IN 2007, WE CREATED SUBSTANTIAL VALUE FOR ALL OUR STAKEHOLDERS, AND I THANK OUR EXECUTIVE TEAM FOR THEIR STRONG LEADERSHIP AND ALL OUR EMPLOYEES FOR THEIR UNFLAGGING EFFORTS AND THEIR CONTRIBUTIONS. I AM CONFIDENT THAT WE WILL BUILD FURTHER ON OUR GROWTH PLATFORM IN 2008.
OVERVIEW AND OUTLOOK
I said last year that UK COAL had put in place a far stronger platform for future value creation and that 2007 would see the execution of our strategy go a great deal further.
I am delighted to report this has indeed been the case. We have delivered another year of substantial progress in our businesses. Pre-tax profits grew almost four-fold to £69.0 million, earnings per share increased 412% to 59.9 pence, and net assets per share increased 46% to 228.0 pence. We have shown that we have a strong growth platform, that we are effectively executing our strategy, and that we have the potential to continue delivering further substantial value this year and beyond.
Regrettably I have to report on the loss of the lives of two colleagues at two separate mines during the year. Nothing can ever be said to reduce the impact of a fatality on the family, friends, colleagues and on the rescuers directly involved. My condolences, and those of each individual Board member, go out to all of those affected, and our thanks are similarly extended for the brave efforts of those involved in rescue. We are dedicated to enhancing controls and to making changes to improve safety at all of our operations. To reinforce this objective, the Board has established a Health and Safety Committee to have oversight of these matters.
In mining, we have been successful in our continued negotiations with customers to move our overall sales prices closer to the world market price for coal and are progressively moving the Group’s contracts position towards a balance of contracts at floating, capped and collared, and fixed (or RPI linked) prices. This is altering the underlying economics of our mining operations and enabling us to invest in accessing more reserves in both our deep and surface mining operations.
We announced that there would be a period of non-production during the early part of 2007 at Daw Mill, our largest mine, and this had a substantial impact on the first half production and profitability of our deep mining business. In the second half of the year, however, our deep mines operated profitably, despite managing face changes and, for 2008, they have the prospect of increased production at an increased overall selling price. Meanwhile, our surface mine production sharply increased last year and is scheduled to increase again this year. I will always make the point that we face challenges and that, particularly in deep mining, there remains an element of unpredictability. These factors should not be underestimated. That said, however, the demand and price environment for coal has improved notably and has created a more positive backcloth than at any time in UK COAL’s corporate life.
In Harworth Estates, we have also delivered further good progress in evolving our development plans, gaining further planning permissions and growing the value of our portfolio.
There has been much publicity about downward pressure on UK commercial property values during the second half of last year. Notwithstanding this, the value of our land and property, excluding the deep mine sites, increased to £411 million, a like-for-like increase of 21%.
Our estimate for “ProjectWorth”, the worth of the portfolio in 2012, with the benefit of the planning permissions we are seeking, grew from £800 million at December 2006 to £935 million by December 2007. Taking a view to 2013, our estimate of this worth increases to in excess of £1 billion. These estimates are expressed in 2007 money terms. It is not that we are immune from the realities of the property market, more so it is that the longer term outlook for property in the UK, with its structural shortage of land for development, remains positive and very little of our land is as yet developed. The construction phase for our planned developments starts to become significant from 2009 onwards, and none of our estimates of future worth include any potential for development phase profits.
As expected, mines output in the first quarter of the new financial year was restrained by face changes at each of Kellingley, Thoresby and Welbeck, the latter starting later than planned following the fatality at the end of 2007. Overall first quarter production was 1.7 million tonnes (2006: ongoing operations 1.7 million tonnes) reflecting these face changes and the slow ramp up of the new face at Daw Mill, but in line with achievement of our overall results expectations for 2008.
With a positive outlook for all our businesses, we face the current financial year with considerable confidence.
MINING AND POWER
Our strategy for mining is framed by the selling prices which we can achieve, the production economics of our collieries and the geological and other factors characterising each colliery. We are focused on accessing and mining reserves only where there is a clear prospect of creating substantial value over time.
The principal change in the market environment is the sharp increase in the internationally traded price of coal. Driven by global energy demand, this price rose last year by circa 90% and over the last two years it has grown by approximately 140%.
Alongside this, there is an increased recognition of the value of security of coal supply, both within the Government’s thinking on energy policy and within the UK electricity generators’ strategy. All this reinforces the role of indigenous coal as a long term fuel resource.
Against this backcloth, we have been successful in our continued negotiations with customers to reduce the proportion of our deep mine production committed in past years at historically low selling prices. This, and the increasing volume of our surface mine production, enabled us to increase our average sales price last year by around 15% to £1.62 per Gigajoule (GJ).
We have estimated a further increase in our sales price to between £1.75 and £1.80 per GJ for 2008, based upon the forward price for 2008 Rotterdam delivery of $118 per tonne as at December 2007 and dependent upon expected tonnages.
This progress has enabled us to commit to around £55 million of new investment over the next 3 years in our Thoresby colliery and a similar amount over 3 years in our Kellingley colliery. This investment will extend the lives of the mines by some 10 years beyond their previously anticipated closure dates and add over 3 million tonnes a year to our planned deep mine production from 2009 to around 2018. At the same time, we continue actively seeking permissions for additional surface mining sites.
As I reported in last year’s Statement, we completed the sale of our Maltby colliery in February 2007 for a cash consideration of £21.5 million, thereby improving the operating profile of our deep mining business. This resulted in a profit on disposal of £8.5 million, lower than originally reported as the improvement in the pension fund deficit over the year reduced the anticipated benefit arising from the transfer of pension liabilities.
Our power generation operation, Harworth Power, generated 181,835 MWh (2006: 119,717 MWh) of electricity from methane pumped from our deep mines and successfully completed a new generating station at Stillingfleet. We also continued with the lengthy process of seeking planning permissions for wind farms to be built on some of our sites, successfully receiving planning consent for our first, 9 MW, wind farm site in February 2008 at Lynemouth, Northumberland.
Overall our Mining and Power businesses produced an operating loss before non-trading exceptional items of £1.8 million (2006: £26.8 million), with a loss in the deep mines business of £14.6 million (2006: £30.4 million) being offset by profits in the surface mines and power businesses of £8.5 million and £4.3 million respectively (2006: £0.5 million and £3.1 million respectively).
HARWORTH ESTATES
Our land and property portfolio is of very considerable value and we have clearly mapped out our strategy for realising this value.
The changes we have seen in UK commercial property valuations and home price trends have had a very limited effect on us for the reasons I have already set out. Our work last year, therefore, has increased the RICS valuation of our property portfolio to £411 million up 21% on a like-for-like basis. Our estimate of the worth of our property portfolio in 2012, has increased as a result from £800 million to £935 million and, taking a view for a further year out, to over £1 billion in 2013.
During 2007, we secured a number of key planning consents and we further expanded our property development plans — increasing the number of projects in our “Project Worth” development programme from 60 to 76 and increasing the net developable acreage from 2,650 to 3,696 acres. During the middle of the year, we also saw a significant change in Government policy towards promoting new housing. This has increased the likelihood of our gaining residential consent on a larger proportion of our acreage.
Among the key achievements last year were the establishment of a joint venture with Helical Governetz to promote our Waverley/Orgreave site, near Rotherham, for a 645,000 sq ft Government office relocation campus, and the submission and short listing of our Eco Town bid for a major housing scheme at Rossington, near Doncaster.
In early January 2008, a planning application for 250 homes and 150,000 sq ft of industrial space was approved at Edlington, Doncaster. Negotiations continue positively on our major scheme at Prince of Wales, Pontefract, where, once highway design matters have been fully resolved, the Council is expected to grant planning approval shortly.
I am confident that we will continue to make significant further progress during the current year and, step-by-step, enhance and crystallise the value of our portfolio.
We further strengthened the Executive team in Harworth Estates by the appointment in the final quarter of Mike Jones, a highly experienced Construction Director who joins us with 20 years experience in the construction industry, most recently with the highly successful Castlemore Securities Group Limited of Birmingham.
Overall Harworth Estates produced a profit of £73.2 million (2006: £73.3 million), including gains on Investment Properties of £70.5 million (2006: £70.0 million), of which £66.8 million was unrealised (2006: £68.6 million). A further revaluation gain of £6.7 million was taken directly to reserves, being the increase in value from historic cost to market value in respect of former Operating Properties transferred to Investment Property status (and thus being revalued) on their ceasing to be operational sites.
DIVIDEND
Over the coming years, the Group will be making significant investments in our mining and property businesses, in both of which we see significant opportunity to drive superior shareholder value. For this reason and to preserve financial flexibility, the Board has decided not to recommend a dividend. We will keep this under review but future dividends will be dependent both on our future performance and on our view of how best to drive total shareholder value.
BOARD
During the year, we made a number of Board changes. At the end of May, we announced that Gerry Spindler was to leave the Group in order to return with his family to the USA. We were delighted to announce Jon Lloyd as Gerry’s successor. Jon has exceeded the Board’s expectations in the way he is leading the Group and developing our strategy and its execution. In September, Chris Mawe left the Group in order to pursue other interests, and we welcomed David Brocksom, his successor as Finance Director.
We further strengthened our non-executive Director team during the year. Last June, Kevin Whiteman, who is Chief Executive of Kelda Group and has extensive coal mining experience from his time with British Coal, joined our Board and, in October 2007, we welcomed Owen Michaelson, who has substantial brownfield land and property development experience and who is a Director of Peel Holdings, our largest shareholder.
DAVID JONES
CHAIRMAN
17 APRIL 2008