How to avoid a ‘Sexit’

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.