INTERVIEW: Czech coalminer NWR looks west as well as east

By bne IntelliNews February 27, 2013

Nicholas Watson in Prague -

The creation of New World Resources by tycoon Zdenek Bakala out of the remnants of the Czech coal industry and its subsequent IPO was aimed at producing a miner capable of consolidating Central Europe's fragmented coal industry. Not for wont of trying, NWR's efforts have so far been in vain, and its new chairman now says the miner intends to spread its net wider, including as far afield as the US.

Is this an implicit acknowledgement that its strategy since Bakala's private equity outfit first bought five Czech coalmines in 2004 has failed? Not a bit of it, insists Gareth Penny, who took over as chairman of NWR in October, after spending five years at the helm of diamond miner De Beers.

"At the IPO, the Central and Eastern Europe roll-up strategy was something that was strongly put out there... [but] we are not going off-piste, the two are not mutually excusive," Penny says about the possibility of buying mines in the US, which at 29m tonnes a year is the largest exporter of high-quality coking coal (that used to make steel) to Europe.

"Our business is to become the number one miner and marketer of metallurgical coal in Europe: the question becomes how do you deliver on that," says Penny. "And if we do so by growing outside the region, we become an immensely attractive partner in terms of consolidation in the region, and the chances of doing consolidation are infinitely greater than if we stay like we are now."

That may be true, but at the very least it's a pushing back of the regional consolidation strategy, the difficulty of which to pull off was exemplified by the chastening failure in 2010 to acquire Polish miner Lubelski Wegiel Bogdanka. That first-ever hostile takeover attempt of a Polish company collapsed not only due to a failure to agree over money, but also because it became the subject of vitriolic attacks by the more nationalistic quarters in Poland.

Marek Jelinek, NWR's long-serving chief financial officer, says any delay in the regional consolidation is a reflection of today's reality, where deep-level mining operations in Central Europe and associated high capital expenditure compare unfavourably with opportunities in other parts of the world where valuations are very attractive.

The US coal industry, for example, is even more fragmented than in Europe, where the geology of coal deposits has given rise to an industry composed of a large number of tiny players typically producing several hundred thousand tonnes a year. "These players don't have the balance sheets to withstand this type of environment and so are simply shutting down," says Jelinek.

Thus acquiring some of these generally low-cost outfits with non-unionised labour would allow NWR to capture some of the trade in certain coal grades that is already imported from the US, says Bram Buring, an analyst with the Prague-based brokerage Wood & Co, in a note. However, "given that the company is in capital conservation mode and financing for [M&A] is still quite expensive, we would not expect any news on this front for the time being," he says.

As Penny notes, it is still economic to bring metallurgical coal to Europe, as evidenced by imports of 50m tonnes a year, "it's just it's happening by someone else." And this structural deficit of coking coal, together with the continuing shift of industry to Central and Eastern Europe, is what gives NWR confidence about the medium to long term. According to energy consultancy Wood Mackenzie, seaborne coking coal imports to Europe are expected to rise at a compound average growth rate of 4% over the decade to 2021.

For this reason, NWR says it is not planning to abandon its largest project, the Debiensko mine in Poland, which is Europe's largest deposit of high-quality coking coal at 190m tonnes. NWR slashed planned spending at Debiensko last year to €5m from €50m after discovering large amounts of underground water, which together with comments it was looking for partners in the project prompted speculation that NWR was heading for the exit. "We are not walking away from Debiensko - that's not on the table under any scenario," says Penny, pointing out that the company is currently buying up the land around the mine, a process that should be completed in April.

Penny says NWR is looking at a number of potential partners on the periphery of the property, as well as perhaps bringing in a financial partner or a customer. "We will look at different alternatives to decide on what's most accretive for our shareholders," he says.

For Penny, the immediate objective is to stop the rot that has seen NWR's shares fall by over 50% in the past year. On February 21, NWR reported its worst quarterly loss since going public in 2008, losing €48.6m in the fourth quarter of 2012 compared with an €8.8m profit in the year-earlier period.

The reason is simple, a solution less so. Prices of coking coal, the mainstay of NWR's business, have fallen 30%, forcing down revenue from €1.63bn in 2011 to €1.29bn in 2012. The company was left with 1.3m tonnes of coal inventories at the end of 2012. "Since 2012, it's been a challenging position we're in and continue to be in. We are a price-taker, operating in a global village, and our fortunes are determined by the steel industry, construction industry and the auto industry," says Penny.

Global steel production rose just 1.2% in 2012 versus the 6.8% growth seen the previous year, while forecasts for this year are at the pessimistic end of the scale, meaning there's unlikely to be much relief for NWR's long-suffering investors. "The results for the first half of this year are going to be very challenging," warns Penny.

Still, NWR believes a floor on prices might have been reached, noting that the price for coking coal has recently risen from €100 per tonne to €103. "It's nowhere near where we'd like to see it, but the trend is in the right direction," says Jelinek.

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