Australia's Gloucester Coal Ltd. (GCL.AU) Wednesday posted a sharp jump in production for its financial second quarter, but said sales volumes were below expectations as overseas coking coal demand weakened.

Gloucester, which has accepted a A$2.2 billion (US$2.3 billion) takeover offer from China's Yanzhou Coal Mining Co. (YZC), said demand for coking coal continued to weaken as steel producers ran at reduced capacity in the quarter. Coal from its Gloucester Basin and Donaldson operations was cleared in the spot market at lower-than-anticipated prices, particularly Gloucester Basin semi-hard coking coal, it said.

Thermal coal prices were also lower over the period, although demand remained reasonably robust. Management has taken steps to shift the company's production profile to focus on thermal coal, it said, adding that stockpiles were at more manageable levels by the end of the second quarter as deferred deliveries were shipped.

Australia is a top exporter of coking coal and iron ore, both steelmaking ingredients, and demand from China and other rapidly industrializing countries has climbed in recent years to send prices soaring. Steel companies, however, slowed production late last year as China's economic growth cooled and concern grew over Europe's economic health.

Gloucester said it produced 1.1 million metric tons of coal in the three months through December, compared with 451,000 tons a year earlier. The company has made a number of acquisitions over the past year, and plans to increase production to more than 12 million tons in less than 10 years.

Output from the Gloucester Basin operations increased 24% to 541,000 tons, while the Donaldson operations bought last year contributed 427,000 tons and the Middlemount venture jointly owned with Macarthur Coal Ltd. added 157,000, it said.

Mining giant BHP Billiton Ltd. (BHP) earlier this month said its volumes of coking coal from Australia's eastern Queensland remained below capacity in the December quarter following flooding across the state early in 2011, and rolling strikes at several mines. Rio Tinto PLC's (RIO) production of hard coking coal in Australia was 2% lower on the year for the quarter, and semi-soft coking coal output down 7%.

Gloucester in December agreed to a takeover by Yanzhou's Australian subsidiary, Yancoal Australia Ltd., in a deal that will create one of the country's largest listed coal producers. The takeover, which has been accepted by Gloucester's 65% owner Noble Group Ltd. (N21.SG) of Singapore, will allow Yanzou to fulfill an undertaking given to the Australian government to list its Australian activities on the ASX, a condition of its acquisition of coal miner Felix Resources in 2009.

-By Robb M. Stewart, Dow Jones Newswires; +61 3 9292 2094; robb.stewart@dowjones.com

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