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Annual Report and Accounts 2011 / Overview / Chairman’s Statement 

Chairman’s Statement

Mike Salamon
Executive Chairman of the Board

 Mike Salamon
 Mike Salamon  Mike Salamon  Mike Salamon
  • Final approval of Dębieńsko project in June with ground breaking in December 2011
  • Quarterly pricing for coking coal aligned our pricing with international trends
  • Early investment in underground mining equipment helped to mitigate geological challenges
  • Continued containment of input cost inflation
  • Further improvements in our safety record
  • Reincorporation in the United Kingdom and inclusion in FTSE 250 and the FTSE 350 Mining indices
  • Strong long-term fundamentals of the region and attractiveness of our business model

The most significant single event for NWR during 2011 was the final approval for the development of the Dębieńsko Mine, a 190 million tonnes hard coal deposit in southern Poland. We have assembled an international team to deliver the project and I am pleased to report that we have broken ground and commenced excavating works on site.

Review of 2011

With an EBITDA of EUR 454 million, NWR delivered one of its best financial performances ever in a period that has been characterised by severe challenges in the global economy. NWR reported consolidated profit for the period of EUR 130 million, 44 per cent lower than for 2010. Excluding the one-off EUR 82 million gain on the sale of the energy business and one-off EUR 23 million tax refund in the previous year, the consolidated underlying profit for the period increased 1 per cent from EUR 128 million in 2010.

Our containment of input cost inflation was a significant achievement in difficult circumstances with the rise in NWR’s mining unit costs limited to just 12 per cent excluding the impact of foreign exchange. This was particularly creditable in the context of double digit price increases for energy and more than 20 per cent increases in European steel long product prices. As a result of year-on-year improved pricing in 2011 and our efforts to mitigate input cost inflation we improved our profitability yet further in 2011 with our EBITDA margin reaching 28 per cent.

Despite the difficult macroeconomic environment and the progressive deterioration in business confidence driven by increasing uncertainty in the Eurozone during the second half of 2011, the fundamentals of the regional coal industry remained strong. Car production in the region, one of the key drivers of local steel production, grew at a rapid pace in 2011 (up 12 per cent in the Czech Republic and 13 per cent in Slovakia), which reinforces our belief in the long-term prospects of the steel sector in the CEE. In parallel thermal coal continued to play an increasing role in the regional energy mix.

We remain well positioned to serve an increasing demand for our products in a region where competitor coal production continues to decline.

Development

During the year NWR continued to benefit from the considerable investment we have made in underground mining equipment over previous years, enabling us to mitigate the geological complexities of our operations and deliver another solid set of results.
The fact that we are mining at around 1,000 metres below the surface is unusual in the global coal mining industry today and clearly this poses particular challenges in terms of both safety and production targets. Hitting our production targets and improving our safety record, in the context of such complex geological conditions, underlines the commitment of our disciplined workforce and supports our intensive capital investment in equipment.

The most significant milestone for NWR during the year was the final approval for the development of the Dębieńsko Mine. This is a 190 million tonnes hard coal deposit (7/8 coking coal and 1/8 thermal coal) in southern Poland over which a Polish subsidiary of NWR has a 50-year mining license. We have assembled an international team to deliver the project and I am pleased to report that we have broken ground and commenced excavation works on site. In 2012, we will invest around EUR 40–50 million as we work towards bringing the mine to production in 2017.

Looking further into new production opportunities, we announced our intention to explore the 1.5 billion tonnes hard coal resource at the Frenštát Mine in the Czech Republic.

Reincorporation in the United Kingdom

The reincorporation of NWR in the United Kingdom and subsequent inclusion in the FTSE 250 and FTSE 350 Mining indices has increased our visibility amongst the international investment community, to whom NWR represents an opportunity to gain exposure to both the global as well as regional hard coal growth phenomena.

Coal

Concerns about global economic growth in the second half of the year affected the year end environment for our customers. The slackening in actual demand for steel was significantly compounded by fears of a weak macroeconomic environment in 2012. This came after strong coking coal prices for much of the year, with car production in the region performing well. The long-term case for a strong steel sector in the Central and Eastern Europe remains intact.

For thermal coal we saw very strong regional demand in 2011. The outlook for thermal coal continues to be positive. With renewed investments in coal-fired power plants in countries such as Germany, thermal coal seems well positioned to play an ever-increasing role in the regional energy mix. In the longer term there are increasingly strong indications of growing demand for coal fired power generation capabilities compared to other forms of electricity generation in our markets, due in part to Germany’s decision to close all its nuclear power plants following the Japanese earthquake, which led to damage at the Fukushima nuclear power plant.

As a result we are optimistic about the role NWR will play in the long-term future of both our coking and thermal coal markets.

Coke

Our coke production was in line with our expectations for the year at 770 kilo tonnes.

Our coke sales suffered due to lower capacity utilisation by our steel customers. Our much improved flexibility to increase the proportion of more demand-stable foundry coke in our sales mix, combined with the reduced cost profile of the new single site operation, helped us mitigate the impact of the weak merchant coke markets in the second half of the year. Despite this, our coke business made an overall loss for the year.

Safety

Safety is a key priority in NWR. The main measure of overall safety performance, Lost Time Injury Frequency Rate1, has improved by 8 per cent to 7.9 lost-time injuries per million hours worked. As expected, the rate of improvement is now slower compared to the dramatic reduction of the past few years but we continue to set a long-term positive trend. Whilst we are now aligned with incident rates comparable to global best performance in deep level coal mines, the particular challenges of mining the region’s underground reserves will always be a significant threat, which makes our commitment to training, discipline and best in class equipment critical.
Despite this, the tragic loss of five employees at our mining operations during 2011 reminds us of the severity of the hazards stemming from our geological and mining environment, and hence we continue to place a strong focus on ways to limit the human impact of these.

Sustainability

Strict adherence to best practice sustainable development forms an integral part of our business strategy and helps us to secure the license to operate our coal mining and coke production businesses.

We realise that our long-term success depends on broad community support of our activities. Our focus is two fold: to ensure the sustainable and responsible management of natural resources, mining and processing; and secondly, to minimise the impact of our activities on the environment when planning, running and decommissioning our operations.

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.

Strategy

Our strategy is focused on maintaining operational excellence while pursuing opportunities for growth in order to serve a growing demand for our products in a region where our competitor’s coal production continues to decline. The development and extension of our existing operations together with the identification and exploitation of new reserves will continue, as demonstrated by our investment at Dębieńsko and our intention to further explore the hard coal deposit at the Frenštát mine site in the Czech Republic. This aim is further strengthened by our focus on advanced mining techniques and a commitment to good corporate citizenship in its broadest sense.

Given our operations are at the hub of the CEE region’s manufacturing base, we continue to see significant value potential in the business model of NWR. Our strategy is based upon ensuring sustainable coal production to serve a growing demand for our products in a region where competitor coal production continues to decline. Poland produced around 76 million tonnes of hard coal last year, 10 million tonnes less than three years ago and only half of what it produced back in 1990.
We continue to believe in the rationale for consolidation in the region over the longer-term and hence we closely monitor the market for potential opportunities.
The listing of our Polish peers is a positive development for both NWR and the sector as a whole. Greater visibility for the coal sector in general has further highlighted the potential for those producers such as NWR, who can sustain production and manage costs within those parts of Europe where coal is in strong demand. We have already invested heavily in our operations to help manage costs and operating risk.

Outlook

In the short-term we expect the market environment to continue to be challenging. Our customers remain cautious due to the uncertain economic environment and ongoing issues in the Eurozone. However, despite the current uncertainty, car production in the region, one of the key drivers of local steel production, is increasing, and hence we expect to continue to see strong demand for our coking coal.

At the same time, our move to quarterly pricing has allowed us to align ourselves with global pricing trends and while prices have dropped during the second half of 2011, as well as in early 2012, we believe that ongoing steel demand in the developing world will ultimately help to support prices.

We have reviewed our longer-term plans and we now expect to increase the proportion of our coking coal in our external sales mix above 50% over the medium term (2–3 years). Any further increase towards our historical levels is dependent on the outcome of our ongoing underground development works as well as favourable mining conditions. Longer term, the additional production from Debiensko is expected to further increase the proportion of coking coal in the overall coal mix.

Coke markets remain volatile, as nervousness amongst our customers is leading them to rely more on their own supplies of coke, and we expect this trend to continue in the short term. A number
of our competitors have exited the market which, combined with our investment in the new coking battery, and the associated fall in our conversion costs, leaves us in a strong postion to cope with the current market conditions.

Demand for thermal coal, which is to a certain extent unaffected by the macro environment, has been growing and we expect this trend to continue. We are seeing renewed investment in electricity plants in our region and we expect Germany to need more coal from neighbouring countries in the future to meet its demand. Therefore the share of coal in the energy mix in our region looks set to continue to increase and we are positive about thermal coal volumes and prices going forward.

Dividend

NWR has performed well against a backdrop of the recent macroeconomic uncertainty and both our business model and our long-term growth strategy remain intact. Therefore, in line with NWR’s stated dividend policy of distributing 50 per cent of the Mining Division’s consolidated annual net income over the course of the business cycle, I am pleased to propose a final dividend of EUR 0.07 per share, which, if approved by the Annual General Meeting in April, will bring the total dividend for FY 2011 to EUR 0.23 per share.

Mike Salamon

Executive Chairman of the Board
Chairman’s Statement