Fool's Eye View

[ April 5, 2000 ]

The Government Hasn't Budged

By Rob Davies (TMFEssex)

Carburton Street, London. I know my fellow Fools in the office would be disappointed if I didn't cover the results of RJB Mining (LSE: RJB), even though it is a painful experience for me. Having suggested this share back in October 1999 as a one to watch for the end of the year my colleagues never loose an opportunity to remind me of my share selection prowess.

However, in mitigation I would point out that on today's increased dividend, 7.5p for the year, the shares yield 28.3%. If half their tech shares deliver anything like that in the medium term they will be doing well. Of course today is not a good advert for the technology sector because, for some unexplained reason, we are unable to get any prices or index levels from the stock exchange. That doesn't really bother us long term investors. But I would imagine that the country would be considerably more agitated if we had no coal, and hence electricity, this morning.

For the record the company reported a 15% decline in revenue to £699.3m and a profit before exceptional items and tax of £11m, down 78% from last year. But exceptional items were there in size, £141m of them in total, mostly consisting of a £131m charge for impairment of assets. In other words it took a big red pen to some of the assets on the balance sheet because they can no longer generate PROFITS. It would be interesting to see what would happen if that policy was applied to some of the dotcoms.

Anyway, back to RJB. As a result of these exceptional charges the net figure was a loss of £94.3m or a loss per share of 64.7p. So if the company made such a big loss how can they pay out a dividend? That loss is struck after the exceptional items and if these are taken out the underlying figure is probably a net profit of £10m or about 7p a share.

Now these figures are aimed at the government, so it is the company's interest to make them as horrible as possible. British coal mining has suffered horribly, from weak international coal prices and a strong pound that makes imported coal cheaper than domestic coal. It has also been badly affected by the generators playing games with the pool pricing system to keep electricity prices high. They need high prices to justify running their new gas fired power stations that have high depreciation charges. The old coal fired stations are cheap to run as base load because they have low depreciation charges. This issue is also discussed in the recently published Industry Focus 2000.

The government and Ofgem, the regulator, have recognised the problem and forced the generators to dispose of some of their power stations last year. More fundamentally the pool trading system is being abolished and will be replaced by NETA, the New Electricity Trading Arrangements, in October. Although no one knows exactly what these will be. Until then RJB had asked the government for temporary protection. Unfortunately, the government has been unable to deliver that in time for these results.

But that dividend payment isn't quite as rash as it might seem. Operating cash flow for the year was a staggering £85m, and even after tax, interest and capital expenditure it had net cash flow of £25m. Looked at that way paying out £10m in dividends doesn't seem unreasonable.

And the balance sheet is not too bad either. It has £36m of cash and only £23m of long term liabilities.

All that in a company with a market capitalisation, at last night's close, of £37m.

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