Annual Report and Accounts 2010

As the first privatised, restructured and modernised coal business in the region and the first to access multiple capital markets, we are in a strong position to bring these credentials, combining both operational and financial expertise, to bear on any opportunities identified.

Review of 2010

After a tough year in 2009, demand for coal and coke in the Central and Eastern European (‘CEE’) markets rebounded strongly in 2010 and we successfully increased our volumes in response to this demand. Coking coal prices also rose in response to global supply pressures and our decision to align our prices with the Japanese Fiscal Year (‘JFY’) pricing meant we benefitted from a much more direct exposure to the China demand phenomenon for the first time.

Consolidated revenues for the year were EUR 1,590 million, up 42 per cent on 2009, reflecting these improved market conditions. Earnings before interest, tax, depreciation and amortisation (‘EBITDA’) rose strongly by 160 per cent to EUR 464 million, reflecting increased volumes and higher prices as well as significant productivity improvements following our investment in new mining technology and stringent cost control across all our operations.

This robust performance demonstrates the underlying strength of the business and gives us a sound platform to deliver on our growth strategy going forward.

We made significant progress on improving efficiency and maximising returns from our existing assets:

Coal

We mined 11.4Mt of coal with three fewer operating longwalls compared to the year before, reaping the benefits of our recent capital investment programme in new longwall mining equipment. The new longwalls produced on average approximately 2,800t of coal per longwall per day – up just over 72 per cent when compared with the old equipment.

Coke

Our coke business delivered a very solid performance, with production up 19 per cent to 1.0Mt and a reduction in coke conversion unit costs of 16 per cent. These numbers reflect increased volumes as demand recovered. Consolidation of coke production at the Svoboda site and the commissioning of a new coking battery there, which came on stream at the end of 2010, will further help lower unit costs going forward.

People

We maintained productive working relationships with our labour unions throughout the year and whilst base wages were held at 2009 levels, good operational performances resulted in the payment of a well deserved performance-related bonus. We continue to focus on training and on investing in our people, particularly to ensure that we further improve health and safety standards. We recognise the hard work and commitment that our employees contribute to the business every day and would like to thank them for their continued efforts during 2010.

Our close working relationships with our long-term customers underpins the success of our business and we are highly appreciative of both our customers and suppliers for their continued loyalty and support.

Safety

Tragically, three of our colleagues lost their lives in our mines during the year. Our thoughts are with their families and friends. This serves as a stark reminder that our people work in a challenging environment and that we must strive to further improve health and safety standards in order to minimise accidents, with the ultimate aim of zero harm.

To that end, in our coal mining operation, the new equipment has continued to deliver improved mining conditions for our miners, contributing to a further reduction in our mining Lost Time Injury Frequency Rate (‘LTIFR’)¹, down 24 per cent as compared to 2009.

Strategy

Our strategy has been to establish a strong platform for growth and this has been the focus of our energies during the past five years, as we restructured our business. In 2008 we started working on our two major investment programmes – Productivity Optimisation Programme 2010 (‘POP 2010’) and Coking Plant Optimisation Programme 2010 (‘COP 2010’) – and we continued committing considerable time and resources to them even during the challenging economic environment of 2009. These programmes are now complete and the business has thus built a strong foundation from which to deliver on the growth opportunities that we postulated at the time we became a public company in 2008.

We have significant opportunities for organic growth within our existing licence portfolio in Poland. We have made good progress during 2010 in developing these investment projects, particularly Dębieńsko, where a world-class project team and group of advisors are now in place and undertaking a detailed feasibility study. Land and some infrastructure have been purchased and we expect to break ground at Dębieńsko towards the middle of 2011. Dębieńsko and our other Polish project, Morcinek, are a significant part of our growth strategy, as they will bring newly developed mines with lower production costs into our portfolio, helping to offset higher costs as we mine deeper seams at our Czech operations.

There are also considerable unexploited hard coal resources in the area where we currently operate in the Czech Republic, which would add to our reserves and extend the life of our mines. Our experience in land rehabilitation means we are well qualified to control the environmental impact of developing these opportunities and we continue to work diligently to find ways for accessing coal that are mutually beneficial for both the local communities and NWR.

We continue to see the logic and benefits of being a regional consolidator. This would increase our scale and resources and deliver synergies in technical and operational skills, and projects procurement. As the first privatised, restructured and modernised coal business in the region and the first to access multiple capital markets, we are in a strong position to bring these credentials, combining both operational and financial expertise, to bear on any opportunities identified.

Our proposed acquisition of the Polish thermal coal producer, Lubelski Węgiel ‘BOGDANKA’ S.A. (‘Bogdanka’) was a good example of this strategy in action and would have created a powerful and diversified regional producer. Our decision not to raise our offer demonstrates our financial discipline and determination that value must remain a decisive factor in any M&A activity for NWR.

We continue to pursue similar opportunities, particularly in Poland and Ukraine where we are monitoring privatisations closely.

Looking ahead

Mid-seam POP 2010 equipment set: conveyor and shearer

We are now reaping the benefits of our recent capital investments evidenced by the results of the first full year of production using the new equipment in 2010.

Whilst the broader European economic outlook remains uncertain, we expect demand for coking coal in the CEE region to remain robust, driven by a continued recovery in the automotive and construction sectors. Recovery in Central Europe’s industrial sectors will also underpin demand for thermal coal. As a merchant supplier of coke, we are more susceptible to changes in demand as integrated steel suppliers will consolidate production in their own vertically integrated facilities when demand falls. However, our new coking battery gives us more flexibility to switch production between foundry and blast furnace coke, putting us in a stronger position to prosper throughout the economic cycle.

Coking coal will remain a scarce global commodity going forward and this will continue to drive up international prices. We will increase our exposure to these price movements as we move more of our contracts onto a quarterly pricing basis. Containment of our mining unit costs remains a major focus as we mine deeper into more challenging environments, and we will remain focused on driving further efficiency gains to partially counter the rising costs. Notwithstanding these pressures on our cost base, our close proximity to our customers gives us a cost advantage over our overseas competitors.

In the medium term, our current development projects will sustain our growth ambitions and we will continue to seek appropriate acquisition opportunities that will further strengthen our competitive position in the region. Our plan to join the London Stock Exchange’s FTSE Index Series during 2011, as we reincorporate the business in the United Kingdom, will also extend our access to international capital markets. There is much work still to do, but we are now in a strong position to deliver on our potential.