Weighing risk by the ton: There is an optimistic scramble in prospect for slices of the

THE CLOCK is turning back for Britain's coalfields. The Government's latest privatisation will return the country to a new era of privately owned mines, last experienced in the 1940s before they were nationalised by Clement Attlee.

But investors must make complex judgements - not least about how much risk they can tolerate in a highly volatile sector after 1998.

On Wednesday, 18 of the 25 companies that have pre-qualified to bid will decide whether or not to go ahead and will put in offers for one or more of the five new regional companies being formed out of British Coal. Although only a handful have publicly declared an interest, industry watchers believe the bidding has been concentrated on the regions dominated by the less complex opencast operations - Scotland, South Wales and the North-east. Ryan Group, one of the biggest opencast operators, is bidding for all three.

But there are at least three contenders for Central South and Central North, which contain the bulk of the deep mines still operating. Coal Investments, run by Malcolm Edwards, the former commercial director of British Coal, is one; English Coal, a management buyout led by Bob Siddall, the current BC opencast director, is another; while RJB Mining, led by Richard Budge, is going for all five regions.

Among those staying on the sidelines was the world's biggest mining company, RTZ. It decided British coal-mines 'did not offer long-term value for our shareholders: we are looking for large-scale, low-cost operations, and British Coal assets didn't fit in with those criteria'.

Nevertheless, the Government must be pleased with the response to the bids. Two years ago, coal was being seen as a chronically unprofitable industry, and one that no sane financier would touch with his longest golfing umbrella. Now 'the ultimate privatisation', as Cecil (now Lord) Parkinson, then energy secretary, called it in 1988, is apparently moving towards a successful conclusion. By the year-end, Britain's coal industry will be back in the private sector, which it left in 1947.

There will, of course, be a few differences: it will have 16 pits instead of 958, and 8,000 miners instead of 700,000. But for once, the industry is not moping over the miserable past: it is gazing into the future, albeit with varying degress of optimism. Can the rump of the coal industry be preserved or even expanded, or will it continue its decline towards oblivion?

The short answer is that nobody knows. 'We can all make money up to 1998,' says Mr Edwards. 'The problem is what happens after that.' Crispian Hotson, chief executive of Ryan Group, agrees: 'On 1 April, 1998, British coal joins the real world,' he says.

For the next three years, British Coal's successors are guaranteed sales of 30 million tons a year to the big electricity generators, PowerGen and National Power.

It should be a profitable business. Productivity has almost doubled since 1990, and according to the newsletter Coal UK, the average cost of Britain's coal is now pounds 1.20 a gigajoule, while the generators are paying pounds 1.44 for it. That translates into a profit this year of pounds 140m. Although the price will come down to pounds 1.33 a gigajoule by 1997, costs should fall even faster, thanks to new working practices and - probably - lower wages. 'They will make a pile of money over the next three years,' says David Price, Coal UK's editor.

The next year should also see a welcome reversal of the jobs haemorrhage. Bids have been received for at least three of the seven mothballed mines that are up for sale. Ellington in the North-east, which is adjacent to an aluminium smelter, has two consortia bidding for it. English Coal is one, and Mr Siddall says its reopening will immediately create 500 jobs. And two newly developed pits, Maltby and Asfordby, will start producing for the first time.

But in April 1998, all certainty vanishes with the contracts. The generators will once again be pulling the strings, and will be able to decide whether the coal-mines live or die. The optimists among the bidders believe they will decide to commit to more medium or long- term contracts, albeit at lower prices; pessimists think they will play their suppliers off against each other, switching between them from one order to the next. 'The industry will still sell a considerable tonnage, but for individual companies, the degree of risk is enormous,' Mr Edwards says. 'We all have to face up to the fact that prices will be driven down to the floor.'

Mr Hotson agrees - but says it is essential that the generators be persuaded to enter into new contracts. 'We need to get prices down by at least another 40per cent to convince them to get into long-term arrangements,' he says. 'I don't see how it will be possible to make big capital investments if the generators are buying on the spot market.'

Mr Prior believes the generators' aversion to coal - a hangover from the days when they were forced to buy from British Coal at well above market prices - persists. 'They have an inbuilt desire to squeeze coal,' he says. 'They are looking hard at other generating options.'

Two years ago, the argument was all about gas and its relative cheapness: coal-fired electricity was more expensive than gas-fired power, so the mines had to go. These sums are already out of date: according to National Power, a coal station equipped with pollution control equipment generates electricity at about the same cost as a new gas station; without the equipment, it is 20 per cent cheaper.

Unfortunately for the mines, though, this point is academic, because regional electricity companies have committed themselves to buying set quantities of gas until well into the next century. Nuclear power is also guaranteed a certain market (because you cannot turn a nuclear station off), leaving coal as a 'swing fuel' - which is squeezed when demand falls, but booms disproportionately when there is a shortage of power.

From 1998, coal's future will hang on a variety of imponderables. Guy Doyle, economist with Coal Information Services, reckons that coal generating demand in 2000 could be anything from 28 million to 48 million tons, compared with this year's 34 million tons. While economic growth will determine the total demand, a plethora of other factors will decide how coal comes out of the equation. How many new gas- powered stations will be built? How much power will be bought from Sizewell B, the new nuclear station? How fast will the old Magnox reactors be pensioned off? How much power will come through the 'interconnectors' from France and Scotland? And, most controversial, will PowerGen and National Power decide to make more use of their near-redundant oil-powered stations, converting them to run on orimulsion, Venezuelan coal-tar?

The return of orimulsion, labelled the 'world's dirtiest fuel' by environmentalists, is said to be high on the generators' agenda. 'National Power has always had a hankering to use it,' Mr Price says. PowerGen already has one station running on the fuel, and both companies have stations that could be converted, fitted with anti-pollution equipment, and still undercut the coal-burners. 'From what I've seen of the economics of orimulsion, we'll never be able to compete with it,' Mr Hotson says.

Mr Siddall is optimistic that the generators will continue to rely on coal. 'John Baker of National Power said that 75 per cent of his electricity will be generated by coal in 2000, while PowerGen has been fairly bullish about the coal burn into the next century,' he says.

The City also seems convinced. English Coal has 10 financial institutions and three banks lined up. Geoff Westmore of Coopers & Lybrand, its adviser, says the first three years' cash flow should pay off the bank debt.

(Photograph omitted)