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Solid Energy prepares for more job cuts at Stockton

11 Mar 2015

State-owned coal miner Solid Energy is preparing for more redundancies at its Stockton mine, near Westport, as slumping global prices for coking coal threaten its long term viability and force it anew into talks with its banks to restructure its borrowing.

Plans under way to stem those losses were in preparation and "reductions will be inevitable on the basis of those plans," chief executive Dan Clifford told parliament's finance and expenditure select committee at the company's annual review hearing.

Staff were being kept informed of the company's difficulties and decisions were "not a matter of days or of double digit months," Clifford said.

In an hour-long grilling by MPs, acting chair Andy Coupe would not speculate on whether the company might fail, but said there were "a number of potential outcomes" from current discussions with its banking consortium and that Solid Energy was "expecting no further support from the Crown."

Finance Minister Bill English yesterday questioned whether Solid Energy remained commercially viable.

Clifford told the committee the company was running $30 million ahead of plan on a cash operating basis, thanks to cost-cutting already undertaken, which had rendered it "neutral or slightly negative" on an earnings before interest, tax, depreciation and amortisation basis, compared with negative Ebitda forecasts previously.

However, a substantial full year statutory loss is still forecast and Coupe confirmed the board had sought advice, but had made no decisions, on options to sell parts of the business.

The North and South Island domestic thermal coal operations were profitable and capable of sale, although they had constrained growth potential because there was no growth in demand for coal in New Zealand and imported coal competed with local product.

"The export business would be the most difficult," said Coupe, who said that indicative valuations for the parts of the business had been sought, but that no sale agent had been appointed. Solid Energy has said it risks breaching its banking covenants in September 2016

"There are no immediate cashflow problems and marginally positive equity," said Coupe. "But it's unlikely to be enough to overcome the September 2016 issues. My view is that we cannot see the refinancing of our debt facilities is realistic absent a restructure of our liabilities."

The government helped bail out Solid Energy in 2013 with $130 million of preference shares and a funding line for operations in a deal that saw taxpayers treated as secured creditors and forced banks lending to Solid Energy to take a $75 million collective writedown and become unsecured creditors of a company that lost $517 million in the previous two years after global coal prices fell dramatically.

That exposed the fragility created by heavy, debt-backed investment in experimental new fuels, none of which were profitable and all of which have now been closed or sold. Just ahead of the general election last September, the government also extended a $103 million indemnity to Solid Energy to cover the cost of remediating mining sites in the event they were abandoned, to shore up its balance sheet further.

However, ongoing poor trading conditions saw Solid Energy announce on Feb. 27 it risked breaching its banking covenants in 2016, based on current forecasts of coal prices and commercial performance, and a need to engage again with its bankers on a restructuring.

That announcement came three days after the sudden resignation of the previous chair, Pip Dunphy.

Coupe said restructuring and cost-cutting had reduced Solid Energy's breakeven price for coking coal by around US$20 per tonne to between US$120 and US$130 per tonne. However, coking coal is currently selling at US$103 per tonne on global markets and the company is basing its plans on a price in the year ahead of US$110 a tonne.

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