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

Friday 22nd February 2013

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.

The new chairman of Solid Energy, 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 said, in the first announcement that one of the most cherished dreams of the 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.

Finance Minister Bill English has pledged the government will not allow the company, which employs around 1,200 people, to go into receivership, but is not commenting yet on whether a capital injection will be required.

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, which were also heavily criticised by the Parliamentary 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," said Kristin Gillies, CANA spokesperson.

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.

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 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, 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", said Ford.

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. 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, English said.

BusinessDesk.co.nz

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