UK coal producer seeks state loan to fund mine closures

(Adds Drax comment, background)

LONDON, April 3 (Reuters) - UK Coal, Britain's largest coal producer, has applied for a 10 million pound government loan to help fund the closure over the next 18 months of its two deep mines which employ around 1,300 people.

The coal miner was placed in administration last year after struggling with rising costs, hefty pension liabilities and strong competition from cheaper imports.

Its business has deteriorated since due to a flood of U.S. coal onto the market because of the development of shale gas there, and the strength of sterling, resulting in the company's decision earlier this week to close the two mines.

The government is due to decide on Monday whether it will hand a 10 million pound commercial loan to UK Coal, a source familiar with the discussions said.

The state loan would complement a combined 10 million pound loan promised by rival coal producer Hargreaves Services (Frankfurt: A0HMDY - news) and regeneration company Harworth Estates, the source added.

If the parties do not agree on the loan package the mines are likely to close immediately.

The government also said it was in discussion with the European Commission regarding support for UK Coal, without providing further details. The 20 million pound package would enable the group to pay its customers, suppliers and employees over an 18 month period.

The Commission can block state aid in European Union countries when there is a risk it could distort market competition.

Prime Minister David Cameron said his government was willing to do what it could to help the company.

"If there are things we can do, bridging finance we can make available, then we will look at that very, very closely," he told BBC television.

Earlier this week, UK Coal started redundancy consultations with staff at collieries in Thoresby in Nottinghamshire, which employs 600 and Kellingley in Yorkshire with 700 employees.

The closure of the two mines will leave Hatfield Colliery in South Yorkshire as Britain's last remaining open pit mine.

UK power producer Drax, which is UK Coal's biggest customer, said it had already increased coal imports from countries such as the United States, Colombia and Russia as UK Coal's output has been declining.

"If there was a situation in the future (of UK Coal ceasing operations), we could manage," said a Drax spokesman, adding the company would be able to import more coal from elsewhere.

Last year 280 UK Coal employees lost their jobs when its largest coal mine at Daw Mill shut after being crippled by fire.

In 2012, UK Coal produced over a third of Britain's domestic coal supply but its operations have been increasingly under pressure from international competition.

Britain's coal-fired power plants were producing around 40 percent of its electricity on Thursday, grid operator data showed.

Britain's coal industry was at the heart of its economic growth in the early 20th century when it employed around 1.2 million people at nearly 3,000 collieries.

Since then, competition from other coal markets where it can be produced more cheaply and greener energy alternatives to polluting hydrocarbons have contributed to Britain's declining coal industry.

Last year, British coal production fell to the lowest in at least 15 years at 12.8 million tonnes, less than a third of what was still being produced in the late 1990s. (Reporting by Karolin Schaps and Kate Holton; additional reporting by Guy Faulconbridge, Editing by Belinda Goldsmith and David Evans)