Chairman Mark Ford's opening remarks to Commerce Committee
Chairman Mark Ford's opening remarks to Commerce Committee (Parliamentary financial review)
7 March 2013
• We recognise that the focus of this Committee is the 2012 year; however we also recognise that since year end Solid Energy’s current financial position has further deteriorated and is now a matter of wide public concern.
• For the year ended 30 June 2012, Solid Energy’s results were:
o an underlying operating performance (after tax) of $99.7m (2011: $86.2 million)
o a net loss of ($40.2m) (2011 : profit of $87.2 million)
This negative result reflected a $149.2 million write down of carrying value of our assets in the face of a softening of international prices for coal. At that time the company was carrying $295 million in debt (42%) from borrowings (bank and bonds) (2011: 30%).
• Since that time there has been a 38% fall in global coal prices with the hard coking coal price falling from a peak of US$224/tonne in June 2012 to a low of US$140/tonne in September 2012.
• To put this in perspective Solid Energy’s total revenue is forecast to fall from NZ$978 million in 2012 to NZ$645 million in the current financial year, a drop of NZ$333 million (or -34%) on only marginally smaller coal volumes.
• With this level of debt and the need to fund a potential $100 million cash deficit for this year, it was clear to the Board that the company could not carry on as it had in the past.
• As a response the company embarked on a major restructuring plan in the first half of the current financial year which had
o Spring Creek Mine placed in care and maintenance
o Huntly East Mine development halted and the workforce reduced.
o Capital expenditure reduced by about $100 million by cancelling or postponing most of Solid Energy‘s discretionary capital investments and development programmes.
o The workforce restructured, with a 50% reduction in corporate, support services and development jobs from 313 to 151, which together with the redundancies at Spring Creek and Huntly East Mines has resulted in a 25% reduction in employee numbers (from 1658 at end of June 2012 to 1210 at the end of February 2013).
o Initiatives put in place to optimise production and minimise costs at Stockton Mine to generate additional profits and cash.
• The impact of these changes will mean the underlying operating performance of the company will be breakeven in the 2013 financial year.
• In the face of this revised strategy and the current financial situation the Chief Executive Officer, Dr Don Elder resigned on 4 February 2013 and an Interim Chief Executive (Garry Diack) was appointed while we conduct an international search for an appropriate CEO to lead this strategy for the company.
• Late last year the existing Board was largely restructured and in January this year the Board reset the company’s focus.
• The company’s focus is now on conventional coal mining and involves:
o the business concentrating on coal development and mining, selling coal to international and New Zealand markets
o exiting all investments in renewable energy technology and products
o exiting all commitments to long-term technology-based coal developments that require on-going capital and/or cannot demonstrate positive value to the company within the next 12 months (underground coal gasification, coal seam gas, coal to fertiliser and other lignite investments)
o significantly reducing the cost base of the business to reflect a smaller, less complex coal operations company (reductions in overhead costs in head office and in some of the large mines)
o moving to a business model that materially reduces the cost of coal production
• We expect this approach to restore the company to profitability in the 2015 financial year based on a very conservative view of future coal prices.
Current Financial Situation
• As a result of this strategic change, as well as weak forecast coal markets, the company is likely to recognise significant further write-downs in the carrying value of its assets within the half year ended 31 December 2012.
• The balance sheet currently contains about $390 million of debt which is currently being reviewed.
• It will take 12 to 18 months to restore an acceptable level of underlying profitability, and it will need to be supported by external funders to achieve this.
· Treasury and the company’s banks are progressing discussions aimed at securing the necessary interim support for the on-going operation of the company required for the next three to four months. This will allow a full analysis of the company’s on-going future strategy and funding requirements to be completed and changes implemented. This discussion reflects a strong level of support for the company from its banks and the Crown.
• At this time we are unable to provide definitive financial results as to the net position of the company at 31 December 2012. On an operating basis however, and before the extraordinary costs of restructuring, the company will recognise a modest underlying operating surplus of $3.5 million for the half year ended 31 December 2012.
• Solid Energy’s performance has not been acceptable over the last period. It is with regret that the company has been forced to seek the support of the Shareholder for a return to profitability.
• We have a new Board and new executive leadership. This is a different company from that of the reporting year and we believe that with the support of our Shareholder and funders a return to profitability is both possible and likely in the near future.