Prime Minister John Key says the situation with Solid Energy is extremely serious and the Government will have to get involved.
The state-owned company has begun crisis talks with bankers and the Treasury, as it grapples with $389 million of debt in light of plummeting international coal prices.
The company's problems culminated last year in the mothballing of Spring Creek mine on the West Coast and 544 redundancies nationwide in an effort to reduce costs.
Solid Energy chairman Mark Ford is not ruling out the need for a Government bailout, but is adamant that the business is still viable despite its spiralling debt.
However, he said the company is dropping plans for the multibillion-dollar lignite mining project in Southland which was to turn low-grade lignite coal into diesel, fertiliser and burnable briquettes.
Mr Key said on Friday the Government will provide support to the company if necessary.
"Exactly what's required and what happens next is a matter that we need to work our way through, but it's fair to say we're very concerned about what we see and the Government will have to get involved."
While not ruling out job losses, Mr Key said the Government is committed to the mining sector and keeping Solid Energy afloat and the situation was not indicative of any issues in other state-owned energy companies.
"There's a couple of unusual things at Solid Energy. One is, obviously, it's reflecting the coal price and the collapse in coal prices. The second thing is, that they made a number of investments which have proven not to be very valuable, and the Government's been working on that process now for the last couple of years.
"So there are issues there we need to work our way through, but I think they're in a very different sector and quite unique in terms of what we see across the other SOEs."
Company still viable - chairman
Mark Ford took over the helm of the mining firm in November last year and said the difficulties stem mainly from an exceedingly low coal price and investment in non-core businesses such as biodiesel.
He told Radio New Zealand's Nine to Noon programme on Friday he was confident that talks with banks and the Government will find a solution.
"I can tell you after those discussions whether it will require a bailout or not. At the moment we're solvent and trading our way through this but we do need to reposition the company."
Mr Ford said coal will always be a viable business. The company employs about 1200 staff and Mr Ford said future job losses cannot be ruled out, but no decisions have been made yet.
Economist Geoff Bertram of Victoria University warned Solid Energy may not be the last state owned company to end up in financial strife.
He told Nine to Noon that Mighty River Power, due to be put up for partial sale, is racing into "highly speculative" investments to expand the company which exposes it to a lot of risk.
Buller District mayor Patrick McManus said Solid Energy's former board was focused on the wrong thing, and possibly slow to react to what was happening on the world market, and he is pleased the new board is getting back to the company's core business.
Call for Government to put in more money
Community leaders in coal mining areas say the Government must come to the party and put more money into the company.
Grey District Mayor Tony Kokshoorn told Radio New Zealand's Morning Report programme that on top of other job losses in the area, the prospect of more lay-offs at Solid Energy is like a dagger going in again.
He said the company took its eye off the ball when it went into alternative fuels including biofuels and wood pellets and should get its focus back to coal mining.
Huntly ward councillor Graeme Tait said the Government has had a fairly good dividend out of Solid Energy in the past, and it is time it put some money back in.
Peter Haddock who owns an engineering firm in Greymouth said many coasters thought Solid Energy was over-managed and top-heavy, and other private coal companies spent much less on senior management.
He told Morning Report concerns escalated about expenditure and overheads as coal prices began falling.
Labour blames government 'mismanagement'
The Labour Party says the falling price of coal is no alibi for financial problems of Solid Energy.
The Government won't rule out the possibility of mine closures and job losses, or a bailout for the company which it is vowing won't fall into receivership.
Labour's state owned enterprises spokesperson Clayton Cosgrove said government mismanagement is the problem.
He said Finance Minister Bill English and State-Owned Enterprises Minister Tony Ryall could have stepped in years ago, and it's not good enough for them to blame the company's board.
Mr English said Solid Energy's cashflow had been good until six months ago when the international coal market took a downturn.
