Solid Energy faces more losses as global coal prices stays capped

Thursday 6th March 2014

Solid Energy, the state-owned coal miner, faces more losses as it contends with muted coal prices on a global market that's been flooded with product from the US and Australia amid dwindling demand from the likes of China.

Acting chief executive Garry Diack told reporters in Wellington the state-owned enterprise will take between 12 months and 18 months before it gets close to a breakeven result as it overhauls the business after ambitious growth plans failed under the previous leadership team.

"With the restructuring we've done, we're running basically plus or minus on the cash breakeven business, if we can sustain that, which I believe we can for the next 12 to 18 months, I think we'll be okay," Diack said. "The business has a future. It's highly volatile. It's exposed to the international coking coal market which has gone up and down consistently over 10 to 15 years. If that volatility continues to run, it's a challenge for the business."

Solid Energy appeared before Parliament's commerce select committee today for its annual review, led by deputy chair Pip Dunphy, who was standing in as interim chair for Mark Ford, who stepped down last week for health reasons.

Last week the SOE reported a net loss of $40.9 million in the six months ended Dec. 31, down from a loss of $318.2 million when it wore impairment charges of some $222.7 million, saying weak coal prices were still weighing on the business.

Solid Energy head of marketing and strategy Bill Luff told the committee the coking coal market, which is the SOE's biggest export exposure, has strong prospects with growing capacity in India and the chance of a new steelmaking business in Vietnam coming on as a customer.

"If you take all the noise out of the short term, the coking coal price should be somewhere about US$200 (per tonne) by 2021. That's in today's dollar," Luff said. "We believe there is some firmness. Right at the moment the dynamics are that there are excess volume coming out of Australia, excess volume coming out of the US and demand is quite weak, particularly in China."

The company expects little or no upward movement in coal prices in the next 12 to 18 months, before oversupply is removed from the system and prices rise to US$200 a tonne over the next five or six years, Luff said. The monthly average price in the six months ended Dec. 31 was US$135/tonne.

Last week, Solid Energy said it hadn't drawn down on either of two $50 million working capital facilities made available by the government as part of last year's restructuring package to reduce the miner's bank debt.

Diack told reporters today the company doesn't anticipate drawing down on them at this stage and would prefer to avoid doing so.

"If the current coal price at spot level converts into contracted payment at that level the chances are we will need to draw on some form of them," he said. The global coal price would have to rise back to about US$150/tonne for the company to avoid drawing on the facilities.

Interim chair Dunphy told the committee the company is under intense monitoring from both the government and its bankers, and that "the tolerance around any variation to our forecasts is very small."

BusinessDesk.co.nz

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