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EU approves state aid for Czech coal mine

World Coal,

The European Commission has approved public funding to help towards closing an “uncompetitive” coal mine in the Czech Republic.

Mining company, OKD, a subsidiary of New World Resources (NWR), decided to close the Paskov mine after “several unsuccessful attempts at returning it to economic viability”, the Commission said.

Czech authorities proposed to fund one-off payments to workers who have lost or will lose their jobs due to the closure as well as provide bonuses to those who have been exposed to health risks since working in the mine.

The Commission said the plan is “in line with EU state aid rules”.

Commissioner Margrethe Vestager, in charge of competition policy added: “Uncompetitive coal mines cannot be kept in the market indefinitely on state support – but the Commission and Member States can find solutions to help coal miners through this difficult transition.”

The coal mine is located in the Moravian-Silesian region.

Moody's Investors Service (Moody’s) said that the approval of state aid for the Paskov mine was “credit positive”, as it was the last hurdle to validate the deal agreed last year between the government and the NWR, and will nearly halve the financial burden, estimated at approximately €50 million, NWR would need to incur to close the mine. Although this is a positive development, Moody’s assesses that it has no rating impact, as it does not change the agency’s current assessment of NWR’s liquidity as weak.

The agency noted that the financial aid will only be paid at the end of 2017 or early 2018, because the agreement with the Czech government makes the public funding to cover the social costs of the closure (CZK 600 million, slightly more than €20 million) subject to the commitment by NWR to keep Paskov mine open until 31 December 2017. This condition, driven by social and political motivations to preserve employment at the mine as long as possible, has actually negative implications for the company’s liquidity in the next several quarters. This is because Paskov, in spite of recent restructuring efforts, remains a high cost deep underground coal mine, and at the coal prices already contracted by the company for 2015 (€93/t for 75% of the metallurgical coal volumes, and €52/t for the entire annual thermal coal production), it will be loss making and will continue to burn cash. Therefore, the reduced cash outflow the company will incur in 2017 for the closure of the mine would likely be offset by the cash burnt by the mine over a prolonged period, due to the condition of preserving its operations for three more years.

On a more positive note, Moody’s noted that if the deal is becoming too onerous for NWR, meaning Paskov losses become unsustainable, there is a way out. The agreement becomes invalid and both parties will need to renegotiate it if the hard metallurgical coal benchmark prices drop below US$110/t for three consecutive quarters in period of between 1 July 2014 and 31 December 2017. Based on current prices at around US$117/t, there is limited headroom to preserve the agreement.

In case of a substantial drop in prices, currently not anticipated, the deal may start posing too much negative pressure on NWR’s liquidity, at least in the immediate horizon. Negative pressure on the rating could result if the weak liquidity position of the company deteriorates further, with an acceleration of the cash burn.

Edited from various sources by Sam Dodson

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