UPDATE 2-UK Coal strives to save mines after crippling fire

Wed May 1, 2013 12:14pm EDT

* UK Coal in talks with creditors to stay solvent

* Declines to confirm FT report of new debt restructuring offer

* UK industry struggling to survive in tighter market

By John McGarrity

LONDON, May 1 (Reuters) - Britain's largest miner UK Coal said on Wednesday it was in talks with creditors to fend off a collapse that would cost up to 2,000 jobs and force power stations to scramble to cover their fuel needs.

Heading a domestic coal sector that already looks under threat, the miner warned in February that a fire that closed its largest mine, Daw Mill, could harm the viability of the whole company unless it got outside help from government or creditors.

"We remain positive that we have an underlying profitable business," UK Coal, part owned by Coalfield Resources, said in a statement after the Financial Times reported it had proposed a voluntary liquidation and the handing over of its remaining mines to a new company.

"I hope we are close to securing a way forward for our remaining mines. There will undoubtedly be some difficult decisions as we have had to look at all possible options," chief executive Kevin McCullough added.

A source with one utility said the company had avoided a debt default and closure of its operations last December after completing a major debt restructuring with shareholders and renegotiating terms with power generators.

The Financial Times story said creditors including power companies EDF, Drax Group, SSE and E.ON were being offered 32 pence for every pound of debt, with the generators having prepaid for coal supplies.

But UK Coal declined to confirm it had made any kind of firm offer to creditors and Drax - which operates Western Europe's largest single power station in northern England - said later that it did not have balance sheet exposure to UK Coal.

MIGHTY FALLEN

Analysts said that if any of UK Coal's mines were to close, utilities would have to buy more of the fuel from overseas.

"UK Coal is a key supplier and therefore its proposed voluntary liquidation is a concern," Liberum Capital said in a research note.

British miners have been hit hard by falling international prices, competition from U.S, Colombian and Russian imports, and rising costs for equipment and fuel. Scottish Coal went into liquidation with the loss of almost 600 jobs earlier this month.

Another major producer, Hargreaves, has secured a 42 million pound cash injection from shareholders to buy mines from rivals and develop new sites.

But Britain is likely to burn less coal this year as old power plants are brought offline under EU environmental regulations and producers, utilities and unions have called for a government 'coal strategy' to reboot the industry.

"Britain's coal industry has long been far too fragmented, but it may be difficult for some of these mines, especially the deep shaft ones, to find a buyer," one former industry lobbyist told Reuters, asking not to be name.

"The key to UK Coal's survival will be how much it gets in an insurance payout for the Daw Mill fire."