26 Sep 2012

Mine could have closed earlier if privatised - former chair

8:10 am on 26 September 2012

Solid Energy's former chairman John Palmer has conceded the coal miner may have closed Spring Creek mine much earlier if it had been partly privatised and avoided heavier job cuts.

The company plans to axe a quarter of its workforce - about 460 jobs - and has mothballed its Spring Creek mine on the West Coast in response to plunging international coal prices.

The action has prompted Prime Minister John Key to say the situation could have been avoided if the state-owned enterprise (SOE) was listed.

John Palmer has been a vocal advocate of selling stakes in state-owned firms. He admits Solid Energy's board has made mistakes, but says mining is a risky sector unsuited to state ownership.

Mr Palmer says the coal miner made investment decisions that included benefits to New Zealand as a whole, rather than what was necessarily best for the company.

"The company has done a number of very good things during that period and ... has been clear that it was ambitious for New Zealand, which is appropriate for an SOE. That, perhaps, is the difference between a SOE and a listed company.

"When things turn down - as the market has very dramatically - there are some costs to that ambition and I think the company is feeling some of that. That's not the same as failure.

"But the question, for example, in relation to Spring Creek is that the mine has been in difficulty for some time. The Treasury and the shareholder have known that for some time, so that's not news.

"The issue is, could the company have been less patient with the financial situation at Spring Creek. Perhaps in a listed company environment it would have been, and that would have meant significant changes and perhaps the closure of the mine may have occurred much earlier."

Mr Palmer says financial markets would have also closely scrutinised Solid Energy's decisions to see whether they stacked up.

"The issue for Solid Energy was, in fact, access to additional capital in order for the balance sheet both to be in a shape that's appropriate for the company and for those projects that we favour to be advanced.

"What you would find in a listed company model is the market would be making daily an assessment about both the appetite for risk and ability of the company to manage that risk. That's a huge advantage over the SOE model."

Some miners are angry at Solid Energy profligacy despite the deterioration in international coal markets but Mr Palmer supports chief executive Don Elder, saying he has done a good job.

Meanwhile, Economic Development Minister Steven Joyce has made a plea for support to fast-track Bathhurst Resources proposed new mine on the West Coast.

Enough demand, says analyst

Miners in Australia and the United States are also taking cutback measures to cope with falling prices.

Coal produced from Spring Creek is selling for about $120 a tonne, but Solid Energy needs to make about $200 a tonne to break even.

While there are no signs of an early price recovery, a resource analyst says there is enough demand to prevent prices from collapsing.

Fat Prohet's David Lennox says prices across the broad commodity groups, particularly in resources, will continue to be volatile.

The chief executive of Straterra, which represents companies involved in New Zealand's mineral and mining sector, says the drop in prices is part of the normal commodity cycle.

However, Chris Baker says the drop in coal has been quite dramatic and exacerbated by the exchange rate.