dole not coal

The miners have effectively been in limbo since that grim Friday evening on April 19 when the 732-strong staff were gathered together at the various plants and told three things: the company was finished; 142 people were being asked to stay on to help deal with the fall-out; and the rest would be leaving without being paid for their last few shifts.

Scottish Coal – which was actually two operations, the Scottish Coal Company and Castlebridge Plant – was the biggest coal producer in Scotland and second-biggest in the UK. Its workers dug about 3.5 million tonnes of coal out of the ground in the central belt each year, all of it from opencast operations, more than a decade after deep mining ceased here.

Owned by Alloa-based Scottish Resources Group, which is in turn controlled by English mining tycoon Colin Cornes, Scottish Coal was the Scottish descendant of the mining operation that was previously run by the state.

Cornes took control around the turn of the century as part of a rescue which was supposed to secure its future for up to 30 years. Prospects looked healthy in the mid-noughties as rapid Chinese industrialisation pushed up world prices, but things turned sour in the past couple of years for several reasons. The most commonly cited is the explosion in shale gas production in the United States. This floored the American gas price, causing many users to switch from coal. US coal miners were forced to sell their product abroad, which drove down international prices. A tonne of coal now costs little over £40 against more than £75 at its peak in mid-2008.

By the second half of last year, several mining firms, including Scottish Coal, were in trouble. UK Coal, which owns several deep mines in England, announced a restructuring (and, following a major fire at one plant in March, there is now speculation about a voluntary liquidation).

Around the same time, Doncaster-based ATH Resources fell into administration with debts of £31 million. It owns five working opencast mines in Fife, East Ayrshire, and Dumfries and Galloway, plus several former mines, employing about 300 people. It is the second-largest mining company in Scotland, digging around two million tonnes of coal per year.

ATH won a stay of execution after its debts were bought out by an investor group called Better Capital, which in early March were then sold on to fellow mining company Hargreaves, based in Durham.

Scottish Coal had last year called in KPMG to help devise a battle plan – usually a sign of corporate desperation – and then began negotiations with the unions about a 10% cut in wages. As a fruitless 90-day consultation period neared its end, the closure loomed of Cockenzie power station in East Lothian, one of Scotland's only two coal-fired generators. That would make producers ever more dependent on selling coal south of the Border. Scottish Coal was surviving on a £47.5m debt facility from Lloyds that had been under review on a monthly basis since December.

On March 7, Scottish Coal management announced that four of the six working mines would close, putting 450 jobs at risk. Experts were not surprised. The four sites earmarked for closure – St Ninians in Fife, Mainshill in South Lanarkshire and Dalfond and Binston Hill in East Ayrshire – were all close to being out of coal. With Scottish Coal clearly under severe pressure from its lenders, the move looked like an attempt to flush out a rescue investor.

In the midst of this Colin Cornes fell ill, removing him from the negotiating table. Rumours spread that Hargreaves executives had been seen on the premises with Scottish Resources Group management, prompting speculation that a new deal was in the offing.

But then came the liquidation announcement. The sudden apparent change of tack while Cornes was out of the picture has fuelled speculation that other directors changed strategy, possibly to lure a new buyer by erasing the debts.

Blair Nimmo, head of insolvency at KPMG, scotched the idea that the Scottish Resources Group board changed tack. He said: "Despite having a blueprint to take costs out of the business and make it viable, without cash it wasn't possible. There had been indications that additional funding might have been available, but ultimately no-one was prepared to make it happen."

He said that the reason why the mines all closed on April 19 is that Scottish Coal was losing money with every tonne it produced. Neither does KPMG believe there will much left over after the attractive mines have been sold.

Nimmo said: "You can't retain 142 staff and all the kit that's necessary to secure and maintain the sites without incurring significant costs. It will eat up most of the asset values - People shouldn't think that the creditors are going to walk away with huge amounts of cash. We suspect that the amounts that will be recovered here will be minimal."

Another problem for KPMG is that Scottish Coal is bound by a responsibility to restore its site back to their natural states, an expensive process. KPMG has now petitioned the Court of Session in Edinburgh to abandon title and responsibility to the 11 former mines, which would allow it to walk away from that responsibility, on the grounds that there will not be enough money to pay for them.

This has enraged environmental campaigners, who have long complained that too many mining companies have been allowed to provide so poorly for the restoration of their sites.

In theory, the companies put aside money each year, while also taking out insurance bonds to cover costs if they go bust. In practice, councils have been reluctant to take too tough a line on whether the estimated costs match the reality, or even whether clean-up is happening at all, for fear that they might drive mining companies away from areas with few alternative employers. Hence the country is peppered with gaping holes that, in some cases, have been dormant since the 1990s.

Oliver Munion, of Coal Action Scotland, which has been campaigning against any new mines opening, said Scottish Coal had "legal actions coming from different directions at any one time. I would like to think we played our part in making things difficult for them [to open new mines]".

Nimmo said that Scottish Coal's total liabilities have leapt from £137m in the accounts ended March 2011 to £250m today, while assets have plunged from £217m to £55m. Even after the restoration bonds have been exercised, he said there will be clean-up costs in the "substantial tens of millions" of pounds. Add in the pension deficit, also in the tens of millions, and he said that the total outstanding liability will be in excess of £100m.

There are understood to be three serious proposals on the table, one of which looks to be a management buyout. Nimmo rejects any suggestion that a deal has already been done with Hargreaves, or that all bids will not get the same treatment. He said a positive scenario would be that a new buyer would see several hundred jobs reinstated.

While that story unwinds, the Scottish Government has become involved. Having realised some time ago that the overhang on restoration liabilities risked making it impossible for mining companies to get permission for new sites, threatening the whole industry, it has for months been setting up the Scottish Mines Restoration Trust (SMRT).

Chaired by serial regulatory specialist Professor Russel Griggs, the SMRT aims to put more pressure on mining companies to deal with former mines, while helping devise clever ways of restoring them more cheaply than their estimates. The aim, which insiders insist is achievable, is to bring costs back within bond levels.

The SMRT will have a budget in the millions to help achieve this, much of which appears to be coming from private-sector corporate social responsibility donations. Its imminent inception was not enough to reassure would-be Scottish Resources Group backers. On the other hand, there are suggestions that it has convinced Hargreaves to restore the former ATH sites as part of a deal for the entire package.

The Government has also set up a taskforce of stakeholders to help with the Scottish Resources Group collapse. Co-chaired by Griggs and Energy Minister Fergus Ewing, it called last week for any Scottish Coal buyer to "protect jobs and meet its environmental obligations, as well as avoiding cherry-picking of assets".

Depending on how rigidly you interpret that statement, it sounds a tall order. It will be interesting to see how it compares with what emerges.