Hargreaves considers abandoning Maltby mine

Mining, processing and logistics group, Hargreaves Services, may be forced to abandon its mine in Maltby, South Yorkshire as 'gas issues' have hampered the development of a new coal panel.

Hargreaves has had a difficult year after reporting delays in the construction of panel "T125" in May. Tuesday's announcement that gas, water and oil have all been found at the site could lead to a possible abandonment putting the company's investment in Maltby, and future revenues, in jeopardy.

No firm decision will be reached until an independent assessment has been completed

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The stock had fallen 20% by 11:57 and is now down 49% since the end of May.

The problems at Maltby have overshadowed what looks like a decent set of results, with revenues up 24.6% on the prior year at £688.3m and profits before tax rising 16.8% to £43.1m. Net debt has risen to £77m from £66m in 2011.

Commenting on the results, Chairman Tim Ross said: "The developments at Maltby were unexpected and we are closely assessing the implications ... However, the overall progress we have made across all our divisions is encouraging and gives us confidence in further growth in the business going forward.

"Based on early trading, setting Maltby aside, and despite a slow start to production at Tower, we are cautiously optimistic that we will meet or even exceed our overall budget for this financial year."

Broker WH Ireland is reviewing its rating following the trading update. It had previously rated the shares a "buy" with a 1385p price target.

"Setting aside the deep mine, Maltby, the outlook statement is strong and the group is tendering in Asia for the first time. The latest developments at Maltby, however, which caused the group to warn in May, have prompted a reassessment of the balance of future value / inherent risk in the mine. The catalyst for this consideration is the unwelcome news that gas issues are adding delays and risk to the face line completion and subsequent production," notes Nick Spoliar at WH Ireland.

"Against this background, the group has raised the possibility that that the mine itself may be closed, with an end October deadline for this decision. This would be a major change, arguably removing a major distraction and releasing the energy of the business in the direction of a fully service-based model, but at the price of an impairment charge and further downgrade," Spoliar suggests.

"Closing Maltby would effectively strip out, we estimate, c£8m of EBITA [earnings before interest, tax and amortisation], leaving however higher quality or at least more risk averse earnings. In either circumstance, the group remains very comfortably within its covenants," Spoliar said.

BS