INTERVIEW-'Baptism of fire' tests UK Coal's new chief

Fri Mar 1, 2013 2:45pm GMT

Quotes

   

* Daw Mill colliery suspended after fire

* CEO says company's other mines still generating cash

* Company could redeploy some Daw Mill workers to other mines

* Stockpile sufficient to supply E.ON for now

By Brenton Cordeiro

March 1 (Reuters) - UK Coal, Britain's biggest coal miner, expects revenue from its remaining collieries to keep the company afloat while it wrestles with the costs of closing a major mine devastated by fire, its chief executive told Reuters.

The underground fire at the Daw Mill Colliery, which started last Friday, is likely to close one of the company's three deep mines permanently at a time when the once-mighty British coal sector is battling greener government policy and cheap imports.

"This is a baptism of fire," Kevin McCullough said in an interview on Thursday, four weeks after his appointment as chief executive of UK Coal, the mining division of Coalfield Resources .

He said on Monday that UK Coal would not be viable as a company in the event it were forced to shoulder the entire cost of closing the Daw Mill pit in Warwickshire, where the fire is still burning.

McCullough told Reuters on Thursday the company might be able to redeploy some of the 650 miners employed at Daw Mill to other collieries. This would reduce the size of any severance package resulting from a closure.

"The two other deep mines and the surface mines that we have are very sound. They're generating cash and contributing to the viability, which is very real, of UK Coal," McCullough said.

He said that supplies from Daw Mill to its main customer, E.ON, had not been interrupted as the company was able to work through coal stockpile on the surface. UK Coal was in talks with E.ON about longer-term supplies, he said.

"We are in the process of making alternative arrangements," McCullough said.

The Daw Mill fire is the second blow to Britain's mining industry in less than three months, after Hargreaves Services said in December it would close the 100-year-old Maltby pit in March with the loss of 540 jobs.

UK Coal employs almost half of Britain's 6,000 coal miners. Its three deep mines and six surface mines together account for about 40 percent of UK coal production.

Shares in Coalfield Resources have lost over 80 percent of their value in the past year.

CASH IS TIGHT

Britain's coal miners supply about 30 percent of the fuel for the country's coal-fired power stations. Since the industry was privatised in 1994, competition from imports has risen from countries including Colombia, Russia and the United States.

Demand is likely to fall from 2016, when EU laws requiring coal-fired power stations to slash emissions come into force.

Weighed down by debt and a pension deficit, UK Coal undertook a complicated restructuring last year to help avoid the closure of some operations.

McCullough, who joined UK Coal from RWE npower this year, said the fact that the fire occurred so soon after this restructuring made "cash management very tight".

If Daw Mill were to be closed, UK Coal would potentially be faced with a large severance bill. The company declined to estimate these costs. It also declined to reveal severance costs related to 96 redundancies at the same pit in November.

UK Coal representatives met with government officials this week. The Energy Ministry said on Wednesday it was "committed to exploring all the options" to support the company.

McCullough said the government, pension trustees and creditors had been supportive of UK Coal's current position.

"(They) all have confidence in the underlying viability of the business," he said.

Daw Mill produced 800,000 tonnes of coal in the first half of 2012, a quarter of the UK Coal's total output, but also cost the company more on a relative basis.

With an operating cost of 58.6 million pounds over six months, Daw Mill is more expensive for UK Coal to run than its Kellingley deep mine, which produced 1.1 million tonnes at an operating cost of 45.8 million pounds in the same comparison.

McCullough said UK Coal had no intention of selling Daw Mill, which has coal reserves that could last until 2028.

"There's nothing up for sale at the moment," he said. "I think that's a very unlikely outcome." (Editing by Robin Paxton and Don Sebastian)