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Lubelski Węgiel
Lubelski Węgiel Bogdanka S.A.

LW Bogdanka Gruop post-2014: implementation of strategic objectives and solid results despite difficult market conditions

Thursday, 2015-03-12

Bogdanka, 12 March 2015



PRESS RELEASE



LW BOGDANKA GRUOP POST-2014: IMPLEMENTATION OF STRATEGIC OBJECTIVES AND SOLID RESULTS DESPITE DIFFICULT MARKET CONDITIONS

REVIEW OF THE STRATEGY FOR THE COMING YEARS DUE TO THE CURRENT DIFFICULT MARKET SITUATION

The Lubelski Węgiel BOGDANKA Group whose parent is LW BOGDANKA S.A., the most advanced and efficient coal mine in Poland and the national market leader in power coal production, despite challenging market conditions, achieved solid financial results in 2014. Sales revenue during this period exceeded PLN 2 billion, which was higher by 6.0% than the results achieved in the same period a year earlier. EBITDA amounted to nearly PLN 750 million, EBIT reached PLN 362.3 million, and net profit PLN 272.4 million. In the fourth quarter of 2014 alone, the revenue exceeded PLN 523 million, EBITDA amounted to PLN 247.5 million, EBIT - PLN 135.7 million, and net profit reached PLN 101.6 million. The Company continues efforts to further increase the efficiency — as a result the unit cash extraction cost fell by 12%, in real terms, in relation to 2012.

In the fourth quarter, the commercial coal production reached 2.6 million tonnes, which is a record in the Company's history and an increase of 21.5% over the fourth quarter of 2013 (2.1 million tonnes). As a result, commercial coal production in 2014 reached 9.2 million tonnes, which represents an increase of 10.1% compared to the same period of the previous year. The new Mechanical Coal Processing Plant commissioned in September 2014 contributed primarily to the increase in net production which doubled the nominal yield on the "wet" line and it currently reaches 2,400 tonnes/h.

The sales of commercial coal in the fourth quarter reached 2.3 million tonnes, which constitutes an increase of 13.5% compared to the fourth quarter of 2013. Throughout 2014 the sales reached the level of 9.2 million tonnes, which was about 12.5% higher than that recorded in the same period a year earlier. The achieved mining and sales levels translate into the Company's strong market position. At the end of 2014, the market share of LW BOGDANKA amounted to 16.6% for power coal market in Poland (compared to 14.8% at the end of 2013), and nearly 25% for power coal sold to commercial power industry (compared to 19.3% at the end of 2013).

In view of the current difficult situation on the coal market, the Company's Management Board decided to review the strategy, so as to adapt it to current and expected market conditions in the coming years.

Production assumptions for 2015 also take into account the current market situation and provide for the sale of coal at the level of 9.3-9.5 million tonnes.

 

FINANCIAL RESULTS – DETAILS

The following table presents the selected financial information of the LW BOGDANKA Group after the fourth quarter and cumulatively throughout 2014:

'000 PLN Q4  2014 Q4 2013 Change Q1-Q4 2014 Q1-Q4 2013 Change
Revenue    523 224 481 531 8,7% 2 013 568 1 899 830 6,0%
Profit on sales 137 983 125 169 10,2% 379 575 455 799 -16,7%
Gross profit on sales 26,4% 26,0% 1,5% 18,9% 24,0% -21,3%
EBITDA 247 469 206 600 19,8% 749 953 754 941 -0,7%
EBITDA margin 47,3% 42,9% 10,3% 37,2% 39,7% -6,3%
Operating profit (EBIT) 135 707 117 244 15,7% 362 315 424 803 -14,7%
EBIT margin 25,9% 24,3% 6,6% 18,0% 22,4% -19,6%
Net profit for fiscal year 101 558 104 995 -3,3% 272 352 329 728 -17,4%
Net profitability 19,4% 21,80% -11,0% 13,5% 17,4% -22,4%

        

In 2014 LW BOGDANKA generated revenue in excess of PLN 2 billion, which is 6.0% higher than in the same period a year earlier.

Approximately 92% of coal sales (in value terms) in the analysed period were carried out on the basis of long-term trade agreements concluded between LW Bogdanka S.A. and its main customers, i.e. Elektrownia Kozienice Grupa ENEA S.A., GDF Suez Energia Polska S.A., ENERGA Elektrownia Ostrołęka S.A., PGNiG Termika S.A.

2014 was a difficult period for the industry due to the decline in demand for coal and a large inventory of power coal in Silesian power plants and mines. As a result, the Company's profit margins throughout the year remained under pressure of falling coal prices to commercial power industry (which at the end of January 2015 were lower by 17.5% than the prices at the beginning of 2013).

The results in 2014 were also affected by the generated yield, which was 66.6% (compared to 68.5% in 2013). This was related to difficult geological mining conditions persistent in the second and third quarters of 2014.

The high profit margins achieved in the fourth quarter of 2014 should also be emphasized, which was related to a record high level of mining in this period and the improvement in yield in December 2014. In the fourth quarter yield was 66.7%, compared to 66.4% in the same period a year earlier.

The Company applies strict cost control. In the fourth quarter of 2014 the expenditure increased only by 8.8%, while net production was higher by 21.5% compared to the fourth quarter of 2013. These measures translate into maintaining by the Company above-average (for the sector) financial ratios (despite the difficult market situation), as exemplified by EBITDA margin reaching 47.3% in the fourth quarter of 2014 and 37.2% cumulatively for the whole year. At the same time, in 2014 the Company achieved a real decrease in unit cash extraction cost by 12.0% compared to 2012, despite the difficult geological conditions in Stefanów in the second and third quarters of 2014.

 

COAL PRODUCTION AND SALES

In the fourth quarter commercial coal production reached 2.56 million tonnes, which is a record in the history of the Company, and an increase of 21.5% over the fourth quarter of 2013. As a result, commercial coal production throughout 2014 reached 9.2 million tonnes, which represents an increase of 10.1% compared to the same period a year earlier (8.4 million tonnes).

The new Mechanical Coal Processing Plant commissioned in September 2014 contributed primarily to an increase in net production, which doubled the nominal yield on the "wet" line and it currently reaches 2,400 tonnes/h. This increase was also due to mining an average on 4.4 walls (4 — by roadheader, 2 — by plough) and since November 2014 mining on the wall 3/VI/385 in the Nadrybie Field — good geological conditions made it possible to improve the yield in December 2014 and achieve the highest level of 73% throughout the year.

The sales of commercial coal in the fourth quarter reached 2.3 million tonnes, which constitutes an increase of 13.5% compared to the fourth quarter of 2013. Throughout 2014 the sales have reached the level of 9.2 million tonnes, which was about 12.5% higher than those recorded in the same period a year earlier.

Work is continuously performed to open up new coal seams. 29.8 km galleries were completed in 2014 compared to 28.6 km in the previous year, which represents an increase of 4.2%. 5.7 km of galleries were completed in in the fourth quarter of 2014 (compared to 7.4 km in the same period of 2013).

Inventories of coal at the level of 306,000 tonnes at the end of December 2014 (41.7% higher than those recorded at the end of December 2013) corresponded to approximately 10-day production and were in line with the schedule of deliveries to customers.


LICENCES

In 2014, the Company received licenses for prospecting of deposits in the Ostrów and Orzechów areas and mining licence for in the K-3 area (19 million tonnes of operative reserves).

The Company is pursuing its efforts to obtain a mining licence in the K6-K7 area — on 12 December 2014 a complaint was filed was with the Provincial Administrative Court in Warsaw against the decision of the Minister of the Environment on the refusal to grant a licence.

At the same time works began with a view to converting the prospecting licence to a mining licence for the Ostrów and Orzechów deposits and additional development of about 400 million tonnes of operative reserves. These deposits are the most promising due to the amount of resources and the possibility to quickly start mining of these deposits using the existing surface and pit infrastructure of the Bogdanka and Nadrybie Fields.

 

STRATEGY

In connection with the substantial change of the market situation, resulting from such factors as a significant decrease in the price of coal, coal stockpiles at Silesian mines and at power plants and plans for the government's intervention in mining and power production, the Company's Management Board decided to review the Strategy for 2015–202.

Main assumptions of the Strategy:

  • Maintaining LW Bogdanka S.A.'s position of a cost leader — creating the conditions for keeping down mining costs in the long term by optimising the structure and level of mining and further reducing operational costs;
  • Selling coal to the power industry, heating and chemical sectors — by widening the audience of coal buyers and entering new and attractive market segments;
  • Expanding on the Polish market — continuously monitoring new investment schemes and projects in the region;
  • Getting a foothold in the foreign market.

Strategic objectives:

  • Carry out the conceptual, organizational and investment projects related to the acquisition of new resources to ensure the Company's operations well beyond the period covered by the plan;
  • Maintain the leading position among domestic coal producers by obtaining 30% share in the fine power coal market — increase sales to medium and small customers;
  • Prepare the Company to operate in volatile conditions affected by external factors and the increasingly competitive market;
  • Further extraction cost optimization program (including labour costs) in the medium term and optimization of capital expenditure;
  • Ensure a return for investors on invested capital.

 

In order to enable the Company to adapt to changing market conditions, an analysis was performed of many optional business and development scenarios according to the possible scenarios of changes in the coal market in Poland.

 

The following scenario was accepted as the best one:

  • Continue mining of the Bogdanka and Stefanów Fields and gaining access to the new areas of “Ostrów-Orzechów” and, in the long-term, the K6-K7 area using the mine's current infrastructure (without constructing new shafts and increased extraction);
  • Limit the development investments to those necessary from the point of view of making new deposits available — in particular in the period 2015-2017 — and to review investment spending to increase the production capacity by 2020;
  • Optimise the production level according to the market conditions, in particular, in the period 2015-2017.
  • Optimise long-term returns for investors taking into account the risks associated with the market conditions.

 

Applying the above assumptions will allow the Company to increase its effectiveness while at the same time put off the decision concerning the further course of its development until the hard coal market in Poland stabilises. The variant selected by the Management Board is the most flexible and it provides the opportunity to return to the planned increase in production and even its expansion.

The Company achieved the target production capacity of 10.5-11.5 million tonnes (depending on geological conditions), but due to the current market conditions, it forecasts the sale of commercial coal in 2015 at the level of 9.3-9.5 million tonnes. Capital expenditure at the Parent in 2015 will amount to approx. PLN 560 million with cash spending for the purchase of non-current assets and intangible assets in the amount of approx. PLN 640 million (due to the deferral of payment for the fourth plough).

The Company is currently developing variants of adapting the Company's operations to the level of coal mining (sales opportunities) consisting in further reduction in costs and capital expenditure. The level of investment for the coming years will be presented together with the Strategy update.

The Management Board analyses the dividend policy for subsequent years, taking into account the risks and price conditions. The Company considers securing liquidity and financial stability as the key factors. Dividend policy for the coming years will be adopted and announced by 30 June 2015, together with the Strategy for the period from 2015 to 2020.

 

Zbigniew Stopa, President of the Management Board at LW Bogdanka S.A.:

“Last year can be summarized as satisfactory. We have achieved our strategic goals, ending several years of investment process pursued with a view to doubling production capacity. After commissioning of the Mechanical Coal Processing Plant, which is one of the last stages of the investment program, our production capacity is already 10.5-11.5 million tonnes. As a result, despite the difficult situation in the coal market, our production has increased last year to 9.19 million tonnes from 8.35 million tonnes a year earlier. Thus, we have strengthened our position as the main supplier of coal to power plants in Poland — at the end of 2014 our market share was close to 25% and the power coal market share in total — 16.6%. Once again, we were the undisputed leader in terms of extraction efficiency and remained the most efficient mine in Poland by reducing the unit cash extraction cost by up to 12% in real terms as compared to 2012. I can state with satisfaction that we implemented all the elements of our strategy for 2013-2020 consistently and in accordance with the plan.

Unfortunately, the current market environment is very difficult. It is significantly impacted by the situation in Silesia and the planned recovery program for KW S.A., whose current form provides for further direct and indirect subsidies for unprofitable coal mines, which translates into their ability to sell the coal significantly below the production cost. This has an impact on the prices and demand in the Polish market, which affects other market players, including Bogdanka. The difficult situation on the Polish market is further complicated by the world market prices of coal and other energy commodities, such as oil and gas, which are currently at the lowest levels in years. Therefore, as announced, we reviewed our strategy. The aim is to prepare the Company to operate in volatile conditions under the influence of external factors and an increasingly competitive market.”

More information - www.bogdanka.eu

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