Hargreaves Serv Regulatory News (HSP)

HARGREAVES SERVICES PLC 

(the "Group" or "Hargreaves")

Pre-Close Period Trading Statement for the year ended 31 May 2012 and update on Maltby.

Hargreaves Services plc (AIM: HSP), the UK's leading supplier of solid fuels and bulk material logistics, today issues the following trading update prior to the Group entering its close period. The Group expects to announce its Preliminary Results on 25 September 2012.

The Group is pleased to announce that results for the year ended 31 May 2012 are expected to be in line with management's expectations.

Maltby Update

We announced in our trading update on 28 May 2012 that we had encountered geological problems that had resulted in a significant disruption to the development of the upcoming T125 panel. A decision was taken to abandon development work in the tail gate area and pull the T125 face line back to 1900m. We estimated that this would result in a gap between the completion of production on the current T15 panel and the commencement of production on T125 of between 12 and 16 weeks and result in a loss of profits of between £12m and £16m in the financial year ending 31 May 2013.

We can report that the revised development programme to complete the T125 panel with a single ABM development machine is progressing in line with our expectations. An extensive precautionary boring campaign to prove conditions around the planned 1900m mark in the tail gate has been completed without highlighting any major areas of concern. On the main gate, the ABM machine has been pulled back and turned and development has just commenced on the first of two passes to create the face line. At the time of writing, the face line was on track at 55m.

Although there is still significant work to be done in the programme to set out the panel, the completion of the boring campaign and the commencement of the face line drivage mark are encouraging milestones in the development process. We remain confident about the previous guidance on a face gap of between 12 and 16 weeks. Further updates will be provided with the preliminary results.

Production

As noted in February, Maltby had a challenging first half. As expected, having worked through an area of very thin coal in the first half, we were pleased that production and financial performance improved in the second half. The new working practices have operated successfully over the past year and prior to encountering the development problem on the T125 panel, the mine was on track to improve its performance. Although coal prices have fallen, the core thermal coal off-take contract, which will run through to the fourth quarter of 2014, is still slightly below current market prices and provides the Group with significant protection against further price movements.

At Monckton, coke production has been consistent and the unit has performed in line with management's expectations for the year ended 31 May 2012. The markets we serve have remained resilient, although prices for all types and grades of coke have fallen over the recent months. The current off-take contracts for Monckton run through to the end of the 2012 calendar year. At this time, despite the reduction in coke prices, the Group is confident that the average price achieved for the calendar year 2013 will be in line with that of 2012. The price achieved will not be known until the contract negotiations have concluded nearer the end of this calendar year when customer demand and appetite to secure supply of Monckton coke have been firmly established.

We are pleased to announce that the Tower project is well underway and production has started. In spite of the very wet weather in April, coal sales of 72kt were achieved before the end of May.

We continue to work to manage and support operations at Hatfield and are currently in the process of changing working practices to implement a fourth shift with the target of increasing production output.

Industrial Services

The Industrial Services division had an exceptionally good year and achieved strong growth in line with our expectations. The year ended 31 May 2012 saw the division deliver on its target of achieving three new contracts in the steel sector. Contracts worth £15m per annum in revenue terms were won from the three steelworks at Redcar, Port Talbot and Scunthorpe. The division continues to satisfactorily progress its business development activities in Asia.

Energy & Commodities

In the Energy and Commodities Division the UK business has continued to trade well. The business model in the Energy & Commodities Division is designed to protect profitability from changes in commodity prices. Power station volumes were strong last year driven by increasing demand for coal and the appetite to exploit the extra value from the coal blending services provided by the Group. Volumes and margins in the speciality markets in the UK have remained resilient. This strong performance, helped by higher than expected demand from the power stations, resulted in profits in the UK being slightly higher than management's expectations.

The Group increased its share in the European joint venture from 72.5% to 81% during the year and completed a re-structuring to provide a better platform from which to manage future growth. As reported in February the European markets for coal and coke were subdued. This continued and has manifested itself through the second half in the form of lower general trading volumes. Whilst volumes of coke that we have traded have reduced in line with lower overall trading flows, volumes of coal traded in Europe have increased year on year as we have increased our market share. The underlying trading profits attributable to the European group in the year ended 31 May 2012 were in line with last year but lower than management's expectations. Although we experienced difficult trading conditions in Europe, we successfully established a joint venture operation with a major Russian producer which has secured our first two coal supply contracts. We continue to view the supply of pulverised coal to the steel sector as an important new product line both in the UK and Europe. Although trial decisions have been delayed as the steel sector experiences very challenging trading conditions, we are confident that our current trials will deliver sales opportunities into the steel sector for coal produced from Tower and sourced from third parties.

In summary, although the market conditions have been difficult, we have been able to hold our volumes. We have continued to develop new relationships, trials and opportunities. Based on the experience we gained during the downturn in 2008, we feel we are very well placed to pick up significant volume and market share when the markets recover. We are confident that the European market offers great potential to drive future growth and we remain committed to deliver that opportunity.

Transport

We are pleased to report that the Transport Division has had a solid year and has performed in line with management's expectations for the year. Both the dry bulk and tanker fleets continue to perform well.

Net Debt

Net debt at 31 May 2012 was lower than management's expectations at £78m as the Group benefited from the timing of coal vessels which resulted in coal purchases and cash disbursement of an additional £9m through June. The net debt position at year end was achieved despite the Group holding higher than normal stocks of coal, purchased early to take advantage of the forward price curve, and from holding a balance of coke purchased in the first half of the calendar year for supply over the remainder of the year.

Outlook

Although the recent developments at Maltby were disappointing, Hargreaves is a diversified Group focussed on a broad range of activities associated with the supply of solid fuel and the Board remains confident about the medium and long term prospects for the Group.

Site Visit

A site visit will be held tomorrow for investors and analysts at Tower Colliery in South Wales. No new financial information will be provided.

For further details:

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