of steam coal in 2009, mainly to generate electricity.
Consumption fell by 17% compared to 2008, as electricity demand was hit by the economic downturn, improved performance at nuclear stations and low gas prices. While the firm did see a lull in short-term demand, it said long-term the appetite for coal would be unaffected by the electricity market as UK production can only meet a fraction of requirements and the country is a "substantial importer of coal".
"Demand will continue substantially to exceed our supply capacity throughout this decade," the firm said.