State miner to return to coalface

MARTA STEEMAN
Last updated 05:00 23/02/2013

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The causes of the financial crisis at Solid Energy are the usual suspects in failing businesses - too much debt, unsuccessful investments and no reserves to weather a slump in coal prices.

Prime Minister John Key's comments yesterday indicated these problems and pointed the finger at an imprudent amount of debt and investments that have not returned any cash yet.

Key said the debt had climbed to $389 million when "typically coal companies do not have a lot of debt on their balance sheets".

His comments also suggested the Government had been unhappy with the investments for a while.

"The second thing is that they made a number of investments which have proved not to be very valuable and the Government has been working on that process for the last couple of years."

Key made his comments in Christchurch after the memorial service for the second anniversary of the February 22 earthquake.

He promised the public would be told the reasons for the near collapse of the state-owned coalminer in time.

"As part of that process, people obviously want to understand what went wrong and why and who is responsible. All of that information will be brought into the public domain and people will be able to assess that for themselves," he said.

To questions about $23m of bonuses at Solid Energy in the past couple of years, Key said that was a matter for its board.

Asked if chief executive Don Elder was to blame, Key declined to point the finger.

Elder has been the champion of technologies that would convert Southland's vast lignite reserves to fuel and other technologies extracting gas from coal. The company spent more than $200m over a decade on these and on two renewable-energy businesses.

Elder marketed that as Solid Energy becoming an energy business and not just a coalminer.

Key said: "In a few weeks time we will be in a position to understand what the Government needs to do to stabilise Solid Energy."

Solid Energy has also spent a lot on two underground coalmines but the costs of such operations are high and coal prices too low for one of them to remain open. Spring Creek on the West Coast has been mothballed and Huntly East in Waikato scaled back. Its debt started to balloon from 2009 and is now at $389m.

New chairman Mark Ford said the new board of directors had decided the non-core investments could not be kept. All non-core investment were up for sale.

The new board was taking the company back to being a "pure coal" operation.

But the mining operations would also change. Advisers had told him there were better ways to run them to save money.

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"And that doesn't mean just extending hours and cutting pay, it's technologically better, workplace rotations, better blending (of coal). A whole series of improvements could occur."

He added: "In the end, it's the non-core that will suffer and the overheads, the head office and those sort of people."

Ford promised management would consult with unions over changes at mines. "It's got to be collaborative," he said.

"Staff are not just commodities you trade, they are real people and I have to look after those people."

While coal prices were beginning to recover, they would not get back to the previous highs and the new board would run the company "conservatively".

Solid Energy had high-quality coal assets but some of them were in difficult places to extract it. The question was whether coal prices were compensation enough for that at some mines.

He said Elder had not received a "golden handshake" and, when Elder resigned he was paid out according to his employment contract which the board was obliged to do.

FOR SALE

Lignite projects. Over the past decade Solid Energy has researched the feasibility of turning Southland's vast lignite resources into fuel.

One of the assets is a $29 million briquette demonstration plant at Mataura.

Coal-seam gas developments. Extracting gas from coal for fuel. Underground coal gasification intellectual property.

Extracting gas from coal where the coal is deep underground. Hundreds of hectares of farmland in Southland.

Solid Energy leases the land to dairy farmers at the moment. Wood-pellet manufacturing plant near Taupo.

COSTS

Capital spent on Huntly Underground Coal Gasification pilot plant, coal seam gas developments and Mataura domestic-scale briquette plant is $75 million. No cash return yet.

Cost of buying Southland land is $77 million. Land is leased.

Lignite investigations are $6.9m.

Capital spent on renewable energy projects is $70m. Source: Solid Energy

- BusinessDay.co.nz

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