Czech miner NWR raked over the coals

By bne IntelliNews May 16, 2013

Nicholas Watson in Prague -

When the new chairman of Czech coal miner New World Resources warned back in February that the first part of 2013 was going to be challenging, few probably envisaged it would be this bad. But on May 16, NWR revealed it made another record loss in the first quarter and said it would take a series of measures worth €100m in order to bolster its finances.

During the January-March period, NWR said its revenues fell 31% to €240m, which pushed the group into a worse-than-expected loss of €80.3m, compared with a year-earlier profit of €6.0m. The record first-quarter loss followed a then-record loss of €48.6m in the fourth quarter.

Earnings before interest, taxes, depreciation and amortization (ebitda) came in at minus €22m, which was about 5% worse than most had expected. "Our negative ebitda was almost entirely driven by driven by price, because our costs are quite significantly down," explains Gareth Penny, who took over as chairman of NWR last October.

The average Australian spot price of hard coking coal, NWR's mainstay product which is used in foundries, has fallen more than 50% over the past two years as the global steel industry struggles in the face of drop in demand from the global economic slowdown. Steel production in the first quarter was down 2% from the same period in 2012, the company noted.

Negative ebitda indicates a business that has fundamental problems with its profitability, so NWR has been forced into taking a series of short-term measures while it carries out a thorough review of its entire business in order to ride out a longer period of what is calls "extremely difficult" trading conditions. "The general consensus is that thermal and coking coal prices are not going to improve significantly this year, so if we can't base a business on rising coal prices, we will have to take the necessary measures," Penny says.

On the cost side, the company said it will embark upon an across-the-board 10% cut in salaries, a reduction in contractor costs and capital expenditure, and sales of inventories of thermal coal - that used for heating - to one-time customers, all of which should realize around €100m through the rest of the year. Production for this year is forecast to be 9m-10m tonnes, down from a February estimate of 10-11m tonnes.

It is also planning to identify mines or parts of mines that could be idled or divested, and will look to sell its OKK Koksovny subsidiary that produces the coke used in foundries. The current economic climate and conditions under which NWR is looking to sell OKK are not ideal, but Penny says he believes a sale by August is feasible. "OKK enjoys right now lower coking coal prices... it continues to and is making money... and it has an important market position by controlling a third of the European foundry coke market."

The measures outlined were initially welcomed by investors. The shares - which are listed on the exchanges in London, Prague and Warsaw - rose as much as 9.3% in morning trading, before falling back to trade around 1.8% higher by midday. That paring back, say analysts, could be put down to the realization that these measures might not prove to be enough.

"While we believe it can bring its operating cash flow to zero thanks to mine closures, the company also has €60m in interest costs and €100m maintenance capex per year and will continue to burn cash in the following quarters. We can imagine a further negative reaction, as some investors might have underestimated NWR's difficulties," says Petr Bartek, an analyst at Erste Bank.

Roger Bell, an analyst with JP Morgan Cazenove, predicts that the business should be able to manage until 2018, at which point a maturing €500m bond would present a "very challenging refinancing risk."

NWR inevitably has tried to accentuate the positive. It notes that with the measures announced today, it will have €300m in cash that can be used to further its goal of becoming the number one miner and marketer of metallurgical coal in Europe, which as it's stated in the past could involve buying lower cost producers in North America. Given imports of 50m tonnes a year, it is still clearly economic to bring metallurgical coal across the Atlantic to Europe.

"If anything, the current circumstance only hastens us on that journey. Like us, all coal producers are deeply discounted, so it's a pretty good time to be looking for acquisitions," says Penny, stressing that the company is "not poised" to strike any deal.

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