Continuous Disclosure

Solid Energy seeks turnaround in extreme downturn, cuts jobs by 25% in response to challenging market

24 September 2012

Solid Energy has today announced that, in response to the challenges the business faces, it proposes to cut corporate, support services and development jobs by 50%. The company has also announced a proposal to put Spring Creek Mine near Greymouth into care and maintenance and confirmed it will reduce output and cut staff numbers at Huntly East Mine in the Waikato.

If these proposals for further change are confirmed, total jobs will have reduced by 25% to about 1360, compared with 1800 at the beginning of 2012.

In June, Solid Energy announced a sharpened business strategy, then last month said that it was reviewing all aspects of its business in response to the difficult market conditions, resulting in an expected revenue shortfall of more than $200 million in the current financial year.

Corporate and Support Jobs

Solid Energy Chairman, Mark Ford, said that the company had this morning announced a new proposal for change and entered into a further period of consultation with corporate, support services and development staff located throughout the organisation, but mainly in Christchurch, which would see these roles reduce by 50%, from 313 to 150 jobs.

The proposed changes reflect the company's reduced mining operations, less coal development work, a halving of the Executive Leadership Team, the setting up of a standalone technical services group and fewer corporate roles.

"We appreciate that this on-going uncertainty is very difficult for people but the management team has to give staff the opportunity to comment on the further changes that we are now proposing," Mr Ford said. "We expect to confirm our new plans to corporate, support services and coal development staff in early October."

Spring Creek Mine

Mr Ford said that this afternoon Chief Executive Officer, Dr Don Elder, told Spring Creek staff were told that the company had completed its review of the mine's viability and concluded that it could not afford the on-going costs of the operation. The company's proposal has been approved by the Board and advised to the Shareholding Ministers.

The company will now begin a period of consultation with Spring Creek Mine staff members who will remain on full pay during this time. All underground work at the mine, except essential safety and maintenance work, will remain suspended. If the company confirms its proposal, staff numbers at the mine will reduce from about 254 to about 32. Up to two months of underground work would be required to set up the mine for care and maintenance, including some tunnelling to enable adequate ventilation. Thereafter a staff of about 20 would maintain the mine infrastructure.

The decision would also affect the jobs of up to another 130 people, employed by contractors, many of whom had been on the site as part of a development project. Solid Energy has contacted contractors and other suppliers to inform them of the proposed change.

If the proposal went ahead, the company would assist affected staff to find new employment and would retain dedicated capability in Greymouth to explore a number of opportunities, especially in the Christchurch rebuild and in the industry in Australia. The company was in active discussions with the Stronger Christchurch Infrastructure Rebuild Team (SCIRT) and with mining workforce companies in Australia.

"We absolutely understand the potential impact of this proposal on the local community and the wider district," Mr Ford said. "We will do all we can to identify future employment opportunities for affected staff and we have already had some very promising discussions which we hope to confirm in the near future."

Solid Energy's announcement of its intention regarding Spring Creek follows a review carried out with stakeholders, including workers and managers at the mine and the Engineering, Printing and Manufacturing Union, and with Solid Energy's Shareholding Ministers. Mr Ford said that as a result of these discussions other stakeholders also now have a greater appreciation of Spring Creek Mine's challenges.

Spring Creek Mine has not been profitable for some time. Since Spring Creek Mining Company was set up in 2007 it has lost more than $100 million. It has been in a development phase since the end of 2011, with minimal coal production and has cost the company $50 million during this time. Spring Creek would not have returned to full production until early next year (2013) and, to reach that point, a further $40-$70 million would have been needed.

"In recent years the mine has performed below expectations as a result of more complex geology being encountered, higher costs and slower development progress," Mr Ford said. "The mine has also struggled to meet the company's and wider public expectations about operating safely."

Options for the mine that were considered in Solid Energy's review included different mine plans and full closure. All variations to the mine plan, including one developed by the mine's management, workers and EPMU representatives, were found to be uneconomic under all reasonable price expectations, because the cost of production exceeded expected returns.

"The price for Spring Creek's semi-soft coking coal would need to be somewhere from NZ$180-200 a tonne for the operation to deliver a profit and pay off the investment made in it," Mr Ford said. "International semi-soft contracts are now being made at around NZ$120 a tonne."

Solid Energy believes the mine still has potential in a stronger international market for steel-grade coal, particularly as a blend-stock for some of Stockton's production or as a speciality product. Placing the mine into care and maintenance would allow options for the future which include waiting for the market to recover, reviewing future options to restart the operation and selling or closing the mine

Huntly East Mine

Solid Energy Group Manager Coal Operations, Larry Hull and Mine Manager, Paul Hunt, confirmed to Huntly East Mine staff this afternoon the company's proposal to reduce development and coal extraction to ensure the mine's immediate financial viability. This will see total workforce numbers reduce from 234 positions to 171. Once the changes are made, the mine will reduce normal production to five days a week.

The company expected to confirm which staff members had been selected for the remaining positions at the mine by early October.

Mr Hull said, "We think that by reducing the workforce numbers we will be able to make the operation more cost-effective and give it a better opportunity for a long-term future. We will do all we can to assist staff made redundant as a result of these changes."

The mine has approximately half a million tonnes of developed reserves in coal blocks which are either fully set up or close to ready for mining. The smaller mine team will concentrate on producing coal from those areas. The decision will not cut off access to any future reserves for the mine, but access to these reserves would require additional development work beyond what is now planned. Any decision to increase mine effort or invest in longer-term development will depend on the company securing satisfactory long-term contracts with major North Island customers, such as New Zealand Steel.

Almost all Huntly East Mine's coal is supplied to New Zealand Steel's mill at Glenbrook. The decision will not immediately affect the company's ability to supply New Zealand Steel. The two companies are currently in talks towards agreeing a new supply agreement.

Other Measures

Solid Energy has already implemented a number of measures to minimise the impact of the deteriorating global coal market on the business, including:

  • Optimising production and minimising costs at Stockton Mine to generate additional cash.
  • 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 and moving to divest non-core assets including surplus land.
  • Selling or closing its biodiesel business, and confirming the Nature's Flame wood pellet business' status as a stand-alone operation.
  • Moving to earlier shut-down of the underground coal gasification (UCG) pilot. Shifting the focus to move, more rapidly, to commercial UCG 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.
Postscript: On 13 November 2012 Solid Energy completed the sale of the agri-business division of Biodiesel New Zealand Ltd to Pure Oil New Zealand Ltd. On 3 February 2013, the biodiesel production arm, including the Biogold™ brand, was sold to Green Fuels NZ Ltd.