Solid Energy shines despite earthquakes
26 August 2011
Solid Energy shines despite earthquakes
In an incredibly challenging year, Solid Energy’s financial result for the year ended 30 June 2011 is a good one, says Solid Energy Chairman, John Palmer.
The resources company’s profit for the year ended 30 June 2011 was $87.2 million, a 29% increase on last year’s profit of $67.8 million. The result was boosted by strong global coal prices and good production performance at Stockton Opencast Mine, Buller. Overall, the company’s operations delivered a strong performance with a Return on Equity of 18%.
At 4.1 million tonnes (Mt) coal sales volumes were up 6% (2010: 3.8 Mt), but less than planned as ship loading issues at Lyttelton, following the June earthquakes, pushed loading of three vessels into the 2012 year. Coal exports of 2.0 Mt were up 19% on last year (2010: 1.7 Mt) and New Zealand sales of 2.1 Mt, in line with last year (2010: 2.1 Mt).
Solid Energy Chairman, John Palmer, says, “This year’s result reflects our strategy of investing in and implementing initiatives to increase productivity, reduce operating costs and improve safety performance. During the year some of these important projects began generating a return on their investment, including the $124 million Stockton coal handling and processing plant.
“We had a record year for drilling, completing more than 136 km (2010: 88 km) in support of our current and future coal operations. On the West Coast alone, we had 15 rigs operating. At Stockton, the new Millerton mining area is producing and we started developing the Cypress extension. In the Waikato, we started construction of a $30 million project for a new ventilation shaft development for the northern extension of Huntly East Underground Mine.
“At year end, we approved construction of a $25 million domestic-scale briquette plant in Mataura which should enter production in 2012. Earlier in the year we started work on our $22 million pilot underground coal gasification plant on the Huntly coalfield. These projects will test the viability of technology to upgrade lower-rank Southland lignites and to access deep unmineable coal seams in the Waikato and will pave the way for other large-scale and more complex projects in future. It will take some years to bring these large potential projects to fruition, but they provide real opportunity to deliver value to the business and create significant benefits for New Zealand.”
Capital expenditure for the year was $115 million (2010: $172 million). Of this, $77 million related to sustaining the business and $38 million to new growth initiatives.
EBIT for the 2011 year was $137 million, up 19% from $116 million in the 2010 year. The main contributors to this result, when compared with last year, were:
prices received, mostly for international coals, increased
EBIT by $84.7 million.
• Increased volumes sold, mainly from Stockton Mine, increased EBIT by $23.2 million.
• Change in product mix with an increased proportion of semi-hard coking coal exported and change in mix of New Zealand sales reduced EBIT by $15.5 million.
• On average, the stronger New Zealand dollar against the US dollar, offset by hedging, reduced EBIT by $26.0 million.
• Taking into account the increased production volumes, cost of sales and other costs increased year on year by $23.5 million. During the year the company continued its aggressive build in capability at all levels to support its strong growth strategy. This included a significant business reorganisation, and creating and filling a number of new positions, to ensure continued delivery of the company’s portfolio of high-value projects in all business areas. At the same time the company continued its strategies to retain people across the business against significant on-going upward escalation of personnel costs, caused primarily by the commodity boom and an overheated mining industry labour market in Australia.
• Our New Developments growth projects reduced EBIT by $21.6 million relative to last year.
Capital Management and Funding: Total assets at year end were $1.13 billion, up $133 million on 2010. The increase is due to a continued capital programme focused on existing operations as well as new technologies to maximise shareholder return and long-term value. Gearing at year end was 30% (2010: 33%). Total debt at 30 June 2011 was $222 million, comprising bank debt of $152 million and Medium-term Note issues of $70 million.
Cashflows: Cashflows from operations were $129 million compared with $86 million in 2010 driven by increased export sales and a 20% increase in international pricing. The positive cashflows from operations were offset by an increase in working capital. While the company continued to manage working capital tightly, the situation at Lyttelton Port of Christchurch, as a result of the earthquakes, meant it was holding abnormally high product inventories at year end.
Tax Expense: Group tax expense reduced by $3.6 million compared to the previous year due to $8.4 million expensed in 2010 upon removal of depreciation on long-life buildings, partly offset by higher tax expense on earnings.
Dividends: Solid Energy paid a dividend of $20 million on 31 March 2011. The Board declared a further dividend of $30 million after year end to be paid on 30 September 2011.
Production: Coal production was up 6% to 4 Mt (2010: 3.8 Mt); production at Stockton Opencast Mine increased 27% to 1.6 Mt (2010: 1.3Mt) despite a very wet winter which constrained mining and delays in opening up the Millerton mining area. However, production was down 24% to 403,000 tonnes (2010: 533,000 tonnes) at Spring Creek Underground Mine as Solid Energy suspended mining for six months to upgrade the mine’s infrastructure following two heatings in early November 2010. Biodiesel production was up 34% to 1.8 million litres (2010: 1.3 million litres) and wood pellets up 53% from 30,000 tonnes in 2010 to 46,000 tonnes as the company’s new Taupo pellet plant completed its first year of production.
John Palmer concludes: “While this has been a difficult year for the business and many of its staff, the company is in a strong position with an on-going pipeline of projects completed or in development that will allow us to increase production in our coal and renewable energy businesses. Over the next one to two years we expect New Zealand sales to remain steady. High international coal prices are expected to continue in the short term, but trend down in the coming year. Subject to international economic conditions, we expect continued steady growth in our businesses.”
PROFIT AND LOSS FOR YEAR ENDED 30 JUNE
Revenue 828,662 689,829
Cost of sales (644,946) (547,581)
Gross profit 183,716 142,248
Other income 2,608 3,568
Exploration, evaluation and development (28,658) (18,976)
Shared services and administrative expenses (42,065) (31,815)
Impairment reversal 1,389 6,290
Results from operating activities 116,990 101,315
Net finance benefit 17,010 16,781
Share of (loss) of jointly controlled entities (6,488) (6,296)
Profit before income tax 127,512 111,800
Income tax expense (40,328) (43,963)
Profit after tax 87,184 67,837