Preliminary results for the year ended 31 May 2013

Review of Operating Performance by Business Unit

Revenues from Continuing Operations for the full year increased by 36.5% from £617.9m to £843.3m, driven mainly by the Energy & Commodities Division which enjoyed a substantial increase in the volume of coal supplied to power stations and the steel sector. Underlying Group Operating profit from continuing operations increased by 4.3% from £53.4m to £55.7m. Reported continuing operating profit decreased from £48.9m to £44.0m reflecting the impacts of the one off impairment of goodwill and intangibles of £4.1m during the year. Underlying Group operating margin decreased from 8.6% to 6.6%, mainly reflecting a changing product mix in the Energy & Commodities Division, with a significant increase in low margin sales to power stations and the steel sector.

 

	Production 2013 £000	Energy & Commodities 2013 £000	Transport 2013 £000	Industrial Services 2013 £000	Total 2013 £000
Segment Continuing Operating profit/(loss)	13,179	27,456	3,814	(477)	43,972
Intangible amortisation/impairment	131	4,152	197	3,505	7,985
Share of profit in jointly controlled entities (net of tax)	2,364	209	-	-	2,573
Share of tax in jointly controlled entities	1,071	60	-	-	1,131
Underlying Continuing Operating Profit	16,745	31,877	4,011	3,028	55,661
Net financing costs - Continuing Operations	(374)	(1,550)	(694)	(864)	(3,482)
Underlying Continuing Profit before Tax	16,371	30,327	3,317	2,164	52,179

 

	Production 2012 £000	Energy & Commodities 2012 £000	Transport 2012 £000	Industrial Services 2012 £000	Total 2012 £000
Segment Continuing Operating profit/(loss)	16,597	25,921	3,674	2,755	48,947
Intangible amortisation/impairment	-	2,429	393	1,570	4,392
Share of profit in jointly controlled entities (net of tax)	76	23	-	-	99
Underlying Continuing Operating Profit	16,673	28,373	4,067	4,325	53,438
Net financing costs - Continuing Operations	(500)	(2,315)	(749)	(530)	(4,094)
Underlying Continuing Profit before Tax	16,173	26,058	3,318	3,795	49,344

 

Energy & Commodities Division

 

Our Energy & Commodities Division encompasses the Group's solid fuel trading activities. These split into two broad categories. The first, Bulk Coal Supply, includes the supply of coal into power stations and steel works. This includes the lower margin markets for thermal coal, coking coal and coal supplied for the use of injection into the blast furnace PCI. The second, Speciality Coal, covers the supply of sized coals, low ash coals and coke products. These more specialised products, such as sized coals for the domestic and commercial heating markets, and industrial coals for customers in the cement and ferro-alloy sectors, continue to offer greater opportunity to add value to the product and hence generate higher margins.

 

The Energy & Commodities Division had another very strong year. Gross revenues increased by £173.0m from £412.0m to £585.0m, reflecting increased Bulk Coal sales volumes to power stations and steel works. Underlying operating profit increased by £3.5m from £28.4m to £31.9m driven largely by a strong performance in the UK where operating profit increased by £4.4m from £20.0m to £24.4m due to increased activity levels in the bulk coal markets. Following a difficult year in the coke markets, underlying operating profit attributable to our German operation reduced from £7.5m to £6.3m.  Despite the headline reduction this represents a very strong performance given the backdrop of low volumes in the market.

 

The average profit per tonne and margin is influenced heavily by the product mix, most notably the difference between the lower margin sales of coal sold to power stations and the higher margin product sold into speciality markets.  An increase in the proportion of lower margin power station coal sales relative to the higher margin speciality product saw overall operating profit per tonne sold decrease from £7.32 to £5.17 and the average divisional profit margin reduce from 6.9% to 5.4%.

 

Profit per tonne in the bulk coal market fell from £2.64 per tonne to £2.35 per tonne. This reduction was driven by the addition of lower margin coking coal sales into the steel sector. The average profit per tonne in the core power station markets remained fairly steady. . Average profit per tonne in the UK specialty markets increased slightly from £20.53 to £21.68. Profit per tonne in the European speciality markets reduced from £14.68 to £9.77 reflecting a challenging year in the coke markets in our German operation.

 

The table below provides a breakdown on volumes and margins within the Energy & Commodities Division. The comparatives in the table have been restated to remove the discontinued operations in Belgium.

2013	UK Bulk	UK Speciality	UK Total	European Speciality	Total
Tonnes Sold (000's)	4,679	618	5,297	645	5,942
Operating profit per tonne (£)	2.35	21.68	4.61	9.77	5.17
Operating profit from trading (£m)	11.0	13.4	24.4	6.3	30.7
JCE & non-trading (£m)					1.2
Total Segment Underlying Operating Profit (£m)					31.9
2012
Tonnes Sold (000's)	2,609	638	3,247	511	3,758
Operating profit per tonne (£)	2.64	20.53	6.16	14.68	7.32
Operating profit from trading (£m)	6.9	13.1	20.0	7.5	27.5
JCE & non-trading (£m)					0.9
Total Segment Underlying Operating Profit (£m)					28.4

 

Note: Operating margin per tonne included profits on handling third-party product volumes through port operations.

 

UK - Bulk Coal Supply (Power Stations and Steel)

 

The Energy & Commodities business exceeded our targets for the last year due to high demand for coal from the UK power stations. This demand was driven by strong base load generation as generators took advantage of the price differential that coal enjoyed over gas during the year.  It is pleasing to note that the high levels of demand have continued into the current financial year. The supply of low grade coals, including pond fines, continues to be an important driver for increased power station demands. The ability of the Group to reliably and efficiently blend such coals into the coal flows, either at the importation port or at the power station has been a key driver of this demand. Although only one million tonnes of pond fines remained at Maltby when the decision was taken to close the mine, the Group has since secured rights to a number of other sites including the Prince of Wales Colliery site from UK Coal. The Group estimates it has secured rights to approximately 4 million tonnes of pond fines in aggregate.

 

UK - Specialised Coal (Industrial & Domestic)            

 

The Group was disappointed, but not surprised, when UK Coal announced its insolvency and re-structuring. This terminated the Group's supply contract with UK Coal, under which UK Coal had been contractually bound to supply around 270,000 tonnes of coal for the industrial and domestic markets. During the last 18 months UK Coal had been struggling to meet its obligations and the Group has taken measures to source sized coal from the international markets and more recently from other sources, including Hatfield Colliery. The acquisition of assets in Scotland should also provide an opportunity to diversify the Group's sources of supply and the Group will work hard to increase the level of potential supply from indigenous and international markets over the coming years.

 

As a result of the failure of UK Coal, we have impaired the remaining £1.6m of acquired intangible asset relating to the UK Coal supply agreement that was operating when the Group acquired UK Coal's 50% stake in Coal4Energy Limited in January 2009. The intangible asset associated with that contract was being amortised over the original duration of the contract which was due to run from May 2009 to May 2014.

 

Europe

 

Separate from our discontinued operations in Belgium, the German business performed well last year in very difficult coke markets. Demand from traditional customers in the steel sector was very low as many European steel makers struggled to balance their own coke production with low levels of steel production. The coke trading business benefited from a number of significant coke purchases from SSI at Redcar Steel works. Growing trading interest in the ferro-alloy markets provides an additional opportunity for the current financial year.

 

Elsewhere in Europe, the Group continued to develop its joint venture with Mir Trade AG, a large Russian coal producer, to build a power station supply operation in Europe. Thermal coal sales in the financial year to 31 May 2013 increased to 320k tonnes. This business continues to grow steadily and the Group will continue to support its development. Although the profit contribution remains small at £0.3m, if greater scale can be achieved, the opportunity to drive additional profits will arise.

 

Production Division

 

The Continuing Production Division results for the year ended 31 May 2013 encompassed the operations at Monckton, our own surface mining operations and our joint venture investment at Tower. The results also include the smaller non-core businesses of MR&R and Rocpower, neither of which were material contributors to the Division's results. Gross revenues from the Division's continuing operations increased by £13.5m from £89.7m to £103.2m while underlying continuing operating profit remained at £16.7m.

 

As anticipated, the Division delivered a very strong second half performance aided by a steady production rate at Tower Colliery following the poor weather encountered in the first half.

 

Monckton

 

The closure of Maltby necessitated sourcing coking coal for Monckton from international markets and we were able to source coal that was very similar to that of Maltby. Our subsequent testing and production has shown that the coke produced from this coal has very similar properties to that produced historically from Maltby coal and we believe that there will continue to be sustained demand for this type of coke.

 

Production at Monckton remained steady whilst revenues decreased by £3.3m from £56.4m to £53.1m. Coke sales fell by £4.5m from £54.1m to £49.6m, whilst by-product income fell by £0.5m to £4.1m through a combination of lower volumes and lower power prices.

 

Annual coke volumes sold fell by 25k tonnes from 261k tonnes to 236k tonnes in the year, due to a combination of slowing coke demand coupled with the effect of de-stocking experienced in the year ended 31 May 2012. Included within annual volumes were 51k tonnes of third party manufactured coke, sold in addition to Monckton's own manufactured product. 

 

Surface Mining

 

The last financial year was significant for the Surface Mining business. In addition to completing the first full year of production at our joint venture operation at Tower in South Wales, the Group secured an equity fund raising in April of £42.3m (£40.7m after issue costs) to allow the Group to pursue the acquisition of assets from the liquidators of Aardvark (TMC) Limited (the main operating subsidiary of the former ATH Resources PLC) and Scottish Coal Company Limited (the main operating subsidiary of Scottish Resources Group Limited). The opportunities presented by these acquisitions are very exciting and will provide the Group the springboard to rapidly develop its surface mining operation, becoming the largest surface mining coal producer in the UK.

 

Acquisition of Assets from Aardvark TMC Limited

 

On 16 May 2013, Hargreaves acquired a number of assets related to the business of Aardvark (TMC) Limited ("Aardvark") for £10.4m.  The acquisition process commenced with the purchase of the secured debt from Better Capital in March 2013 following extensive discussions with many of the key stakeholders of the former ATH group. We worked for two months with the management of Aardvark and other stakeholders to ensure continuity of operations following the liquidation of Aardvark.

 

As part of the transaction, ATH's interests in two active mining sites, Netherton and Duncanziemere were hived down into separate new companies (the "Hivecos") which will continue to be owned by Aardvark. The objective of these Hivecos will be to resolve outstanding restoration liabilities. Hargreaves has and continues to actively assist with the process of seeking an optimal solution in light of the level of funding available through continued mining activity at the sites and the existing restoration bonds.

 

Going forward Hargreaves has an exclusive option to purchase the shares in the Hivecos for a nominal sum.  As and when the outstanding restoration issues on each site are resolved on commercially acceptable terms, Hargreaves will acquire the relevant Hiveco from Aardvark and fully integrate it into the Group. This will only happen after all planning permissions are in place and would be expected to take approximately between 3 and 12 months. In this interim period, it is expected that Hargreaves will continue to provide mining, coal marketing and restoration services to ensure the sites are held safely, restoration activities are commenced, and jobs are preserved.

 

The successful acquisition has secured over 200 jobs at Netherton and Duncanziemere, protecting employment in East Ayrshire and we are hopeful that we will soon be able to recruit additional personnel as we start operations at other sites. We expect to produce over 1 million tonnes of surface coal from the ATH sites during this financial year.

 

The Surface Mining business is working with various stakeholders to provide restoration activities at other sites including Glenmuckloch in Dumfries and Galloway and we are optimistic that both mining and restoration projects at other sites will be commenced before the end of this financial year.

 

As part of the transaction Hargreaves assisted with the formation of the Scottish Mines Restoration Trust ("SMRT"). This trust has been established as an independent charity to help address outstanding legacy restoration issues. Following the acquisition of ATH, Hargreaves made a donation to the SMRT of £1.1m.

 

Post Balance Sheet Event - Acquisition of Assets from Scottish Coal Company Limited

 

Following an intensive period of due diligence we announced on 5 July 2013 the completion of a transaction to acquire certain assets from the joint liquidators of Scottish Coal Company Limited ("Scottish Coal") for £8.4m.

 

The transaction was complex and initially involved the acquisition of a property portfolio of approximately 30,000 acres together with unencumbered plant and equipment. The property interests include Scottish Coal's rights and interests in various wind farm projects that were being progressed through design and planning. Scottish Coal will share in any near-term profits realised on the wind farms. 

 

Hargreaves intends to progress the wind farm projects, together with one specific development property, as a joint venture with the SMRT, to provide a future potential income stream to the Trust. The Group does not currently intend to take these projects beyond the realisation of the design and planning stages.

 

As part of the transaction, Scottish Coal's interests in five former active mining sites, most notably at Broken Cross and House of Water were hived down into separate new companies (the "Hivecos") which will continue to be owned by Scottish Coal. This structure was similar to that used for the Aardvark transaction. The key difference to the Aardvark transaction was that operations at all sites ceased when Scottish Coal was liquidated. Like the Aardvark Hiveco's, the objective of these Hivecos will be to resolve outstanding restoration liabilities. Hargreaves is actively assisting with the process of seeking an optimal solution in light of the level of funding available through continued mining activity at the sites and the existing restoration bonds.

 

It is our intention to resume operations to support revised mining and restoration plans as quickly as possible and Hargreaves expects to bring approximately 1 million tonnes of production capacity on line in the current financial year. Hargreaves will acquire the necessary plant and equipment to support the target of one million tonnes of production and would expect to invest between £12m and £15m of capital expenditure.  Significant efforts are underway to achieve this goal.

 

As with the Aardvark transaction, Hargreaves has an exclusive option to purchase the shares in the Hivecos for a nominal sum.  As and when the outstanding restoration issues on each site are resolved on commercially acceptable terms, Hargreaves will acquire the relevant Hiveco from Scottish Coal and fully integrate it into the Group. This will only happen after all planning permissions are in place and would be expected to take approximately 12 months. In this interim period, it is expected that Hargreaves will continue to provide mining, coal marketing and restoration services to ensure the sites are held safely, restoration activities are commenced, and workers are re-employed.

 

It is inevitable given the rapid growth of the business that we would reach a stage where our acquisitions exceeded the technical thresholds laid down in the Enterprise Act 2002 and would give rise to a dialogue with the Office of Fair Trading ("OFT"). In anticipation of this next stage in our growth and following this transaction, Hargreaves voluntarily approached the OFT to commence a dialogue on competition issues relating to any further consolidation opportunities that may arise in the coal sector in the UK. The Group will continue to work closely with the OFT to ensure there are no competition concerns in the UK coal market during this period of consolidation and uncertainty.

 

Tower Joint Venture

 

The Tower project contributed £8.3m of underlying operating profit to the Production Division during the year through a combination of our 35% share of TRL's profit, profit made by Hargreaves Surface Mining and management charges.

 

This was the first full year of production after operations at the site commenced just before the start of the last financial year. The first six months of operations were significantly hampered by exceptional rainfall. The weather improved in the second half and higher production levels were achieved. Total sales of 574k tonnes were split 179k tonnes in the first half and 395k tonnes in the second half of the year.

 

Strong production levels have been maintained since the end of the year. We remain confident that the site will deliver coal in the average ratio that was planned and expected. Off-take from two steel plants that were interested in buying PCI grade coal from Tower have been delayed. As a result we will continue to focus on production of coal to support the RWE contract.

 

Other Surface Mining

 

Outside of the Tower project we were also pleased to announce the receipt of planning permission for our first wholly owned small surface mine. The site at Well Hill in Northumberland, our first mine in England, is expected to produce 130k tonnes and as anticipated and announced at the interim results we expect coaling to commence within the next month. We remain on track to fulfil our previous target of getting an additional two sites into the planning process before the end of this financial year.

 

Surface Mining Reserves

 

Following the activity of the last 12 months the Group has significantly progressed its pipeline of potential mining sites. The sites targeted in the UK will continue to be smaller sites with a typical mining life of between two and four years. After careful consideration we have decided that the most informative way to provide guidance on reserves is to focus on "Proven Reserves."

 

Proven Reserves are defined as reserves where, in the opinion of management, sufficient drilling has been undertaken to form an opinion with reasonable certainty on the quality and quantity of coal that would be available from that site. Before capital is committed to a site, Hargreaves' internal assessment of coal reserves, coal quality, overburden ratios and mining plans will be independently reviewed and confirmed by independent external consultants.

 

As planning permission is a key process and control, Proven Reserves will be analysed into three categories

 

(1)      "With Planning Permission" are reserves where all the necessary planning permissions are in place to operate the site

(2)      "In Planning Process" are reserves where planning applications have been submitted

(3)      "Pre-planning" are reserves where land rights have been secured and the process for submitting a planning preparation is underway. This category would most typically include sites where the typical 12 month Environmental Impact Assessment is underway.

 

We have elected not to report Probable Reserves, even where property rights have been secured, as they are deemed to be too early stage having still to undergo both proving and planning. We have not elected to adopt JORC reporting regime on the grounds of cost and the greater flexibility to present reserves in the way  we consider is most informative to the reader in terms of understanding the development of the pipeline.

 

As the surface mining business grows and evolves we will review the presentation of information on a regular basis.

 

Proven Reserves (million tonnes)

	With Planning Permission	In Planning Process	Pre- Planning	Total
Joint Venture	5.8			5.8
Former ATH Operating Sites	1.5			1.5
Former Scottish Coal Operating Sites		3.0		3.0
Other Operating Sites	0.1			0.1
Other Sites		1.8	12.0	13.8
Total	7.4	4.8	12.0	24.2

Of the 24.1 million tonnes of proven reserves, 0.1 million tonnes are at Hargreaves owned sites.

 

 

Other Continuing Activities

 

The Group continues to provide management services and support to Hatfield Colliery Limited from Maltby Colliery Limited. In light of recent production challenges at Hatfield, Hargreaves has elected to waive management fees at this time. The coal produced by Hatfield continues to be marketed by the Energy & Commodities Division. The ongoing commercial arrangement is currently being reviewed as operations at Maltby are wound down.

 

Following the landslip in February 2013, the rail link at Hatfield Colliery re-opened in July 2013. Network Rail has indicated that it intends to bring a claim against, among others, Maltby Colliery Limited and Hargreaves Services plc.  However, no claim has been issued and it is therefore unclear as to the basis on which a claim may be brought by Network Rail and the remedy which may be sought.  It is intended that any claim will be vigorously defended by both Maltby Colliery Limited and Hargreaves Services plc, and we are currently working with our insurers and solicitors.  In the circumstances, the Board does not feel that any provision for a claim or costs is necessary based on the facts available at this time.

 

Industrial Services Division

 

Revenues increased by £68.6m from £80.7m to £149.3m. This significant increase in revenue was mainly due to two large biomass conversion projects undertaken during the last financial year. These, together with other non-recurring contracts and projects generated an additional £37.1m of revenue.

 

The core material handling operations enjoyed another year of growth that saw revenues increase from £64.7m to £96.2m. Operating profits for the core material handling business increased from £3.6m to £5.0m. The revenue increase in the core business benefitted from a full year of revenues from the contracts that were won in the preceding year in the steel sector. In the steel sector, the division is in the process of tendering a number of other significant contracts. The Division has continued to perform well in the power generation sector, although we have seen cost and competitive pressures rising in the UK power generation market. We continue to be encouraged by interest from overseas operators and the Division is working on a number of tenders in overseas countries. We are pleased to note that the division won its first maintenance contracts in Hong Kong last year with China Light and Power and is awaiting the results of a major tender to outsource core material handling services.

 

This strong performance from the core Industrial Services business was adversely impacted by a poor result on the biomass conversion projects, offset by contributions from other non-recurring contracts. This, along with a disappointing performance in our engineering services business where some restructuring costs have been incurred, reduced the profitability of the division by £2.7m resulting in a fall in overall underlying divisional operating profit from £4.3m to £3.0m.

 

We are pleased to note that one of the two biomass conversion projects has now been completed. The second major project is ongoing and is expected to complete in the next quarter. These contracts have placed significant pressures on our engineering services business and whilst they have been problematic and loss making, we have remained committed to delivering a quality solution. We have reviewed the lessons learnt on these projects and decided before the end of the year not to pursue further contracts of this nature, resulting in impairment to goodwill of £2.5m. Accordingly we have scaled back our engineering services business unit to focus on small scale projects undertaken in support of the core material handling business. We would expect this decision to reduce the future volatility of earnings in the division.

 

Transport Division

 

Overall the Transport Division performed well last year. The Transport Division's gross revenues increased by £5.4m from £77.3m to £82.7m reflecting a strong year from the Bulk fleet. Underlying operating profit reduced by £0.1m to £4.0m (2012: £4.1m). The Bulk fleet exceeded our internal expectations having benefitted from higher than normal coal shipments as power stations increased their coal burn and rebuilt coal stocks. The Tanker fleet had a quieter year following the loss of the Petroplus contract. By the end of the year the Tanker fleet had successfully re-positioned itself and we would expect Tankers to deliver a stronger performance in this financial year.

 

Discontinued Operations

 

Discontinued operations incurred a loss of £81.8m net of tax during the year. This overall result reflects a loss of £59.8m in Maltby and a loss of £22m in Belgium, including both the exceptional write off and the trading loss.

 

Maltby

 

Following consultation with employees and trade union representatives, the decision to proceed with the mothballing of Maltby colliery on health and safety, geological and financial grounds was announced on 17 December 2012. The timing of the decision to mothball the mine means that the results of the underground operations at Maltby have been classified within discontinued operations in the current and prior year.

 

The mothballing process has progressed well with a reported loss (including closure costs) of £59.8m net of tax incurred in the year ended 31 May 2013 were in line with plan. These costs included the operating loss to the point of decision to mothball the mine, redundancy costs, closure and settlement costs to the end of the year, and non cash write offs relating to plant and equipment, development costs and other related assets.

 

The sale of the methane assets to Alkane Energy, announced on 22 May 2013, allowed the Group to achieve its target asset realisation for the year ended 31 May 2013. Hargreaves received an initial payment of £5.5m in cash in May 2013 and this will be followed during the year ending 31 May 2014 by a further £2m payable six months after the mine shafts have been filled and capped as part of Maltby's planned closure and restoration programme.

 

The process to sell the remainder of the plant and equipment is ongoing, and the closure and restoration programme remains on track to be completed during the current financial year. At this stage we have not made any changes to our estimates of the amounts recoverable from the sale of equipment. We do however note that the mining equipment markets remain subdued.

 

Overground operations at Maltby continue to trade and surface coal fines remaining amount to approximately one million tonnes and the harvesting and processing of these reserves will continue. Further, Maltby will continue to provide mining management services to Hatfield Colliery Limited.

 

The loss of jobs at Maltby is very regrettable. The Group, management and unions worked together closely to minimise the inevitable socio-economic impacts. In this regard, great efforts continue to be made to find alternative jobs for as many of the workforce as possible.

 

Belgium

 

The fraud in our Belgium business, which was set up as a joint venture in 2008, was an extremely disappointing development. Following the work that has been done we remain confident that we have accurately estimated the direct financial impact of the fraud.  The net loss is reported at £17.3m net of tax before any potential recovery from those involved in perpetrating the fraud.

 

A detailed review of stock quantities and qualities was completed to assess the true value of the book stock and a significant misstatement in the value of the stock was identified.  We also reviewed all other balance sheet values and identified those that were also fraudulently reported.  Finally we reviewed the contract position and identified the quantity and value of coal that needed to be purchased to allow us to complete the delivery of valid and genuine customer contracts.  This provided us with a high degree of confidence in our estimate of the impact.

 

As previously stated, significant detailed work has been ongoing to ensure all necessary and appropriate steps are undertaken to achieve the maximum possible recovery.

 

We have also previously stated that we are confident that no such issues exist in other parts of the Group.  To provide additional confidence, PricewaterhouseCoopers were engaged to carry out a detailed forensic investigation into certain balance sheet items in the German business.  This forensic investigation identified no issues or concerns.

 

The Belgian business has been closed before the year end and consequently, in addition to the exceptional write off relating to the fraud, the trading loss of £4.7m in the year has also been included within the discontinued operations result.

 

 

Iain Cockburn

Group Finance Director

 

Gordon Banham

Group Chief Executive

23 September 2013