We lay primary emphasis upon safety, and I am pleased to say we have made good progress in reinforcing the safety culture of our Group. We are especially pleased with a reduction in the major injury/fatality accident rate in the deep mines from 3.3 per 100,000 manshifts in 2007 to 1.7. On behalf of the Board I would like to thank all of our employees for their dedication, not just on safety matters, but for the progress made within our operations. We are very fortunate in having a very skilled workforce with tremendous belief in our businesses.
Group revenue has increased 18.3% to £172.9 million during the first half of the year, reflecting the higher average realised coal sales price, which rose 17.8% to £1.79 per gigajoule (GJ) compared with £1.52/GJ for the same period in 2007.
AROUND 95% OF UK COAL’S DEEP MINE OUTPUT IS DELIVERED TO POWER STATIONS BY LINER-TRAINS LIKE THIS BEING LOADED AT THORESBY COLLIERY IN NORTH NOTTS.
5% of the country’s electricity is generated from our coal
In mining, our first half output was proportionately more committed to satisfying older contracts, muting the positive impact of the increased market price for coal. In addition, first half production was constrained and was marginally lower than original expectations, principally reflecting the timing of face changes at Kellingley and Welbeck. For the second half, while there may always be unpredictabilities, we expect significantly higher production at a significantly higher sales price.
Our surface mines performed well, increasing production in the first half by 28.5% to 0.9 million tonnes (H1 2007: 0.7 million tonnes)
While the increased market value of coal is highly positive to the business, cost inflation, in particular in other fuel and steel prices, is affecting our businesses. Diesel fuel is a significant element of surface mine operating costs and overall performance in the period was affected by increases in its cost. The sharp increase and long term outlook for the price of “red diesel” has also led us to review the provisions required for the restoration of surface mine sites over the next 3-5 years, and for us to make an exceptional charge to the income statement of £5.6 million.
In our property business, Harworth Estates, we are differentiated from others in the sector as our property portfolio is at an early stage in its development life, with milestone planning gains, some rental appreciation and the good performance of agricultural land values in the period more than offsetting current general property market conditions. Longer term, we believe that the UK’s structural shortage of land for development benefits our estate and that the locations of our brownfield sites fit well with both local and national government’s vision of sustainable communities.
Harworth Estates performed well in the tough conditions for the property market as a whole, achieving a 5% like-for-like increase in RICS property valuations since the end of 2007 to £438.4 million. While last year’s rate of increase in valuations could not be maintained, it is notable that, despite difficult market conditions for the property industry as a whole, our further progress in securing planning permissions and the strength of agricultural land values mean that we have achieved a modest valuation increase in the first half of the year and expect to do so again in the second half.
We were pleased to receive planning approval from the Local Authority Planning Committee for the first phase of the Prince of Wales project in August.
Reflecting the lower scale of property valuation gains and the surface mines restoration provision, the Group made an operating loss before non-trading exceptional items of £4.2 million in the first half of the year compared to profit of £35.5 million in the same period in 2007.
The Group loss before tax in the first half of the year was £9.9 million (H1 2007: profit before tax £40.6 million). Loss per share was 6.5 pence (H1 2007: earnings per share 34.2 pence, or 25.9 pence excluding the tax credit in the period).
While overall the reported result for the first half is lower than for the same period last year, this is not unexpected bearing in mind the scheduled timing of our mining production over this year and the unsurprisingly reduced level of non-cash property valuation gains achieved for the first half of 2008 given the current property environment.
Net assets on the balance sheet were £319.8 million compared to £358.2 million at the end of 2007, primarily a result of a £28.5 million increase in the Group’s pension schemes’ deficits to £101.7 million. This increase mainly reflects a reduction in the market value of the schemes’ assets of £43.5 million, partially offset by an actuarial gain of £12.5 million resulting from an increase in the interest rate used to discount the liabilities, both reflecting market conditions at the end of June 2008.
Overall net debt (excluding restricted cash balances) at 30 June 2008 was in line with expectations at £145.3 million (December 2007: £104.3 million).
AN ILLUSTRATION OF THE DEVELOPMENT PLANNED FOR THE FORMER PRINCE OF WALES COLLIERY SITE AT PONTEFRACT, APPROVED BY WAKEFIELD COUNCIL. OVER 900 NEW HOMES, A BUSINESS PARK AND RETAIL OUTLETS WILL BE DEVELOPED ON THE 300-ACRE SITE.
UK COAL is one of Britain’s largest brownfield site property developers
DIVIDEND
The Group is making significant investments in its businesses to take advantage of opportunities to maximise shareholder value. For this reason and to preserve financial flexibility, the Board is not declaring an interim dividend.
OUTLOOK
In our deep mines, Daw Mill is working through its two year long panel and, while Kellingley and Thoresby continue to face difficult coal conditions as they work their way through the last of their current seams, the investment programmes are well on track to enable access to their further substantial reserves from mid and late 2009 respectively. Welbeck will continue to mine its remaining resources until these are exhausted at the end of 2009. We have also begun the geological work to enable us to decide on the economic viability of re-opening our Harworth mine.
The sharp increase in the market price of coal, up around 45% from the start of the year to the end of July, and the strong forward price curve, transforms the outlook for our mining operations. For the second half, we expect to achieve both a significantly higher average sales price and, absent any disruption, a significantly higher volume of production, delivering strong positive cash flows. While we expect the
difficulties in the commercial and residential property market to continue, we also expect to achieve a further modest increase in RICS property valuations in the second half.
Longer term, the proportion of our coal production needed to meet legacy contract commitments will now progressively fall, and we have made good progress in putting in place a balance of new contracts at floating, capped and collared and fixed prices, leaving a proportion of our production available to take advantage of short term market prices. This will progressively move our overall sales prices closer to world market price and is changing the economics of our mining business.
In property, it will take time for the current difficult market conditions to work through but we believe the longer term outlook, with the UK’s structural shortage of land for development, remains positive. We also believe we are well positioned given the strength of agricultural land values, the impact of the planning permissions we are pursuing, the location of our development sites and the timing of the construction phase, the latter not being significant until after the end of 2009.
Overall, we have made further good progress in realising the substantial potential of the Group. We continue to be confident of meeting expectations for the full year and view the future with optimism.
DAVID JONES
Chairman
27 August 2008