Brian Gaynor: Miner’s end leaves taxpayers in a hole

The sale of Solid Energy’s remaining operating coalmines terminates the Crown’s 114-year involvement in the coal industry.

The sale has been greeted positively by the company, with its press release noting that participating creditors “should see a return of approximately 60 cents in the dollar compared to the estimated 20 cents that creditors would have received if the company had gone into liquidation in September 2015”.

This is an incredibly positive spin on the woeful performance of the company over the past five years. Its disclosure has also been inadequate; taxpayers are entitled to far more information on the company’s asset sale process, particularly the price it received for its mines.

Coal was first mined in New Zealand in the 1830s at Shag Point in Otago, with the first recorded coalmine at Saddle Hill near Dunedin.

Numerous mines were opened in the second half of the 19th century in the Waikato, Buller, West Coast, Otago and Southland. More than 130 mines operated in the Greymouth area after Thomas Brunner discovered coal there in 1848.

National output increased dramatically in the late 1800s, from just 165,000 tonnes in 1878 to 1.1 million tonnes in 1900.

The Crown entered the coal sector in 1901 with the establishment of State Coal Mines. The new government department opened its first mine at Seddonville in the Buller region in 1903, but most mines remained in private ownership through the early 20th century.

Total production peaked in 1945 at 2.9m tonnes, but after the war production stabilised and profitability declined. Many mines closed while others were acquired by State Coal Mines, mainly to ensure a cheap supply of coal and preserve mining skills in traditional mining areas.

By 1950, State Coal Mines was New Zealand’s largest coal producer but many of its operations were uneconomic.

In 1986, when total national output was 2.5m tonnes, the Crown entity reported a trading loss of $76 million and had interest-bearing debt of $600m.

An industry study, financed by Coal Research, estimated that it cost $160,000 a year to keep each State Coal miner employed.

In 1987, State Coal Mines was corporatised and became Coal Corporation of New Zealand Limited. The new company’s main aim was to operate as a commercial business, whereas State Coal Mines had central energy planning, regional development and employment objectives.

In 1997, when Coal Corporation was renamed Solid Energy New Zealand, it was 100 per cent Crown owned and produced two-thirds of New Zealand’s coal from 10 mines.

Solid Energy underwent a massive transformation after Don Elder was appointed chief executive in May 2000. Elder was born in Christchurch and educated at Christ’s College before attending Oxford University on a Rhodes scholarship.

The miner achieved a huge increase in output under Elder’s stewardship. This was a major contributor to the surge in national coal production from 2.1m tonnes in 2000 to an all-time high of 4.3m tonnes five years later.

But Elder had a bigger vision for Solid Energy: he believed the company should play a major role in New Zealand’s total energy development, not just coal.

The company’s 2009 annual report noted that the New Zealand economy “depends on energy to survive and thrive” and “Solid Energy is committed to making these energy resources available to support New Zealand’s increased economic prosperity and standard of living”.

As part of this total energy strategy, Solid Energy invested in biodiesel, coal seam gas, lignite gasification, a briquette plant, wood pellets and renewable energy. Most of these investments were financed through borrowed funds.

The energy company hit the proverbial brick wall in its June 2013 year when coal prices slumped and revenue plunged from $978.4m the previous year to $631.1m. The company reported a net loss after tax of $335.4m, which included impairment charges of $215.3m.

These impairments included writedowns in the value of the Stockton, Spring Creek and Huntly East mines as well as the company’s briquette plant, coal seam gas operations, biodiesel, lignite and other assets.

Interest-bearing debt had soared from just $15m in June 2007 to $399m, operating leases from $5m to $93m, while total equity had plunged from $342m to only $92m over the same six-year period.

Meanwhile, the number of employees paid $100,000 or more soared from 130 in 2006-07 to 472 in 2011-12 and 554 the following year, including redundancy payments.

The coalminer was in serious trouble and in October 2012 creditors agreed to a debt rescheduling compromise.

The next three years can be summarised as follows:

• The company’s coal production slumped from 3.9m tonnes to 3.3m tonnes in its June 2014 year, revenue declined from $631.1m to $449.2m and it reported a loss of $181.9m after an impairment charge of $110.6m. Asset sales of $39m included non-core land, the briquette plant and wood pellet business. 

• In 2014-15 coal production declined from 3.3m tonnes to 2.8m tonnes, revenue from $449.2m to $369.8m and the company recorded a net loss of $176.7m, including a further $256.6m of impairments. Solid Energy went into voluntary administration on September 17, 2015 because of potential problems in meeting its debt repayments when they became due. 

• Coal production slumped again in the June 2016 year, from 2.8m to 2m tonnes, and revenue declined to $230.6m. The coal miner reported a net profit of $94.7m but this included a positive contribution of $250.1m from the write down of its participant debt from $385.6m to $135.5m. 

In October 2016, Solid Energy announced the following mine sales:

• The New Vale and Ohai coal mines in Southland would be sold to Greenbriar, a private Dunedin-based company. 

• Agreement had been reached to sell the West Coast Strongman and Liverpool mines to Birchfield family interests. 

• BT Resources, a 35/65 joint venture between the Motueka-based Talley family and ASX-listed Bathurst Resources, would purchase the Stockton export coal operation and the two Waikato mines, Rotowaro and Maramarua.

No sales figures were given, a characteristic that is consistent with Solid Energy’s poor disclosure regarding its assets sales and balance sheet restructurings. As well, the last interim report on its website is for the six months ended December 2013.

The Greenbriar and Birchfield agreements were settled in April and the Reddale Mine, Burkes Creek washery and related Reefton assets were sold to Christchurch-based Moore Mining in August. Once again, no sale price was given. 

Finally, the Talley/Bathurst Resources sale was finalised on August 31, ending the Crown’s involvement in operating mines that started in 1903 at Seddonville.

Solid Energy is now on track to complete its remaining administrative activities by December, prior to the company going into solvent liquidation by March 2018.

Solid Energy’s demise is a sad reflection of the Crown’s governance of commercial businesses. The company has been impacted by the decline in coal prices, but probably would have survived if it hadn’t adopted a debt-fuelled expansion strategy under Elder’s stewardship.

Taxpayers will effectively receive nothing for their 114-year investment in the coalmining sector.

By contrast, the Talley/Bathurst Resources joint venture has revealed that it paid $38.4m for the Stockton, Rotowaro and Maramarua mines, with an additional contingent payment of up to $50m over the next four years.

An ASX release indicated that these mines are forecast to achieve operating earnings of $65m-$82m in the current financial year.

These figures clearly indicate that Solid Energy can be added to the list of Crown asset sales – a list that includes Bank of New Zealand and Telecom – where purchasers have received a far better deal than taxpayers.

Brian Gaynor is an investment analyst and the Executive Director of Milford Asset Management.