Costs soar as analysts attribute profit growth almost solely to coal price surge Yanzhou Coal Mining will miss its sales targets this year as the relocation of villagers near new mining sites has proved more problematic than expected, according to chief financial officer Wu Yuxiang. Mr Wu, speaking after the company's interim results announcement yesterday, said Yanzhou Coal had planned to relocate five villages to make way for mining projects this year, compared with one or two in previous years. 'Since the second half of last year, the schedule has been slipping, I expect the impact will last until early next year,' he said. 'While we have pity on the villagers, they have become more demanding, which has made the situation more difficult for us.' Yanzhou Coal set a sales target of 38 million tonnes at the start of the year, but moved only 16.64 million tonnes in the first half. 'This year, we won't be able to attain the target, and it is difficult to say how much we can achieve,' Mr Wu said. As Beijing seeks to calm rural unrest and close a yawning gap between rural and urban income, farmers have become emboldened to contest forced relocations without fear of punitive reprisals. Yanzhou Coal's strained relations with villagers come as coal prices and industry profits are at their highest levels in the past five years. The company yesterday reported a 53.9 per cent year-on-year rise in net profit to 1.88 billion yuan. But it is having trouble finding enough coal to meet demand. A Beijing-based analyst said the conflict with villagers reflects the firm's imperative to supplement declining reserves, leading it to extract coal even in populated areas. Yanzhou Coal's reserves are equivalent to 15.4 years of production, compared with more than 57.9 years of reserves held by industry leader Shenhua Energy, according to a Deutsche Bank report. Mr Wu said the company normally made a provision for relocation expenses of eight yuan for every tonne of coal it mines, but the scale of this year's relocation efforts meant it had to pay out a total of 22 yuan per tonne in the first half. Relocation costs are normally amortised over a mine's total estimated operating years. Due to uncertainty over higher relocation costs, the company's auditors, Deloitte & Touche, required it to book relocation provisions of more than 200 million yuan in the first half. 'We do not agree with our auditors as we believe the costs should be amortised over the mine's life,' Mr Wu said. 'We will discuss the matter with them.' Daiwa Securities metals and mining analyst Geoffrey Cheng Bik-hoi said the auditors might have also considered that Yanzhou's provisions balance for land subsidence, restoration, rehabilitation and environmental costs had turned negative since last year. 'This raised the question as to whether it understated expenses and overstated profits last year,' Mr Cheng said. UBS analyst Joe Zhang Huaqiao said his biggest concern was soaring costs, especially management compensation, adding that net profit growth came entirely from a 57 per cent rise in the price of coal. Despite a 12.6 per cent year-on-year fall in first-half output, total costs surged 24 per cent. Yanzhou's 2,013-strong managerial staff - relative to a total headcount of 29,674 - enjoyed an 87 per cent compensation rise in the half, Mr Zhang said.