Update on Maltby Colliery & Trading Update
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For immediate release |
17 December 2012 |
Hargreaves Services plc
("Hargreaves" or the "Company")
Update on Maltby Colliery and Pre-close Period Trading Update for the six months ended 30 November 2012
Hargreaves Services plc (AIM: HSP), the UK's leading supplier of solid fuels and bulk material logistics, today issues the following update on Maltby Colliery together with a trading update prior to the Group entering its close period.
Update on Maltby Colliery
On 7 November 2012 the Company confirmed that the Board of Maltby Colliery Limited ("Maltby"), supported by the Board of Hargreaves Services plc, proposed the mothballing of the mine on health & safety, geological and financial grounds.
Since 7 November 2012 the Board has continued to consult and meet with employees and trades union representatives. On 30th November, a working party comprised of employees, union representatives and external consultants presented alternative proposals to the Board. Further detailed submissions were made by the working party on 7 and 14 December 2012 and the Company wishes to express its thanks to the working party for their great efforts made on behalf of the wider Maltby workforce.
The working party submissions have been carefully considered and evaluated both by the Board of Maltby Colliery Limited and, subsequently, by the Board of Hargreaves Services plc.
The Company has now concluded that, as with its own previous findings, the plans presented by the working party do not provide it with a viable alternative solution.
It is therefore with regret the Company confirms today that the proposed mothballing of Maltby Colliery will proceed. The mothballing process is planned to be completed by the end of March 2013.
The Company remains committed to exploring alternative employment opportunities for staff, both within the wider Hargreaves Group and externally. The Company is also working closely with external agencies to provide maximum opportunities for its committed and loyal workforce.
The Company will update the market further of any significant developments in the process.
Impacts of Mothballing
The cumulative operating loss at Maltby for the current financial year to 17 December 2012 is forecast to be £10.4m against a budgeted full year loss of £8.2m.
Preparations for mothballing will take place from 17th December 2012 through to the end of March 2013. It is expected that the substantial elements of the mothballing task, including the completion of the last strips of coaling on the T15 panel and recovery of equipment, can take place and be completed during that period. Forecast costs during this mothballing period amount to approximately £12.3m, of which £10.4m are expected to be cash costs.
The Group estimates that the net cash effect of the complete mothballing exercise will be positive. The approximate cash impact of mothballing the mine in the current financial year will be an outflow of £7m. The estimated impact in the following financial year will be an inflow of £14m. The estimated net cash inflow over the next three years will be approximately £5m.
At the conclusion of the 90 day consultation process, which began on 8 October 2012, if redundancy notices were served to all employees, the redundancy cost would be £7.3m. This includes £3.7m of enhanced redundancy payment. Although the Group is not contractually obliged to honour the enhancement, which expires on 31st December 2012, it is the Board's intention to pay this enhancement.
The Group anticpates that the cash tax credit resulting from the mothballing costs and book write downs will amount to approximately £12.5m in the next 12 months. Based on current forecast corporation tax payments we anticipate that £5m will be realised in the current financial year and £7.5m in the following financial year. A potential additional £5m of cash benefit could be realised in subsequent years.
The net book value of equipment and machinery, development costs and other related assets as at 30 November 2012 was £59m. Plant and equipment accounted for £34m of that amount. We currently estimate that cash realisations of approximately £14m will be achieved. This is an estimate, and whilst management has attempted to be prudent, we note particularly that there are significant negative pressures at play in the second hand mining equipment market at this time and that prices have fallen even in the last two months. No cash proceeds are expected for the goodwill, mineral rights or development assets. This will result in a non-cash, book write off that is estimated at £45m
The land at Maltby has a net book value of £11m with costs of restoration provided in the amount of £6m. The Group does not expect any material restoration cash requirement in the short term and no impairment of the net carrying value is considered necessary at this time.
From a Group financial reporting perspective, the decision to mothball the mine will mean the results of Maltby will be included in Discontinued Operations in the year ending 31 May 2013. This will include the operating loss of £10.4m incurred to date. The table below shows the forecast position that will be included within Discontinued Operations:
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£ in million |
FY13 |
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Forecast operating loss pre-mothballing |
(10.4) |
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Operating cost in mothballing phase |
(12.3) |
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Redundancy costs |
(7.3) |
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Mothballing costs |
(19.6) |
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Non cash write offs |
(45.4) |
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Exceptional items |
(65.0) |
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Forecast operating loss post-exceptional items |
(75.4) |
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Estimated tax at 24% |
18.1 |
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Post tax forecast loss from Discontinued Operations |
(57.3) |
Ongoing Operations
Maltby will continue to trade. Surface coal fines remaining amount to approximately one million tonnes and the harvesting and processing of these reserves will continue. Further, it will continue to provide mining management services to Hatfield Colliery Limited. The mining team is also evaluating the optimal strategy for exploiting electricity production using the mine's methane regeneration assets during the mothballing phase.
It is expected that these activities will create a continuing modest profit stream.
Trading Update
An announcement was issued on 4th December regarding the discovery of irregularities in our Belgian subsidiary. Aside from Belgium, we are pleased to announce that the Group's overall underlying trading has been encouraging and the Group is well placed to deliver a strong second half performance. Further details on the rest of the Group's trading are provided below.
Energy and Commodities Division
The Energy and Commodities division is trading ahead of management's expectations. The contracted sales plan for the current year was heavily weighted towards the second half and the Group is well placed in terms of order book and stock positions as we enter the second half.
The UK coal trading operations have traded strongly with volumes and margins of power station shipments expected to be ahead of management expectations. The order book for power station sales is very strong. Volumes and margins in the speciality markets in the UK have remained resilient. In parallel with sourcing coking coal for Monckton, a new contract has been agreed with a major steel producer in the UK to source coking coal. This contract is expected to contribute to an over-performance in the second half.
Setting Belgium aside, European markets remain subdued with lower volumes in our coke trading business due to the slowdown in global steel production. Recent order activity has however been encouraging, but is unlikely to be indicative of a general recovery.
The Belgian coal operation is under review following the discovery of irregularities. A provision will be made for the expected losses when further investigation and assessment have been made.
Production Division
At Tower, the weather continued to be exceptionally poor and as previously announced, production has been impacted in the first half. The Board is confident that production will improve in the second half. Any shortfall in overall full year volumes are expected to be at least partially compensated for by strong net margins and Tower is still anticipated to be a significant contributor to the Group's profit in this financial year. The outlook beyond this financial year is very positive.
Monckton continues to perform consistently and in line with expectations. The first cargo of Maltby substitute coal has been sourced from the US and has been received and successfully processed. A long term supply contract has been agreed and is expected to be concluded now that the decision to mothball Maltby has been taken.
We recently reported the receipt of planning permission for our first small surface mine and remain on track to fulfil our target of getting an additional two sites into the planning process before the end of this financial year. The Group is actively investigating a number of opportunities that would allow it to significantly accelerate the development of its surface mining activities.
Industrial Services
The Industrial Services division is performing in line with management's expectations. The core material handling and related contracts in the power station and steel sector are performing well. The two major biomass conversion projects at the Ironbridge Power Station and the Liverpool Bulk Terminal are progressing well and are on track to complete on time this year.
The Group is continuing to develop its presence in Hong Kong and, as anticipated in the year end statement, we were successful in securing our first significant outage contract with China Light and Power. We continue to step up our business development activities across the region and are currently tendering for a significant materials handling project with the same customer.
Transport
We are pleased to report that the performance of the Transport division is in line with management's expectations.
Net debt
Net debt at the end of November was £106m. As in prior years we would expect our core coal stocks to reduce during the second half.
Outlook
This has been a very challenging period for the Group. The decision to recommend mothballing the mine at Maltby has been a difficult one but the Board is confident it is the right decision given the health and safety, geological and financial risks. The Board also believes that in the longer term the decision will reduce the volatility of the Group's earnings.
The irregularities in our Belgium subsidiary are a very disappointing development and we will update the market accordingly as the investigation progresses. The Board is confident that the problems identified are confined only to Belgium. These problems have been masked through the combination of forged documents and collusion that appears to extend as far as employees, or former employees, of a major supplier. Although the investigation is at an early stage, nothing has emerged that would change our preliminary estimate of the maximum loss.
The rest of the Group is trading strongly and is again well positioned for a strong second half performance. Hargreaves is a diversified, strong Group focussed on a broad range of value added activities associated with the supply of solid fuel and the Board remains confident about the prospects for the Group and of achieving management's targets for the full year.
The Group expects to announce its Interim Results on 5 March 2013.
For further details:
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Hargreaves Services |
Tel: 0191 373 4485 |
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Gordon Banham, CEO |
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Iain Cockburn, Finance Director |
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Buchanan |
Tel: 020 7466 5000 |
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Tim Anderson / Mark Court / Fiona Henson / Sophie Cowles |
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N+1 Singer (Nomad & Joint Broker) |
Tel: 020 7248 4400 |
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Sandy Fraser / Nick Owen |
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Jefferies Hoare Govett (Joint Broker) |
Tel: 020 7029 8000 |
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Sara Hale / Harry Nicholas |
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This information is provided by RNS
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