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Solid Energy responds to very tough market

29 August 2012

Solid Energy responds to very tough market

Solid Energy has today outlined a number of strategic and structural change proposals in response to the impact of the extremely challenging global coal market on its business.

The changes are designed to absorb the impact of the global coal market downturn by introducing operating efficiencies to preserve and generate cash, while retaining core capability and future options for growth.

The company plans to narrow its business scope and development pipeline down to the best business opportunities by reducing its exposure to underground coal mining to concentrate on lower-cost opencast coal mining – both conventional and using conversion technologies – and underground coal gasification to harness the energy from deep coal seams.

The main proposals announced today are:
• Ceasing further capital investment in upgrading ventilation at Huntly East Mine in Waikato and working with a reduced mining team. This will see the mine’s staff reduce from 234 positions to 171, while about 60 mainly contracting roles will go at the mine’s ventilation upgrade project.
• Suspending operations at Spring Creek Mine while the company completes a review involving many complex issues and interaction with different stakeholders. Solid Energy will advise the outcome of this review as soon as possible.
• Optimising production and minimising costs at Stockton Mine to generate additional cash.
• Selling or closing its biodiesel business, and confirming the Nature’s Flame wood pellet business’ status as a stand-alone operation.
• Shifting the focus to move, more rapidly, to commercial underground coal gasification projects in Huntly and overseas, utilising funding from partners or syngas customers.
• Shifting the focus of coal seam gas development to the company’s Taranaki holdings.
• Reducing capital expenditure by approximately $100 million in the current 2013 financial year by cancelling or postponing most of the company’s discretionary capital investments and development programmes.
• Restructuring the organisation to meet the needs of the refocused business, expected to result in about 140 fewer positions – about 75 in coal operations, including Huntly East Mine, and about 65 in other areas of the business.

Staff members now have an opportunity to consider and comment on the proposed changes and any suggestions they make will be carefully considered by management before a final decision is announced in late September 2012.

Solid Energy Chief Executive Officer, Dr Don Elder, says the decisions are the result of a comprehensive review of the business. “I am very aware of the impact these decisions will have on affected staff members and our communities, but we’ve had to make these difficult decisions to cushion the impact of the market and protect as much as we can of the long-term value of the business.

“Compared with the first half of the 2012 financial year, the deteriorating market will potentially reduce our revenue in the current financial year by more than $200 million. The current weak market conditions have also exposed the huge challenges of underground mining in New Zealand’s geologically complex coal resources which, as a result, will always be near the top of the cost curve and therefore the first production to be susceptible to any market downturn,” Dr Elder says. “We believe Spring Creek still has potential if the international market turns around, as does Huntly East if we can secure satisfactory long-term contracts with our major North Island customers to support future investment,” Dr Elder says.

A number of the decisions announced today have a post-balance date impact on Solid Energy’s 2012 result as they have implications for the carrying value of various assets. Dr Elder says these will be detailed when the company announces its 2012 results on Friday, 31 August.

Background to the Proposed Changes
A steep fall in demand and prices for internationally traded coal means the business anticipates its revenues will fall by about $200 million in the current financial year. International prices for high-grade coking coal have fallen over 40% to below US$200 per tonne (from well above US$300 per tonne in 2011) and are at their lowest point for some years.

The outlook is different from that faced by the company during the 2008/09 Global Financial Crisis. In early 2009, as commodity prices plunged, the New Zealand dollar followed, softening the fall in New Zealand dollar prices. Spot prices then rebounded within a matter of months. At present there is no certainty about when international growth will resume and lift international coal demand and prices.

While many in the industry still expect demand, driven by Asia, to pick up again strongly sometime in 2013 Solid Energy believes it needs to plan to withstand these market conditions for at least the next 12 months and possibly for 24 months or longer.

Impact on Solid Energy’s operations
Work at Spring Creek Mine will cease almost immediately as the review is completed. Spring Creek Mine has struggled to be profitable for some time. It has been in a development phase since the end of 2011, with minimal coal production as tunnels were being formed into a new resource area and underground infrastructure installed to allow this new coal block to be mined. It is not expected to return to full production until early in 2013 and will need a further $70 million of operational cash and capital investment to reach that point and at current market prices will not generate a positive margin.

At Huntly East Mine the company is proposing a smaller mine team. With fewer underground working places, the mine would not require the increased ventilation capacity which was being built to support future expansion. Any longer-term development of the mine would depend on the company securing satisfactory long-term contracts with major North Island customers, such as New Zealand Steel.

Solid Energy’s opencast mining operations – Rotowaro in Waikato, Stockton and Reddale in Buller, and New Vale in Southland – will largely maintain their current operations, with an even stronger emphasis on cost-effective production.

Solid Energy will continue to progress its plans to unlock the value of Southland lignites, including full commissioning of the Mataura domestic briquette plant by October this year. The first stage of a feasibility study is under way for a proposed integrated coal-to-fertiliser project which would include a new lignite mining operation, a coal-to-fertiliser processing plant and associated infrastructure to produce enough urea to replace current imports and supply export markets. This work includes examining technology options and capital costs for the plant. Decisions about the plant and mine locations are not expected before the end of 2012.

The operational test programme at the Huntly Underground Coal Gasification pilot plant has made exceptional progress and is likely to achieve its substantive targets ahead of schedule. UCG has very strong potential to enable New Zealand and other countries to safely harness energy stored in deep coal seams. The pilot plant is generating strong interest from potential partners here and overseas, which supports the company’s plans to commercialise its UCG technology globally.

In late May, Solid Energy announced its coal seam gas focus was shifting to Taranaki and work in Waikato, where a demonstration plant successfully proved the technology in local conditions, is being put into care and maintenance. The company has applied to New Zealand Petroleum and Minerals for a five-year extension of the Taranaki permit to allow its coal seam gas project there to move to appraisal/discovery phase.

Nature’s Flame, which was separated from Solid Energy in June, now operates as a stand-alone company. The business closed its ageing Rolleston pellet plant in February and is mothballing its smaller Rotorua factory. Efficiencies have been gained by concentrating production at its modern Taupo plant but the domestic market remains very challenging and exit strategies are also being examined.

Following the end of the Government’s grants scheme, Biodiesel New Zealand has been unable to meet Solid Energy’s performance expectations. The business has been reorganised into two parts – one manufacturing and marketing fuel and an agrifoods unit which contracts with farmers to grow oilseed rape, processes the seed and markets the oil. Both parts of the business are for sale.


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