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Last year, 2009, was a tough year. We started the year focused on our long-term strategy of business expansion underpinned by high and predictable cash flows from our export coal business and, after five record months of revenue, our balance sheet was very strong. BY DR DON ELDER, chief executive officer, Solid Energy New Zealand.
Our top priorities were to secure immediate export cashflows, and preserve our strong balance sheet for the medium term. We undertook a comprehensive review of all aspects of the business, cut costs across the board, reduced production to meet demand, reviewed and reprioritised all projects. As a result, we slowed down most major development projects, particularly in our Renewable Energy and New Energy business areas. Now, with export markets surging back strongly, we are confident in saying that we survived the downturn well, but certainly not unscathed. Our financial performance this year will be behind last year’s record result. There has been a firming in coal trading of recent months and that will be positive for our business, but the international market is still very volatile and a strong New Zealand dollar continues to impact profitability. Coupled with this, we have faced industrial action at our four main sites in November 2009 which will reduce profit and constrain our ability to invest in the business this year. Operationally 2009 was a really challenging year, but we remain confident in our long-term expansion and diversification strategy. Although we have slowed some projects in the year, we have confirmed and committed to a number of projects that will generate future value. This includes $35 million for a third wood pellet plant, in Taupo; $110 million for a coal processing plant at Stockton and, since year end, $75 million for a new mining fleet at that mine. These will draw heavily on our balance sheet over the next few years. Our operating cash flows will be lower than previously forecast and our debt will increase. We will need to work hard over the next 12 months to complete this capital investment programme on time and on budget. Our challenge is to maintain a strong balance sheet to manage our way out of the downturn while progressing the long-term projects that are important for our future and the future of New Zealand. We remain confident in the assumptions and analysis that underpin our long-term 20-year business strategy. There is no question that the fundamental drivers behind them remain unchanged. As the global economy recovers from the downturn, supply of energy and other commodities will struggle to keep pace with demand generated by continuing economic growth in China, India and elsewhere in Asia. This supply/demand gap has been exacerbated by a global lack of investment in energy supply projects over the past 12 months. Not surprisingly, there is once again increasing international concern about future energy security. Our international commodity price forecasts – especially our upper ranges – may look bullish to some here, but they are increasingly viewed as realistic by many of those internationally who know and understand world energy market demand and supply. Our New Energy projects are being developed to secure long-term value for the company and for the country. These encompass coal seam gas, underground coal gasification, and lignite utilisation projects. Gasification technologies will allow our globally-significant lignite deposits to be converted to products that New Zealand currently imports at a high cost to our economy. We already have sufficient lignite to convert to diesel to make us self-sufficient for more than 50 years, by which time it seems highly likely that the rest of the world will largely have run out of oil. Or – as we announced recently – sufficient urea to supply all of the country’s farmers’ needs – and export that much again – for over 500 years. These two projects alone could create export equivalent earnings of $4 billion to $5 billion a year – equivalent to the current sheep and beef export industry. We’re also advancing plans to upgrade lignite into briquettes that have much higher energy density and burn cleaner than raw lignite, with potential for both domestic and export supply. Our Underground Coal Gasification project is advancing well and continues to hold promise as a major new energy technology for New Zealand, including an ability to export our skills and experience to offshore projects. We successfully produced the country’s first coal seam gas near Huntly, then achieved another first when we generated and exported up to 1MW of electricity to the national grid. We remain at the forefront of work to ensure we and New Zealand have multiple good options to reduce greenhouse gas emissions. We are a core member of the CO2CRC, which has now successfully stored more than 50,000 tonnes of Cº2 underground at the Otway Basin project in Victoria, Australia. During the year we began a five-year research project with the Department of Conservation to quantify the benefits of intensive pest control on forest growth rates and carbon sequestration. This is a hugely important, and insufficiently prioritised, opportunity that could play a major part in our future national emissions plan, as well as bringing enormous biodiversity benefits. Our coal and lignite resources are a major and strategic national asset. Our objective for the projects we are implementing and investigating is to maximise the long-term national benefit from these resources. Some people believe that our plans pose a significant environmental threat. We are acutely aware of our responsibilities. The company’s recent record in our mining operations is a good one. This was endorsed in the recent report of the Parliamentary Commissioner for the Environment. We will not develop new projects without full consideration of the wider climate and carbon issues that any investment needs today for commercial soundness. We have, however, watched the current amendments to the ETS with concern, both as to the speed with which they took place and the confusion we have had around the treatment of fugitive emissions of methane from coal mining. In conclusion, our overall company focus is very clear. Our number one priority is to ensure our current operating businesses deliver to plan and budget, and continue the drive for a step change in operating performance that started during this year and has already achieved substantial results. A major part of this is a substantial programme of capital investment in our current business. We must deliver these capital projects on time and within budget. Unless we do that we will have neither the cash nor the credibility to progress major investment in new areas such as the lignite developments, regardless of their national importance. We are committed to achieving this.
Q&M Vol.7 No.1 February-March 2010 |
In late November 2008 the global economic downturn hit our customers almost overnight. In December customers cancelled every single export shipment. As our ongoing export revenues plummeted, we shifted very quickly to a comprehensive downturn strategy.