New Zealand's Solid Energy Faces Potential $322 Million Taxpayer Bailout

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Researched by Industrial Info Resources (Perth, Australia)--State-owned Solid Energy (Christchurch, New Zealand), the largest coal mining company in New Zealand, is in crisis talks with the New Zealand Treasury over company debts that now total more than $322.61 million. Solid Energy attributes the problem to low international coal prices, weak demand, and the poor performance of its investment in alternative energy assets. The company also borrowed millions of dollars for a high-stake lignite mining project in Southland.

The New Zealand government has been criticized for not intervening when problems became apparent 18 months ago. Problems were first identified in mid-2011, when a scoping study was conducted to assess the option to become partly privatized under a mixed ownership model. In late 2011, reporters highlighted an $829.08 million gap between the board's view of the company's value and an estimate prepared by an external private sector analyst. The Treasury explained that the discrepancy was a result of differing views on the outlook for international coal prices.

The New Zealand government has been defending how it's handled the situation as the state-owned company nears collapse. The government has confirmed that the coal company has been incurring debts of about $8.29 million a month since last June. The company cut 450 jobs last year, and the remaining 1,200-strong workforce fears further redundancies when a restructuring package is agreed upon. The Finance Minister has not ruled out a taxpayer-funded bailout.

Solid Energy is one of five state-owned enterprises earmarked for partial sale by the government, but its problems could postpone such a move, which in turn will deny the government of proceeds worth as much as $704.61 million. The situation has added pressure for the government to get a strong price for shares in Mighty River Power (Auckland, New Zealand). A Supreme Court ruling on whether a Mighty River Power sale will go ahead is due in a matter of days.

Analysts say Solid Energy can't manage this level of debt, and therefore needs to write off some of its other investments. The company already has made a decision to mothball its Spring Creek underground mine on the West Coast and to halt the expansion of the Huntly East coal mine in the Waikato.

Coal prices peaked in January 2011 at $290.14 a tonne, but fell to a low of $116.04 per tonne in September 2012 following a sharp decrease in steel demand from China.

Industrial Info is currently tracking three plants in New Zealand that owned and operated by Solid Energy: one lignite mine and two coal mines and processing plants.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.