13 Aug 2015

Solid Energy expected to go into administration

10:03 am on 13 August 2015

State owned mining company Solid Energy is expected to announce today it will go into voluntary administration.

Solid Energy's headquarters.

Photo: RNZ / Conan Young

The company will then set up a two-and-a-half year business plan during which the profitable parts of the company will be separated out and sold as going concerns.

When this process is finished, the remains of the company - one of New Zealand's oldest state owned enterprises - will be consolidated into a rump body which will probably be closed down.

The scheme will be unveiled to staff at 11am at four meetings this morning; on the West Coast, Southland, Waikato and elsewhere.

A formal announcement will then follow at a press conference in Christchurch at noon.

The company is understood to believe this is the best way it can save itself from the weight of a debt worth $320m.

Going into voluntary administration means all creditors, not just the banks, will be put onto an equal footing.

It also means worker entitlements such as redundancy will be protected from legal restrictions.

The scheme could see particular mines continue to be operated, probably under new ownership, even as the original parent company shuts down.

Money from any sales of mines would be used to pay off debts, but it is unclear whether they would raise enough to meet the $320m total of gross debt. The scheme could see the banks and the Crown both take a haircut.

Investment analyst Brian Gaynor of Milford Asset Management told Nine to Noon that if the company went into voluntary administration, it would be likely to stay in New Zealand hands, and the government would still have some control over the future of the company.

Digger loads up a truck at Stockton Coal Mine.

Digger loads up a truck at Stockton Coal Mine. Photo: 123RF

The latest crisis is the third in three years for Solid Energy, and another decline in the long history of New Zealand mining.

This country is rich in coal. Most of it is relatively young - 30 to 70 million years old - and quite a lot of it is hot-burning coal suited to steel making.

Europeans began digging for coal in the 1840s and by the end of the century, companies - especially on the West Coast - were producing over 2 million tonnes of coal annually.

They hired a great many workers, many of whom became pioneers in New Zealand's trade union and Labour Party movements.

In the 1940s, the first Labour Government nationalised large numbers of mines to create publicly owned state coal mines.

By 1960, New Zealand produced 3 million tonnes of coal a year, but the industry went into decline, and the numbers of workers shrank. Mines also made big losses and by the mid 1980s many were being kept alive by subsidies from the taxpayer.

However the state mines were made into an SOE in 1987, re-named Coal Corp, and then re-branded as Solid Energy.

Production picked up and reached 5 million tonnes a year by 2003.

Much of this was used domestically for the steel, electricity and dairy industries. But a lot was exported to India, China, Japan and South Africa.

Huge trucks move high-grade coal from a stockpile at the Stockton Mine near Westport.

Huge trucks move high-grade coal from a stockpile at the Stockton Mine near Westport. Photo: 123RF

Solid Energy was successful, earning $94m after tax in 2007 and $68m in 2010.

But it also launched some costly investments in that time.

These included biofuel farms, a coal-to-gas conversion scheme, wood pellets and large areas of farmland bought in Southland for future brown coal or lignite mining.

Coal price collapse

Then, during the global financial crisis, the price of coal collapsed on world markets to about a third of its previous level.

The company had borrowed from the banks to fund expansion during the good times, leaving a dangerous debt overhang which could not be funded from earnings when times got tough.

In 2013, Solid Energy went through the first of a series of September crises, when it ran into trouble paying the interest on its debt.

In a deal two months later, the banks took a $75 million haircut, but won preference shares in return.

The Government also got preference shares in return for a $25m grant and made $100m available to the company as a loan.

A year later, the crisis returned.

This time, the Government made $103m available to Solid Energy in a complex arrangement which was actually an indemnity against the cost of restoring mined land to its previous condition.

This also ensured there was enough equity in the company to outweigh its debts.

Now, the third September crisis is upon the company.

Once again, it can't pay its debts and so the Board of Directors has declined to sign off on the accounts.

This time, the Government has said there is no more public money, leaving today's announcement the best of several unpalatable alternatives.