Solid Energy has a basically sound business that is being crushed by debt. If Greece’s debt sent it hurtling towards a ‘Grexit', Solid Energy can avoid a Sexit.

Here’s how.


The basic business operations of the company, the coal mines, are cashflow positive. Solid Energy makes enough to pay for safe operation and keeping miners in jobs, and that keeps the lights on for downstream parts of the Coast economy who depend on mining - businesses like railways that help to keep other export businesses competitive and could become marginal without coal.

Solid got into trouble in the past because it made over-confident assumptions about the future price of coal. Those assumptions may or may not have been justified at the time - there are plenty of experts who believe Solid’s management were over exuberant, but it’s also true that businesses take risks and they don’t always come off, but you have to analyse decisions from the perspective at the time, not with hindsight.

If you approach Solid that way, then the government, as owner, and lenders who supported the rosy asset valuations deserve to take a haircut because investing comes with risks and sometimes risks mature. 

But the miners shouldn’t have to pay for management folly. Nor should the tradies and small businesses, the families and other locals who all depend on the mine for work.

Those over-rosy revenue projections led to the company blowing cash on failed diversification ventures, paying staff generously for adding value, taking on debt to make the balance sheet more efficient, and paying dividends to the government on the basis of a return on capital derived from an over-enthusiastic valuation.

Think about it: If you tell yourself the company’s value has gone from $300 million to over a billion on the basis of forward cost projections, then you won’t be conserving cash against a looming rainy day - you will be investing heavily in future business opportunities; you will reward the genius who created this uplift in value; you will borrow against your balance sheet like an Auckland house-owner whose property values only ever go up. Your owners are going to want to cash out some of the lolly.

What owner wouldn’t do this? The only one I can think of would be an owner which had a different business objective. An owner that saw the company as a way to keep miners in jobs and the Coast economy on its feet would keep its focus on the mines breaking even. Its focus would be on operations, not on balance sheet management.

That’s why the government should devolve ownership of its assets to the West Coast - possibly to the regional economic development trust, which was set up in the early 2000s to keep the Coast engine running when the government ended felling of ancient native trees.

There is no need to privatise the business or shut it down. The solution - as so often, relies in transferring power to the people. The mandate of a Coast-operated Solid would be to keep the mines operating at least at break even.

Any capital for new mines and developments would have to come from elsewhere, but that’s not an issue right now. It would mean that eventually the asset would be tapped out. But thats a long way in there future and there would be plenty of room for others to step in on a normal business basis.

The government is not getting its money back anyway, so the transfer of the business would be mostly a paper exercise, not a real one - plus it would save the government the crippling cost associated with social impacts of job losses.

Plenty of people cheer Solid’s demise because they don’t like coal and think it has no future. Its true that coal is the worst source of energy for the climate

Globally, the coal business is growing, not shrinking. The International Energy Agency projects coal demand will grow over the next 25 years. For the sake of the climate, it would be good if that forecast were wrong, but it probably isn’t. Here’s what they say:

“Global coal demand grows by 15% to 2040, but almost two-thirds of the increase occurs over the next ten years.”

It’s just not true that coal is going away. 

“Current low coal prices have put pressure on producers worldwide to cut costs, but the shedding of high-cost capacity and demand growth are expected to support an increase in price sufficient to attract new investment.” 

There are better alternatives than shutting mines to address the climate effects of coal.

“Adoption of high-efficiency coal-fired generation technologies, and of carbon capture and storage in the longer term, can be a prudent strategy to ensure a smooth transition to a low carbon power system, while reducing the risk that capacity is idled before recovering its investment costs,” the IEA says.

The lesson for Solid is clear. It should focus on its core operations - getting the coal out of the ground and selling it. The government should transfer it to a Coast entity with a charter to do just that. No more funny business that puts livelihoods and the regional economy at risk.

I am not a fan of bailing out failing business, but Solid’s operations are not unprofitable. I do want to see the Coast economy diversified away from an over-reliance on extractive industries, but that it a 25-year project that needs to be led by the Coast.

Trust the local community, and the outcomes will be better.


Comments (10)

by barry on August 13, 2015

"There are better alternatives than shutting mines to address the climate effects of coal"


Coal has no future in a planet that cares about climate change.  there is not technology that captures the carbon (and stores it permanently) and costs less than the savings from burning coal versus any other reasonable energy source.  And there never will be.

There are plenty of alternative job sources for the Coast and if any of the governments of the last 30 years had cared they would have invested in them instead of relying on coal.

by Murray Grimwood on August 14, 2015
Murray Grimwood

It's bullshit on several counts. Politely but firmly.

Yes, on CC grounds it has to stay in the ground. There is no carbon sequestration - the Krumdieck approach is to google CCS - all artists impressions. New-growth forest does it once, old growth just can't be chopped down. Both processes are in reverse, globally. Global finance can't afford to deal with carbon without collapsing - it would triage too much energy.

Don Elder made a bet that I'd have made, back in 2005. That Fossil Fuels were inevitably getting used up (they are - we go through a billion barrels of oil and an equivalent amount of coal every 11 days or so) and woud therefore become ever-more expensive.

The problem is that it requires ever-more future energy, of equivalent or better quality, to produce the future goods/services which pay off the debt of today.

It's a bootstrap problem, which no economist has yet addressed.

Inevitably we cherry-pick the best stuff first, so quality (EROEI - google it if you haven't come across it) diminishes with time. Needs more volume, then, minus efficiencies. That supply puts a physics lid on real wealth earnable; all else will be whatever; virtual, a bubble, bigger numbers indexed to nothing. Rebuttal invited!

2005 was peak conventional crude, 2007/8 the first fiscal choke. The can has been kicked down the road, but the problem can only get worse. We can't afford to take on more debt to fund more energy demand, because of lack of quality energy ahead.

Why is it so hard to understand?

by Katharine Moody on August 14, 2015
Katharine Moody

taking on debt to make the balance sheet more efficient

I see you've adopted the same language/worldview as Simon Power did in setting off the demise;

Debt to riches - you'd think we'd have had enough of this ideological school by now.

by Rich on August 14, 2015

Raw commodity industries are an intrinsically boom-bust cycle. They'll never deliver stable high quality jobs. One software company, Xero, employs more people and exports more value than the entire coal industry. Also, it doesn't fuck the planet up.

Keeping Solid Energy going is a waste of money and a con trick on those working there (I know quite a few who saw the writing on the wall and grabbed the redundancy package). The best bet would be to shut down the mines immediately, put measures in place to create some sustainable jobs and restore the minesites (which should employ a few hundred people for the next couple of years).


by Murray Grimwood on August 14, 2015
Murray Grimwood

So those who profit from Xero aren't going to buy any processed parts of the planet then?

No Beamers, no new kitchens, no jetting holiday.......

What, exactly, does their profit represent, pray tell?

You're right about sustainable jobs - but if the job expects to be paid in a manner that can be spent on unsustainably-produced stuff, it ain't sustainable.

This is the problem Labour face and if they continue to avoid the issue it'll continue their trend towards standing for nothing. The Greens just took a step backwards recently too, in an effort to 'grow'. The Nats are ideologically snookered.

Interesting times

by Rich on August 14, 2015

What, exactly, does their profit represent, pray tell?

A paycheque.

(Yeah, you're right about un-sustainability at the consumption, rather than production end. But in terms of what can be done about it, not mining coal here is a start. Retiring Huntly is a good thing. Replacing gas generation with renewables would be a good thing. Making steel from scrap rather than ironsand would be a good thing. etc)


by AIC on August 15, 2015

I would dispute your premise Josie.  Just because Solid has positive cash flow from operations, it does not necessarily follow that they make enough to continue operations.  This is borne out in the financial statements.  The company is losing money at an operating level, even once all the impairments are stripped out.  They can run a small positive operating cash low by running down their equipment (cash flow from operations figures exclude depreciation).

Absent a recovery in the coal price, I suspect the government will need to tip in more money to keep this company afloat over the medium term. No regional body would want it absent a stronger balance sheet. 

Your thoughts?

by Murray Grimwood on August 15, 2015
Murray Grimwood

AIC - read my comment above.

Then read this:

Why are we still speaking in the failed vernacular (tip in more money). Money was only ever a marker system, and it worked until the essential underwrite ran into the problem of ultimate scarcity. They don't teach this in Econ101 so you won't hear it from the High Priests of today - but it's the mental transformation we have to make.

Beyond peak flow-rate, you cannot value energy with money. You'd be better doing it the other way round, that way you avoid bubbles and aren't flying blind. It's amazing how ingrained assumptions become.

From here on, the underwrite of future expectations has to be unavailable, the trend happening at an exponentially-increasing rate. Good luck 'valuing' a company on that basis. You'd have to do it again in a month, then in a week, then in 20 minutes time......Here's the classic treatise, well worth the time:



What I am describing here is nothing less than a complete and utter paradigm shift that is so profound and so large that it will, paradoxically, escape detection by most people. - See more at: I am describing here is nothing less than a complete and utter paradigm shift that is so profound and so large that it will, paradoxically, escape detection by most people. - See more at: I am describing here is nothing less than a complete and utter paradigm shift that is so profound and so large that it will, paradoxically, escape detection by most people. - See more at:
by Brendon Mills on August 15, 2015
Brendon Mills

Your suggestion about handing over SE's west coast mines to the WC community is interesting. I would embellish it by having the profits go into come kind of 'Future Fund' which would be used by the 'coasters' to move on from coal when the mines run out.

by Moz on August 25, 2015

Brendon, who gets the losses? In the short term we have the dodgy financials. In the longer term the physical problems will catch up sooner or later. Or will this be another "now we have to remediate the workings we'll declare bankruptcy and walk away" scam, leaving the taxpayer to foot the bill?

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