Solid Energy told to prepare for sale despite damning scoping study

Treasury first advised the government in June last year to place Solid Energy into “intensive monitoring status” amid its financial troubles.

The report, sent to state-owned enterprises minister Tony Ryall, said mining company’s performance had deteriorated sharply over the last few months as a result of a significant fall in international coal prices.

“This fall has put the company in a position that if it does not take significant action, it will be in a loss-making position in the next financial year,” it said.

Despite the study, Mr Ryall still wrote to company chairman John Palmer in December 2011 asking that the company be prepared for partial sale and that it would be an “important focus for the coming year and would involve Solid Energy continuing to work closely with Treasury and its advisors”.

Treasury has today released 52 documents detailing the lead up to the company’s current woes, dating back to a meeting on August 17, 2006, with Trevor Mallard, the then Labour minister for state-owned-enterprises.

Take at least 12 months

While the list of documents does not include the UBS scoping study carried out in 2011 when preparing for the partial sale, Treasury’s summary shows it noted a Solid Energy restructure would take at least 12 months.

The study recommended a detailed review of head office costs in order to identify the company’s cost structures compared to Australian coal mining companies.

Solid Energy was ruled out of the government’s planned partial asset sales programme after the UBS study revealed the company was facing a $389 million debt.

It recommended Solid Energy have no debt at the time of the initial public offering.

“The majority of listed Australian coal companies have positive cash balances because of the inherent volatility in coal mine cashflows and the substantial cash requirements for new mine developments,” the report said.

It also concluded retail investor participation in New Zealand and Australian coal companies is lower than in sectors which are inherently more stable. The retail composition of the Pike River share register, before the company’s collapse, was just 23%.

Treasury’s recommendation to move to intensive monitoring suggested:

• Requiring the company to move to monthly reporting from quarterly.
• Requiring the company to meet with Treasury monthly to discuss their reports.
• Noting there would be additional scrutiny of the financial data supplied to the Treasury.

It also said it was concerned about proposals by management to reduce capital expenditure, markewt additional coal domestically, sell assets and possibly seek an equity injection.

Might not be effective

“Treasury has some concerns that proposed actions might not be effective. Solid Energy has struggled to demonstrate cost control in the past. There may not be any appetite domestically for increased coal supply and asset sales will be difficult in the current market,” the report said.

The documents released today also make it evident the company’s financial woes became apparent as early as the August 2006 meeting with Mr Mallard.

At the meeting, Solid Energy ceo Dr Don Elder and former chairman Tim Saunders detailed the troubles with Spring Creek Mine after a feasibility study earlier that year. It showed Spring Creek would not be economically feasible after January 2007.

Weak global coal markets saw the company put the West Coast mine into care and maintenance last year, resulting in 220 redundancies.

In August 2006, Solid Energy bosses had identified two major issues facing the company: the sustainability of high international coal prices and the difficulties of accessing economically viable coal reserves.

“Coal prices are particularly crucial to Solid Energy because its mines are small and its cost of mining high. Even at today’s high prices, some of these mines are marginal,” the ministerial briefing said.

It was a similar story to Solid Energy’s business plan delivered to ministers on June 29, 2007, when it outlined the two main issues were the “deteriorating short-term performance of core coal mining activities and the development of risk, but potentially long-term value enhancing, alternative energy activities”.

A planned $130 million investment between 2007 and 2010 included $31 million in Southland lignite land purchases, $38 million on a small-scale underground gasification plant, $55 million in coal-to-gas activities and $39 million in bioenergy.

Mr Mallard and the then-minister of finance Michael Cullen, along with their associate ministers, were told dividends during that period would be reduced to nil to support capital investment.

bcunningham@nbr.co.nz