Caution, communication lacking at Solid Energy
Taxpayers have got what may be as a good an explanation as they are going to get over what went wrong at Solid Energy.
Auditor-General Lyn Provost blamed poor communication and a failure by the company's board to consider "worst-case scenarios" for the unravelling of the state-owned miner.
Solid Energy has slashed more than 800 jobs, half its workforce, and required a $100 million lifeline following a steep slump in coal prices in 2012.
However, several MPs questioned whether the auditor-general's report, presented today to Parliament's commerce select committee, delved back far enough in time to get to the heart of the matter, saying over-optimistic valuations of the business had led Solid Energy to take too many risks and take on too much debt.
Solid Energy's board upped its estimate of the value of the business by 15 times in 2008, from $500m to $7.8 billion, triggering Treasury officials to express "significant concern" to ministers in a May 2008 briefing paper.
However, Provost said that was outside the scope of her inquiry, which, because of resource constraints only looked back over the last five years of the company's history. Labour MP Clayton Cosgrove said he advised the office to look back further.
The auditor-general's office sector manager Andrea Neame said Solid Energy had had a better track record than more pessimistic financial analysts in forecasting the price of coal before the crisis, but its board failed to plan for the worst-case scenario of the price drop that occurred in July 2012.
Solid Energy's managers did not provide enough information to its board about the company's "underachieving" $34m investment in a wood pellet fuel plant in Taupo, she said.
"Solid Energy did not in our view carry out enough risk analysis about the wood pellet target market nationally or internationally, nor did the company sufficiently consider the ongoing operational costs of the plant."
Provost said the lessons included:
* Clear communication was important between shareholders, the board and management.
* In risk management, you needed a "sceptical mindset and not to take too much of an optimistic view".
* The need to have people with relevant industry expertise in management and on the board.
Between 2008 and 2012, Solid Energy had only one board member and one senior manager with mining expertise despite its efforts to find more, she said.
However, Neame said Solid Energy's board was given enough information and understood the risks of its $128m investment in a coal processing and handling plant at its Stockton mine, which Provost described as "critical" to Solid Energy's performance.
Solid Energy had not sat on its hands after the coal price slump in 2012, she said.
"It is not fair to say that nothing was done," she said.
"They actually did quite a lot."
Accountability for the performance of a company lay with its board of directors, she said.