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Annual Report and Accounts 2011 / Business Review / Coal 

Coal

Highlights

Coal production 11.2Mt

  • Total coal production of 11.2 million tonnes
  • Thermal coal revenues up 27 per cent to EUR 437 million
  • Coking coal revenues up 8 per cent to EUR 800 million
  • Less that 8 lost-time injuries per million hours worked – our best safety record to date
  • Fundamentals for both coking and thermal coal remain attractive in our region in the long-term
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 Coal  

1 Average sales price per tonne.

Klaus-Dieter Beck
Executive Director of NWR, Chief Executive Officer of OKD and Chairman of the Board of Directors of OKD

 Klaus-Dieter Beck
 Klaus-Dieter Beck  Klaus-Dieter Beck  Klaus-Dieter Beck
NWR’s significant investment in new equipment in recent years has enabled us to better face the challenging environment of eep level mining in our region. The long-term outlook for both coking and thermal coal remains positive. In markets such as ermany and Poland, the outlook for thermal coal usage has been positive in comparison with alternatives such as nuclear.

Our safety and production performance, independently from economic headwinds, clearly demonstrate our on going operating efficiencies.

Highlights 2011

2011 has been a year in which the coal business performed in line with our expectations and which, compared to previous years, reflects a more regular operating pattern. The scale of early investment made in new equipment over recent years has led to significant improvements in the performance of the business enabling us to better face the challenging environment of deep level mining in our region.

Work around difficult geological conditions in the deposit remained a focus in 2011 in order to meet robust demand from our customers in the Central and Eastern European market. Despite the difficulties associated with mining at over 1,000 metres underground NWR continues to successfully access further areas that would have previously been impossible to reach safely.

Safety

Safety plays a pivotal role in our decision- -making and is a key company performance metric. Mining LTIFR1, the industry-wide safety indicator, improved in relation to our mining operations by 8 per cent to 7.87 – the best result in NWR’s history. Major enhancements in safety performance have already been realised, although we remain committed to continuous improvement of the existing positive trend. Our health and safety standards are comparable with the levels reported by other major international mining companies. Given the relative complexities of the geology in which we mine, we remain committed to working further on our safety protocols for continuous steady improvement in the coming years.

Fatalities have regrettably occurred this year and we were saddened by the tragic loss of five workers. Two of these incidents were caused by ‘tectonic stress releases’, which could not have been predicted, or prevented and our commitment to move towards zero fatalities remains absolute. Further internal and external expertise in the area of tectonic stress release is included in all of our mining activities to help mitigate against these bounce issues and NWR, as one of the world’s deepest-level coal mining companies, remains committed to developing practices to address these particular issues.

Markets

The main market development for coking coal during 2011 was the move to quarterly pricing, reflecting the impetus to move to shorter term pricing by the industry as a whole. Such a move has provided NWR with a greater level of parity with global coking coal prices. However, the long-term benefits of this move are as yet uncertain.

For thermal coal the demand dynamic over the year has improved and the signals from core electricity generators, in markets such as Germany, have been positive for coal usage by comparison to alternatives such as nuclear energy.

Coking coal prices peaked in the second quarter, although the deteriorating macroeconomic environment in the second half of the year has affected our coking coal customers and led to a reduction in coking coal prices. However, we have not experienced a dramatic change in the Central European region compared to previous years, and much of the underlying activity remains stable.

Looking ahead, the near-term outlook remains uncertain in terms of coking coal prices and we remain cautious on the near-term prospects of the regional steel industry, which has been affected by the wider European economy and the sovereign debt crisis. Nevertheless, we remain confident in the long-term fundamentals of the region given the significant manufacturing base and structural shortage of coking coal in the area.

Operational performance

Our safety and production performance in spite of the economic headwinds clearly demonstrate our ongoing operating efficiencies. The emergence of listed regional coal mining peers provides additional quarterly assessment of our comparative performance, which we see as a useful development.

Sales

Coking coal

External coking coal sales in 2011 reached 4.4 million tonnes and comprised approximately 53 per cent hard coking coal and 47 per cent semi-soft coking coal.

Since April 2011, 100 per cent of our coking coal sales have been priced on a quarterly basis in line with international markets. Average coking coal price in 2011 was EUR 181 per tonne, an increase of 28 per cent, taking out the impact of reclassification of PCI coking coal.

Given the ultimate consumer of PCI coking coal is the steel making industry, we started to classify its sales as coking coal as of 1 January 2012, in line with industry practice.

The average agreed price of coking coal, including PCI coking coal, for delivery in the first calendar quarter of 2012 is EUR 142 per tonne, a decrease of 13 per cent compared to the fourth quarter realised price and in line with developments in the global coking coal markets. This average price is based on expected Q1 2012 coking coal sales of approximately 54 per cent hard coking coal, 38 per cent semi-soft coking coal, and 8 per cent PCI coking coal.

1 Lost Time Injury Frequency Rate represents the number of reportable injuries causing at least three days of absence per million hours worked. Includes contractors.

Thermal coal

NWR sold 6.2 million tonnes of thermal coal in in 2011. Thermal coal sales in the period were approximately 77 per cent coal, 6 per cent PCI coking coal and 17 per cent middlings.

We sell 100 per cent of our thermal coal volumes on a calendar year basis and the average price agreed for thermal coal sales for the 2011 calendar year was EUR 70 per tonne, an 11 per cent increase excluding the impact of reclassification of PCI coking coal.

The average price agreed for thermal coal sales for the 2012 calendar year is EUR 74 per tonne, an 11 per cent increase compared to the 2011 average realised price and reflects strong regional demand for thermal coal as a source of power generation. This average price is based on expected calender year 2012 mix of 82 per cent thermal coal and 18 per cent middlings.

Costs & revenues

Revenues for the coal segment increased by 11 per cent to EUR 1,509 million mainly due to higher realised prices for both coking and thermal coal, and increased thermal coal sales volumes.

Main operating expenses for the coal segment increased by 13 per cent excluding the impact of currency movements to EUR 1,017 million. This increase was mainly driven by continuing mine development, as well as higher input prices of energy and steel, scheduled maintenance of mining equipment and increased costs for contractors and personnel.

Mining costs per tonne, which do not include the cost of transportation, rose by 12 per cent excluding FX fluctuations to EUR 82/tonne mainly due to the cash cost inflation detailed above, as well as 2 per cent decrease in production.

The coal segment generated EBITDA of EUR 483 million, a 10 per cent increase on 2010. The EBITDA margin remained flat at 32 per cent and EBITDA per tonne of production was EUR 43, up 12 per cent from 2010. The total coal production per coal segment employee including contractors reached 666 tonnes of coal in 2011.

Reserves

One of the largest, richest sources of hard coal in Central Europe, the Upper Silesian Coal Basin underpins the long-term prospects of our mining operations in the region. Our total JORC reserves was 385 million tonnes as at 1 January 2012.

Efficiency enhancement

A number of further steps have been taken to continue to improve efficiency during the year. The Continuous Improvement Programme and the PERSPective 2015 (‘PERSP 2015’) initiative have been central to improving production performance and cost control. PERSP 2015 refers to a range of measures to maximise the utilisation of the POP 2010 mining technology acquired in 2008–2009, in turn improving productivity whilst still replacing older production equipment as part of a regular replacement cycle. Throughout 2011 we allocated financial and management resources to the Continuous Improvement Programme, the aim of which is to encourage the submission by employees of innovative ideas and suggestions which help promote efficiency and safety measures, as well as achieving additional cost savings which in 2011 amounted to approximately EUR 12 million. The programme also exemplifies the co-operation between the Company and its employees.

Further enhancement to our infrastructure is the focus of the next stage of improvements. This activity relates to the mining operations as well as to areas including the supply and handling of material at both the surface and underground.

Gate road development between the Darkov and Karviná Mines

A connecting gate road development was initiated between the Darkov Mine and the Karviná Mine during spring 2011. Completion of the project, including the installation of belt haulage systems to facilitate the transportation of coal and other materials underground is scheduled for the second half of 2013 and will lead to the optimisation of OKD’s preparation plant capability.

Outlook

The principal challenges for our mining operations in the coming year and beyond are the market environment in which we operate, and the nature of our deposits. As a result, our priority remains safety first, coupled with productivity improvements.

In relation to productivity improvements, further exploration of our existing mining areas is central to sustaining our production volumes and quality mix over time as the reserves are depleted. The principal projects we are currently working on include the expansion of the Karviná Mine to access adjacent coal reserves. Another ongoing project is the gateroad development between the Karviná and Darkov Mines, which is designed to facilitate the transportation of coal and other materials underground. In addition to the installation of new central air conditioning equipment at the Karviná Mine, we also continue to replace out-dated gateroad equipment with modern technology as part of the standard replacement cycle.

During the second half of the year, we announced our intention to explore the Frenštát deposit. This process will take four years to complete, after which we will be in a stronger position to outline the nature and quality of this reserve base, and thereafter, we will decide on the feasibility of developing the resource safely.

At the end of 2011 NWR announced the official ground breaking at the Dębieńsko Mine in southern Poland; we expect to first coal out of the deposit by 2017. For more details on our growth projects please refer to pages 22 and 23.

Klaus-Dieter Beck

Executive Director of NWR, Chief Executive Officer of OKD and Chairman of the Board of Directors of OKD

Case study

Mining controllers have access to new real time monitoring systems

We will eliver greater economies with the iplementation of our new logistics system.

Logistics is fundamental to safe and efficient deep-mining operations and the new system is focused on increasing the efficiency of materials handling, from surface loading all the way through to underground deployment, dramatically reducing the physical effort involved in such processes, and importantly, increasing the safety of our operations. By transmitting information at each stage of the process over an underground online network, the new system enables the controller to monitor progress in real time, eliminating bottlenecks and the nnecessary stacking up of material.

With the pilot phase launched at our Darkov Mine in 2011, the new system will radually be rolled out across all our mines with full implementation by 2014.

 Case study
 Case study  Case study
 Case study
 Case study  Case study

ČSM Mine in Karviná region produced 2,862,000 tonnes in 2011 which is record volume in its more than forty years history. The key determinants of the success were investment in mining technology and installation of new belt coal haulage. The greatest redit for reaching of production level and increasing the safety belongs ČSM Mine employees. By investing in modern echnologies employees often exchanged paper and pencil for a computer connected online to surface and underground operations.