Solid Energy's lignite coal plans dead, all related assets for sale

Mark Ford

State-owned coal miner Solid Energy's plans for a multi-billion dollar new industry based on turning low-grade Southland lignite coal into diesel, fertiliser and burnable briquettes has been abandoned as the company struggles with mounting debts and low world coal prices.

New chairman Mark Ford told Radio New Zealand the company could be profitable again with an improvement in world coal prices, but that the lignite projects were on the block.

"I think that's part of the non-core assets that we will be exiting from," he says in the first announcement that one of the most cherished dreams of former chief executive Don Elder would now be abandoned.

Solid Energy is in talks with its banks and the government over an unsustainably swift rise in its debt burden, which has gone from $300 million at June 30 to $389 million at present – effectively a $10 million a month increase.

Government backing confirmed

Finance Minister Bill English has pledged the government will not allow the company, which employs around 1200 people, to go into receivership, but is not commenting yet on whether a capital injection will be required.

Mr Elder had already announced the sale of loss-making bio-fuels and wood pellet manufacturing when unveiling a $40.2 million loss last year, and had presided over the mothballing of the Spring Creek underground mine, a halt to expansion of the Huntly East mine and the loss of some 450 jobs across the Christchurch-based business.

The news was cheered by the Coal Action Network Aotearoa, which has campaigned against the lignite developments. They were also heavily criticised by Commissioner for the Environment Jan Wright in a report in 2010.

"This was a ridiculous project from the outset: dirty, low-grade coal being turned into a product nobody wanted, digging up prime Southland farmland for coal that would simply end up in the sky, adding to the looming climate crisis," Kristin Gillies, CANA spokeswoman, says.

Mr Ford's announcement suggests Solid Energy's $29 million demonstration briquette production plant at Mataura faces mothballing before it even opens. The plant is close to commissioning, but recent reports suggest a prospective major customer, Fonterra, had already decided against using the materials.

Another possible customer for lignite-sourced urea, fertiliser producer Ravensdown, had also reportedly gone cold on the lignite plan.

The economics of the lignite developments as an export industry were likely to have changed for the worse with the rise of shale gas and oil extraction, Professor Basil Sharp, an energy expert and economist at the University of Auckland, suggested earlier this year.

More staff cuts likely

Mr Ford also suggested there would be more cuts at Solid Energy's head office, a large standalone building that had often attracted criticism for its size relative to the company's coal mining activities and where many senior executives were tasked with bringing to life Mr Elder's vision of a new generation coal and energy company.

"There needs to be a review of what's optimum" for head office staff, Mr Ford told Kathryn Ryan's Nine to Noon show. There had been one such review already, but "we need to review this again".

"If we take it back to just a straight coal production operation, it's a different configuration."

While he saw no prospect of the Spring Creek mine on the West Coast reopening, the open-cast operations at Stockton were "vital to us".

Work under way at present was looking at how to optimise the mix of coals being produced from Stockton and other Solid Energy mines to achieve the best possible prices on a weak world coal market.

He pointed also to improvements in recent weeks for steel demand and the coking coal required to make steel, which is Stockton's primary output.

"The coal price has certainly contributed to the debt, but if the coal price bounces back, the gearing ratio would be quite reasonable. Coal prices are starting to move."

He declined to discuss the performance of the company's previous board and senior management.

However, opposition politicians are attacking the government for allowing years of multi-million dollar salary and bonus payouts to senior executives. Mr Elder turned down bonus elements of his package in the last financial year but was still paid more than $1 million.

Solid Energy had been on the government's list for partial privatisation, although it was the process of preparing the company for sale that revealed the depth of its problems, Mr English said.

(BusinessDesk)

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I'll say it again....management by dreaming....

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The general level of management competence in NZ is extremely low and the people have inflated egos. Bring back the old school where people had their own money at stake and made real decisions. The government has done nothing to improve the Solid Energy management by appointing token "jobs for the boys" board members. What has Mark Ford done that involves his own money. Anybody can run a water monoploy and oversee an Auckland city amalgamation which was always going to happen no matter what. It is easy spending someone else's money.

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Exactly. Surely there's an energy-backgrounded heavy in Australasia that would be better suited to sorting out this pile of coal.. I mean s__t ! Ford sounded p__s weak this morning on RNZ

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Yes, and we are constantly admonished by those, usually with self-serving and vested interests, that if you want top managerial talent then you have to pay a king's ransom to get it. Or else they will simply walk and take their shining magnificence with them elsewhere in the world, to any number of breathless sobbing companies that will enthusiastically snap them up with heartfelt gratitude.

In other words, if you pay peanuts you get monkeys.

Sadly however, in the case of Solid Energy, a king’s ransom in salaries was paid. But they still got the monkey.

And that should be one of the major lessons here, in my view. Rather than a lot of fawning HR PC BS about the brilliance of ‘top talent' we, in fact, need to be a lot more cold, hard and objectively assessing of it. Top talent should not be paid a bonus for doing its job.

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You can't blame Elder et al for the bonuses, as it'll be part of their contract. It is the individual charged with signing off the contract (someone at State Services, I presume) that needs to come under the spotlight

It makes my blood boil to see these obscene amounts of taxpayer money been handed out like there's no tomorrow. What planet do those in charge of the cheque book live on? It's obscene as having Cullen as chairman of NZ Post whose business experience and financial acumen (or lack thereof), almost sent this country broke. It’s this totally absurd and out-of-touch thinking by bureaucrats, which p*sses the poor people off to the core.

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Think you need to blame those in charge of the bureaucrats -- the National Government.

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That's what being a listed company would help to achieve.

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The New Zealand people are ultimately responsible for these ongoing wasteful fiascos by passively voting into office a succession of governing parties that have aggressively pushed through neo-liberal policies that are starting to yield their poisonous fruit in earnest. It could be argued that this was only possible with the (unearned) wealth effect created by 40 years of rising property prices, and especially so since 1990, when prices decoupled completely from traditional price measurement ratios.
Had the property market remained in lockstep with general inflation instead of greatly exceeding it, it is possible that the people would not have tolerated the reforms that began in 1984 and continue to this day. The exodus to Australia, the finance company failures, the Fonterrisation of the countryside and the resulting despoliation of land and waterways, Pike River, the CTV building collapse, salary inflation for (often poorly performing) executives in industry and government but salary deflation for workers, the failures of F&P and Feltex and now Solid Energy and so on and so forth are all direct outcomes of decisions made by National and Labour led governments on the advice of the Treasury department during the past 30 years.

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Most of the directors under whose watch this debacle happened were appointed by the last Labour government. Solid Energy should have been privatized decades ago. There is no reason for the taxpayer to fund government ownership of a coal mining company (or any commercial business for that matter).

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Yes, but failing to remove them is an indirect endorsement. Both sides of the house are responsible for this mess.

I would like to add to your argument that government (and hence taxpayers) should not be exposed to commodity prices or business risk beyond the tax take and royalties. Individual taxpayers can choose to invest in coal, but the government should not do it on their behalf.

At least under a mixed ownership model we have the option to go short (or even).

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Yep... Something like the MOM model is needed for sure.

That... And keep the socialists away from any levers of power and NZinc cheque book.

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Thank god someone noticed this strategy got going under Labour and only fell apart under National. Someone in the Treasury should have noticed, though.

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All the more reason to privatise the whole thing, Clearly, the governments don't know how to run a mining company. Get rid of it before the taxpayers have to foot the bill.

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If they can't run a mining company how are they supposed to run NZ Inc? For god's sake, keep the capitalists away from the cheque book.

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Solid ministers need to refresh the Board but not with political junkies. Look at the rise and rise of NZ Oil and Gas after recent governance changes

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Yes Fresh Blood, I have been very impressed with the new NZOG directors. Share price has gone from 60 to 90 cents plus a juicy dividend. There is no substitute for class when it comes to governance.

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John Palmer was Chair of Solid Energy when most of the decisions that now look awful were made. Time for him to move to the dangerous director list I think.

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Exactly, Tumbler. John Palmer was the chairman as this debacle unfolded. He tries to get Don Elder to take all the heat but the chair is responsible for hiring and firing the CEO and strategic direction. This is a few billion down the dunnie here. And the dummies from Rabo have made him the Rabo NZ chairman! And his record at Air NZ is abysmal. If Palmer is here, I am not there!

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jobs for the boys and girls must stop. Why are these things not advertised? I did not see an application to be chairman!

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More evidence that government should not be running/owning companies. The SOE model was meant to remove ministers from the direct running of these firms but they cannot even be trusted to pick efficient management (note the focus thus far on overheads and non-core assets rather than just the coal price as the cause of the trouble).

And on top of that taxpayers are now going to have to prop up this company when an orderly bankruptcy is the best option.

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Absolutely no external/market focus here. But what would you expect from a mix of politico/academic/bean-counter nerds. No excuse what so ever for not making a profit in energy.. if you understand the business.

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The govt needs to start appointing board members with the skills need to run company's like Solid Energy. Board and management should have had a significant mining and commodity management skill base and a deep understanding of key markets in Asia, and what impacts and drives these economies to successfully run a company like this. Very few people in NZ business have this skill base.
It was well known over the last year that these high coal prices would not last yet Solid Energy continued to push ahead with projects that were uneconomic and with technology that had been proven to be suspect.
The management and board should have focused on reducing overhead mine and operational costs on the West Coast to protect their income stream and maintain profitability and jobs. Costs could easily have been stripped out through more efficient mining methods and logistics to ensure profitability was maintained as coal prices dipped. Again, a right mess created by a board and management that did not focus on the right strategy and identify the issues.

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You can appoint all the qualified people you like, but stupid decisions will still get made when it's not your money at stake. It's the principle of gov't ownership that's fundamentally flawed, not the experience of the management.

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Govt is merely a shareholder, the board determines the company's strategy and approves the projects presented by management. If the board/management does not have the required skills then flawed decisions will eventuate.

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Govt should not own mining businesses, our restaurants or corner dairies or farms. Sell Landcorp now to people who know what they are doing and have a vested interest in success, not collecting director's fees.

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So you call yourself a company operating under the SOE regime but when you go broke ($400 mil) you don't fall over, you get bailed out by a bottomless money pit - what sort of pretend BS game is this?

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I agree. Palmer has not got a great record and it certainly worries one him being NZ chair of Rabobank.

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And along the way they have managed to dis-enfranchise NZ's major customers of coal, Golden Bay Cement, Holcim, Lime producers and NZ Steel while chasing the kudos for high risk R&D, they're supposed to be a coal company.

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This company must not be bailed out by the taxpayer; it's not a strategic asset like power supply and distribution. It should be allowed to fail with assets sold off to stronger, more competent hands. The taxpayer is going to take a haircut anyway as liquidation of Solid Energy assets are unlikely to cover all the debts it has accumulated.

Government bailouts is not capitalism. It's welfare for incompetent friends of the government. The National Party must be removed from office come the next election.

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