NWR says crisis contingency plans could involve coal project delays

By bne IntelliNews September 1, 2011

Nicholas Watson in Prague -

New World Resources says it hasn't seen any evidence of a slowdown in its business and remains optimistic about the longer-term outlook for the region. Nevertheless, the Central European coal miner tells bne it's drawing up contingency strategies in case things do go south, which could include as a last resort delaying projects like Debiensko in Poland.

In its latest earnings statement released on August 24, NWR insisted that while there is a risk of near-term volatility in prices and demand given the recent market turmoil and uncertain economic conditions, the coal producer has seen no physical evidence yet of the economic slowdown weakening demand for its coal.

However, Marek Jelinek, chief financial officer of NWR, tells bne in an interview that with the markets clearly pricing in an economic slowdown, reflected particularly in the fall in shares of commodity producers (so far this year, NWR shares have fallen around 45% on the London and Prague bourses where they are listed), the company is developing "a number of 'plan Bs' to be able to mitigate any economic slowdown."

When pressed on what those "plan Bs" might include, Jelinek admitted that a delay on Debiensko, a huge project with 190m tonnes of reserves and forecasted production of 2m tonnes per year that only got the go-ahead from the board in June, could be on the cards. He stressed, however, that a delay on such a crucial project to NWR would be "the option of last resort," since the first coal from Debiensko would not come until five years away, so "whatever the shape of the GDP curve is going to be over the next six to 12 months, it's not really relevant for the future of Debiensko."

Jelinek says in his opinion NWR should press ahead with Debiensko irrespective of the short-term economic outlook of the region given past experience. "We pressed on with a very significant equipment investment throughout the last crisis even though those large capital projects are typically the first things that people axe and... it was a great decision even though it led to us bleeding cash through the crisis, because as a result we are in a much stronger position today."

Indeed, Jan Tomanik of Prague-based brokerage Wood & Company, noted that NWR's slightly better-than-expected earnings in the second quarter of €84m, showed its business was reaping productivity gains from that investment in new equipment; in the spring, Tomanik estimated that the Debiensko project was worth around CZK35 per NWR share, which closed at CZK164 on August 30.

Rising prices

Many analysts share NWR's optimistic view of the longer-term fundamentals for the coal industry. Continued growth in emerging markets and higher demand for steel should keep demand for NWR's coking coal buoyant, while the continued move toward using coal in electricity generation as nuclear generation is phased out in many countries will help its thermal coal business, they say. In terms of reserves, NWR is primarily a coking coal producer, but for this year at least its production mix will be approximately 52% thermal coal, 48% coking coal.

Citigroup Global Markets in a recent report on the global coal industry increased its price forecasts for thermal coal by 13-45% over the next 10 years as the fuel's share of the electricity generating capacity continues rising not only in Japan and Germany, but also in developing economies; the bank increased its forecast for prices of coking coal used in the steel industry in 2014-2018 by an average of 15% given that new sources of supply are scarce.

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