Chairmans Statement
Dear Shareholder
Coal International’s third year since listing on AIM was marked by significant continued growth in its United States operations as the Company established itself as an important new coal producer in West Virginia, located in the Central Appalachian region of the United States.
West Virginia
Following the acquisition of three coal properties during the previous reporting period the Company now has two principal mining operations: Atlantic Leaseco and Maple Coal. The Company operates through its wholly-owned US operating subsidiary Atlantic Development and Capital LLC (“ADC”) and its subsidiaries Atlantic Leaseco LLC and Maple Coal Co. During the period, the Group substantially expanded operations at the Atlantic Leaseco property and commenced development of its first underground mine at the Maple Coal property. Coal production and sales increased in each quarter and the Company reported production of 561,192 tons of marketable coal and sales of 587,649 tons for the year ending 30 June 2007.
The Atlantic Leaseco facility is now operating at a sustainable rate of production of 750,000 tons per annum of marketable coal with the current equipment and labour configurations. The Eagle No. 1 underground mine at the Maple Coal operation commenced production in June 2007 and is currently increasing its operations with the goal of achieving a sustained production rate of 720,000-750,000 marketable tons per annum.
This steady improvement has been made possible through the efforts of Dan Stickel, President of ADC and his team. Dan has assembled an experienced operating team which is focused on increasing operating productivity while improving safety and environmental standards. The Group took over all mining and processing operations from contractors in July 2006 and had assembled an operating workforce of 118 full time employees by 30 June 2007. All employees are now working under the Group’s health and safety training programs and operating standards, injury and accident rates are becoming consistent with other established, large regional operators.
Management has also been active in building on its existing asset base at Gauley Eagle with significant new property acquisitions and by advancing permitting activities to allow for an expanded production platform as additional markets are developed. During the 2007 calendar year the Group acquired approximately 2,760 acres of additional coal properties adjacent to or synergistic with the Gauley Eagle property, increasing the size of Atlantic Leaseco’s properties to approximately 17,739 acres.
As the Group has continued to establish itself as a reliable supplier delivering consistently high quality products, it has been able to expand its marketing efforts. Initial shipments were marketed on the spot market and limited to customers that could be supplied by truck. The Group has been focusing on developing a range of transportation alternatives, encompassing both rail and barge loading, which could greatly expand the potential marketing range for the Group’s coal products. The Group is now negotiating medium term contract business with a number of key customers which, if completed, will represent an important milestone and demonstrate recognition of the Group’s increasing stature in the market place. In addition, with two coal preparation plants and operations capable of producing coal from a number of alternative seams, each with particular chemistry and characteristics, as well as purchased third-party coal from specific operations, the Group has begun utilising its production capability to produce specific coal blends for customers. These blended products enable the Group to earn an improved margin and utilise its resource base more efficiently.
Investments
Energybuild Group Plc (“Energybuild”)
On 6 August 2007 (subsequent to the reporting period) Energybuild was admitted to trading on AIM following the raising of approximately £15.0 million (£9.7 million net of loan repayments and expenses) to finance the Energybuild group’s development and operations. Immediately prior to Energybuild’s listing, Coal International held 50 per cent. of the issued capital of Energybuild and, as a result of the placing, Coal International’s holding has decreased to its current shareholding of 23.08 per cent.. Coal International’s major shareholder, Cambrian Mining Plc, currently holds a further 27.51 per cent. of Energybuild.
Energybuild has continued to develop its drift mine and opencast activities in South Wales. With the increased price of world coal, the main activity of Energybuild has been to accelerate the mine development with a view to achieving production of 440,000 saleable tonnes per annum within the next three years and 770,000 saleable tonnes per annum within the next six years.
A number of milestones were reached in pursuing this strategy, including successfully accessing and recovering the old British Coal intake and returns across the Pentreclwydau fault at the Aberpergwm Colliery in September 2007. This allowed access to the 18 foot landing where underground production will resume.
NEMI Northern Energy & Mining Inc. (“NEMI”)
Coal International holds a 20.1 per cent. interest in NEMI, a Vancouver based coal investment company. NEMI’s principal asset is a 20 per cent. stake in the Peace River Coal Joint Venture, managed by Anglo Coal Canada (“Anglo”) (60 per cent.), which operates the Trend coal mine in northeastern British Columbia, Canada and other development projects in the region. The principal asset of the Peace River Coal Joint Venture is a 50 per cent. stake in the Belcourt-Saxon Joint Venture with Western Canadian Coal (50 per cent.), which is advancing a major new metallurgical coal project through the permitting and feasibility stage.
The Peace River Coal Joint Venture was entered into in December 2006, with NEMI, Anglo and Hillsborough Resources Limited each contributing properties or cash or a mixture of both. Anglo and Hillsborough Resources Limited have agreed to pay NEMI’s required contribution to the Joint Venture until the end of December 2007 up to an amount of US$18million. Thereafter, NEMI will be subject to joint venture capital calls and potential dilution.
In order to take a more active role in helping NEMI to bring value to its shareholders, Coal International Directors W. Durand Eppler and John Byrne joined the NEMI Board of Directors on 20 March 2007. The NEMI Board is reviewing a range of strategic alternatives for the company.
Financial
In recognition of the rate of growth and development of the Group, the Board was pleased to appoint Deloitte & Touche LLP as the Company’s auditors in June 2007.
Following the identification of a number of misstatements and missing disclosures in the financial statements for the year ended 30 June 2006, the Board requested a review of the financial controls of the Group including a review of the 2006 report and financial statements. These items have now been corrected and the restated amounts are set out in the 2006 comparatives along with appropriate disclosures with full explanation included in note 1 of the 2007 financial statements.
The loss before tax for the year was £12.4 million (restated 2006: £8.1 million). The loss for 2006 as previously reported was £5.4 million. £1.4 million of the £2.7 million increase is accounted for by the adoption of FRS20 Share Based Payments. The balance of £1.3 million relates primarily to a reassessment of mineral rights and restoration provisions. The net assets at 30 June 2007 were £58.6 million (restated 2006: £62.9 million). The net assets as previously reported for 2006 were £55.1 million. The increase of £7.7 million has arisen primarily from revisiting the fair value accounting of acquisitions completed during that year.
The Board is satisfied that the internal controls across the Group have been reviewed and the issues and areas requiring improvement have been identified. Implementation of strengthened financial controls at the Group and Company level is an active process with ongoing development. The Board receives monthly management accounts from both ADC and Energybuild and believes the accounting functions within ADC and Energybuild are effective. The Company has recently recruited a dedicated financial controller and intends to recruit a finance director. In the meantime, Cambrian Mining Plc’s Finance Director continues to provide support to the Company’s finance and accounting functions. Further, to strengthen the governance of the Company, the Board intends to identify and invite additional independent non-executive directors to assist in overseeing the Company’s affairs.
The financing activities of the Group included the raising of £8.1 million in cash, net of expenses, by the Company through a placing in May 2007. ADC also finalised a US$7 million third party equipment financing package with CIT Equipment Finance in May 2007.
Outlook
As at 30 June 2007, Coal International has invested approximately £40.7 million (US$80.5 million) to develop its West Virginia coal business. The Group has established itself as a respected new entrant into the US coal industry with a solid operating base and an impressive platform for future growth.
Looking forward to 2008, the Company intends to continue to seek a permit to open the Eagle No. 2 mine, planned for late in the 2008 calendar year, which will enable the installation of a third mining unit in the Eagle seam. These activities are intended to bring metallurgical coal production from Maple Coal to approximately one million tons per annum by the end of the 2009 financial year. Subject to permitting and settlement of marketing contracts, the Company also hopes to establish its first surface mining operating unit at the Maple property during the 2008 calendar year.
At the Atlantic Leaseco property, we will continue operations at the Silo Mains underground and Crooked Run surface mines and will seek permits to open new surface and underground mining operations to maintain production as reserves at the current mines are exhausted. Simultaneously, we are continuing to seek permits to establish surface and underground operations in the Peerless seam reserve blocks which were acquired in this reporting period. First production from these reserve blocks is anticipated to occur in 2009.
The Company is closely following activities at Energybuild as it looks to accelerate development of its first coal operations. Management is also continuing to work with NEMI’s operating team to explore new development opportunities.
John Byrne Chairman
19 December 2007
Page last updated December 20 2007 20:13:23
