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Tale of Two Polish Mines Shows Biggest EU Producer’s Woes

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Dec. 23 (Bloomberg) -- Stock markets aren’t usually a subject of discussion when you’re a kilometer underground, yet Dariusz Batyra isn’t a typical Polish miner.

“I check the share price each day,” said Batyra, 39, a senior foreman at the mine run by Lubelski Wegiel Bogdanka SA, one of three coal companies in Poland not controlled by the government. “Everybody does in here.”

The performance of his employer compared with competitor Kompania Weglowa SA, the biggest producer in the European Union, explains why. Since debuting on the Warsaw Stock Exchange in 2009, Bogdanka has more than doubled in value as profits rose every year but one. It has done so even as the price of coal more than halved since 2008, when the global financial crisis took hold, pushing Kompania Weglowa to the brink of collapse.

Another year of diverging fortunes for the two miners underscores the contrast in an industry that’s struggled to adapt to the reality of the free market almost a quarter of a century after communism ended in Poland.

Bogdanka employs about 5,000 and analysts expect net income of 313.5 million zloty ($103 million) for 2013, making it the most profitable of seven Polish coal producers. Kompania Weglowa has 56,000 miners, the biggest employer after the postal service and railroad. It lost about $100 million after nine months with the coal price below the cost to mine it.

Costly Illusions

“At such a level of prices and costs and without restructuring, we won’t survive,” Marek Uszko, 55, the acting chief executive officer of Kompania Weglowa, said on Nov. 19. “We all need to face the truth. Illusions will cost us dear,” he said at the company’s convention later that month.

For decades, that’s proved easier said than done for an industry that politicians have been unwilling to grapple with because of concern about strikes and civil unrest.

The Solidarity labor movement that helped bring down Poland’s Soviet-backed communist government led some protests. In 2005, it blocked government plans to raise the retirement age for miners after demonstrations turned into street fights.

While Bogdanka is based in eastern Poland about 200 kilometers from Warsaw, Kompania Weglowa is located in Silesia, the cradle of mining in eastern Europe and a region that produces more than a half of the EU’s hard coal.

“In Silesia, mining is put on a pedestal and any changes are difficult to execute,” Marcin Gatarz, an analyst at UniCredit SpA in Warsaw, said last week. “The government will do everything to save it. Failure to do so would cause a big social problem. It’s hard to foresee any government could afford it, especially that miners’ protests are usually violent.”

Historic Benefits

The coal price is forcing change in a country that relies on the fuel to generate 90 percent of its electricity.

Polish Prime Minister Donald Tusk has repeated his government’s commitment to the strategic importance of coal, saying on Dec. 4 miners are “needed now as much as ever.”

Meanwhile, Kompania Weglowa’s survival plan involves cutting 32 percent of its workforce by 2020, merging and selling mines and whittling some of the historic benefits for miners. When the company was created in 2003 after the merger of different state-owned mines, it employed 85,000.

Where the company is similar to Bogdanka is in rewarding miners with double-than-average pensions and two annual bonuses. The difference is the ability to afford them and whether miners at an unprofitable employer should be entitled to them.

Silesian Mindset

“What’s destructive for Silesia mines are two things: they are too involved in politics and they all think they deserve what their fathers and grandfathers got,” said Batyra, standing at the mine entrance underground with an industrial flashlight and dressed in a checked cotton shirt, rain boots and hard hat.

The workers at Bogdanka talk about 20 years ago, when the company almost went bankrupt, Batyra said. Being the least profitable of 71 Polish coal mines that year, Bogdanka had to fire about 3,000 employees.

“Sadly, only an extreme situation makes people open their eyes,” CEO Zbigniew Stopa, 54, said in an interview in Bogdanka on Nov. 21 “Here, people still remember 1993 and they have a different approach than in the Silesia region.”

It hasn’t all been a one-way trip for Bogdanka since then. Its share price has dropped 6.5 percent this year, valuing the company at 4.3 billion zloty. Coal prices for delivery next year dropped 20 percent to $82.4 a ton.

Resistance Builds

At Kompania Weglowa, resistance is building to the change management said is required to stop losses. Union leaders said it’s also unfair to compare with Bogdanka, whose mines are newer and under fields rather than urban areas. Some of the Silesian mines date back to the 18th century.

Globally, the worst-performing companies mine about 1,000 tons per full-time employee, said Tomas Novotny, the Prague-based director of coal trading and logistics at EP Energy, which owns PG Silesia, one of the two private mines in the region. Kompania Weglowa sold PG Silesia to the Czech company in 2010 to help raise money to avoid bankruptcy.

Kompania Weglowa produces 35 million tons of coal, or 620 tons per employee, compared with 11.5 million tons planned by Bogdanka for 2015, or 2,300 tons per worker, based on filings.

“People were outraged when they heard about the management’s proposals,” said Jaroslaw Grzesik, 49, head of the Solidarity union at Kompania Weglowa. As for Bogdanka, “we will never live up to their performance,” he said.

Different Miners

Bogdanka CEO Stopa said the company is operating in geological conditions that make it easier and cheaper to mine. Uszko, his counterpart at Kompania Weglowa, is looking at how Bogdanka makes its operations more efficient.

“Bogdanka is a different kind of mining, but we can take an example from the way they use their equipment and how they work,” Uszko said. “Constant work and a six-day working week are the kinds of solutions we’d like to pursue.”

After shelving a plan to sell Kompania Weglowa on the stock market, the government is looking at alternatives and other state-controlled companies are providing indirect aid.

Tauron Polska Energia SA, the country’s second-biggest utility, agreed to pay 310 million zloty to buy a stake in one of Kompania Weglowa’s businesses, while JSW SA, the biggest coking coal producer in the EU, is in talks to buy another. PGE SA, the largest utility, revived the 11.6 billion-zloty coal-fired power plant project and will buy coal from Kompania.

As for the miners, management is trying to persuade unions to give up some perks including discounts for city transport, free coal allowances, or school subsidies for children.

Bogdanka offers similar perks for employees, though the difference is in its pay structure. Bonuses can reach 80 percent of salaries with an average reaching 30 percent, Batyra said.

“You don’t need to shout at people to make them work hard,” he said. “Obviously, there are profitable and good mines in Silesia, but there are many they should have closed a long time ago. There’s no other cure.”

To contact the reporters on this story: Maciej Martewicz in Warsaw at mmartewicz@bloomberg.net; Marek Strzelecki in Warsaw at mstrzelecki1@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net