So why do we own a mining company?

February 21st, 2013 at 4:52 pm by David Farrar

Stuff reports:

The depth of ’s financial woes have been laid bare with the Government confirming the company is in talks with bankers over its debt levels.

The Solid Energy board was working with Treasury, advisors and the banks about further restructuring options, with the aim of returning the company to a sustainable financial position, Finance Minister Bill English said.

“Despite restructuring, Solid Energy’s financial position has continued to deteriorate. It is in constructive discussion with banks,” English told a media briefing this afternoon.

He confirmed there had been differences of opinion for some time over the direction of the company.

“There will be the opportunity for us to go back and look pretty hard at the governance and the monitoring.”

The Government would not let the company go into receivership, English said. He would not directly answer questions about a taxpayer-funded bailout, but would not rule it out. …

State-owned Enterprises Minister Tony Ryall said a number of factors had weighed against the company, in particular world coal prices dropping by 40 per cent.

We should have sold Solid Energy years ago. Taxpayers should not be forced to be investors in risky commercial enterprises such as mining. There is no strategic need for the Government to own a mining and power company – just as we also don’t need to own companies that run hydro-dams.

Labour and Greens go on about all the dividends from these companies, and overlook the risk – as we have seen with Solid Energy.

We shouldn’t own a loss making rail company either.

Governments should focus on what they are good at – passing laws, developing policy, regulation etc. The private sector should run companies, receiving both the benefits of them when successful – but also having to foot the losses when not sucessful.

Sadly this means Solid Energy will probably never be sold, and potentially remain a taxpayer liability for some time.

I just hope the Supreme Court upholds the High Court decision, so the Government can get on with at least reducing its shareholding in these competitive commercial companies.

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31 Responses to “So why do we own a mining company?”

  1. Redbaiter (9,094 comments) says:

    “Governments should focus on what they are good at”

    Nothing in other words.

    But you’re right. National should have sold Solid Energy years ago, when it was being run by politically correct wankers so enamoured of GW bullshit they invested millions in failed new technologies like CSG exploration.

    But of course the real question is- Why wasn’t it sold? How long has National been in government again?

    And they should sell TV One for the same reason. It’s a miserable failure too.

    In fact that is one project they should give top priority.

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  2. Jack5 (5,137 comments) says:

    You are right DPF.

    But nor does the State need to lead finance and steer fibre-optic cabling to the door of city houses. Nor does it need to own an ISP (Orcon), nor a TV network, nor the backbone for broadcasting TV, nor the Radio NZ national radio network. Nor does it need to be the country’s biggest farmer, nor its biggest sharemilker, which is working for Chinese investors.

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  3. Mobile Michael (452 comments) says:

    Hell, Labour closed the mapmaking company it owned rather than bail it out, then sold the assets to the private sector. Yes, in this century!

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  4. Jack5 (5,137 comments) says:

    Mobile Michael:

    An example of just how tightly the State is stitched into NZ business lies in the Met Service, which provides newspapers with the sharemarket tables we read – and the print-formatted TV information.

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  5. rimu (48 comments) says:

    I agree, sell Solid Energy. Unlike electricity generators or rail it meets few of the criteria for government ownership, which are:

    * Managing significant externalities that are not easily managed by other means (e.g. the environmental effects of large power generation; the use of fixed natural resources such as land and water on a large scale).

    * Controlling government risk. This is an argument for the state being involved in industries for which it is legally or politically the guarantor of last resort (e.g. major banks) – trying to neutralise the usual “privatise the profits, nationalise the losses” approach.

    * Managing situations where commercial pressures are weak, e.g., large monopolies or oligopolies (e.g. the national electricity grid);

    * Financial factors: where the government cost of long-term borrowing is much lower than the cost to the private sector.

    * Ensuring universal access (e.g. roads, hospitals).

    * Improving quality for consumers by controlling a major player in an otherwise competitive private sector – especially where set-up costs may be high and a cluster of incumbents dominant; this alternative to regulatory control led to the creation of KiwiBank, and years before that, State Insurance.

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  6. Komata (1,191 comments) says:

    ‘So why do we own a mining company’? In three words ‘ security of supply’. The governments of the day (Liberal, Labour, National) purchased and nationalised a very large number of coal mines over the years of the late 19th and up-to mid 1940’s. The economy at that time was largely steam-powered (literally) and the unions had been using their ‘influence’ to leverage themselves into positions of ‘influence’ and power up to and including WW2, threatening the cutting-off of ‘strategic supplies’. It eventually reached the point where these actions (including a series of strategically-placed strikes- particulalry in relation to the railways which was 100% steanm powered) posed a very serious threat to national security. To short-circuit that ‘system’, nationalisation was resorted-to. In the late 1940’s especially, with the country having just been through a pair of world wars, ‘security of supply’ was the catch-cry.

    As ‘steam technology’ has been largely superseded, the need to hold such a strategic reserve has diminished, and its continued necessity in the 21st-Century is probably a moot point.

    It does have to be said however, that the sale of coal does generate both an income (from overseas sales) and employment for coal miners on both the West Coast and in the Huntly area; get rid of the coal, and you get rid of the jobs, with a consequent direct flow-on onto both the local and national economies. Unemployed miners mean more people on the unemployment benefit – never a good situation .

    Perhaps ‘That is why we own a mining company’?

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  7. liarbors a joke (1,069 comments) says:

    How much was Don Elder paid to run it into the ground? How much was it again to move those snails?

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  8. rimu (48 comments) says:

    Maybe if Solid Energy had spent less time and money spying on activists and more time focussed on their business they’d be better off (HT @RusselNorman)

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  9. rimu (48 comments) says:

    Given that making money from coal mining is really difficult at the moment, why is National so keen on us doing more of it?

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  10. Viking2 (11,487 comments) says:

    Well how about the state energy company that generates power at Huntly stop buying in Indonesian coal and buy Huntly coal.

    Oh fuck no the Hreens would heamorage at the though that we would burn coal. But they do. POT make a lota dosh transitting coal.

    Ah but the market rules. Yep to the detrement of us all is obvious. We would rather employ Indonesians then Kiwi’s.

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  11. Komata (1,191 comments) says:

    Rimu

    Re: ‘Maybe if Solid Energy had spent less time and money spying on activists and more time focussed on their business they’d be better off’

    Point made, and valid. The probelm is that the ‘activists’ (with ‘Dr’ Norman’s complete connivance BTW), don’t merely ‘stand in one place and protest’ – they break things, they wifully DESTROY things, they go into locations where they put themselves in danger (and then expect their enemy (the miner) to rescue them. Most of them are also idealistic kids who haven’t a clue really what the issues are, but are totally-convinced that they do; and hey, it’s fun to break things ‘against ‘the man’.

    THAT is why SE has to spend time (wasting their own time) doing this, because if they don’t, and the ‘activists’ get themselves into real strife (through their own actions) the carefully-primed media will take the Company to the cleaners, because it will ALWAYS be the miners fault – always.

    THAT (to praphrase your statement)is why Solid Energy ‘….. Has to spend time and money spying on activists’

    And yes, agreed, they’d (SE) would be better off if they didn’t have to.

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  12. scrubone (3,099 comments) says:

    Ah but the market rules. Yep to the detrement of us all is obvious.

    I’d venture that getting rid of the market has proved to be more detrimental where it’s been attempted.

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  13. m@tt (629 comments) says:

    If a private company were required to pay the full costs of the operation, including fair value for the minerals/fossil fuels they are buying from the crown, then they’d never be able to make a profit.

    In reality the crown, as owner of the product to be mined, is best placed to profitably run a mining operation. Granted they need to get people that are actually good at it, but given the simple fact that they already ‘own’ the product they should be able to turn a bigger profit.

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  14. Nick K (1,244 comments) says:

    M@tt’s argument is that private mining companies can never make a profit because they have to pay royalties to the government for the product pulled out of the ground.

    One word answer to that: Australia.

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  15. orewa1 (410 comments) says:

    Exactly right, Rimu. And the public understand this well, even though they might not be able to articulate it as eloquently as you.

    That’s why selling Solid Energy is “maybe” ok, but power companies are absolutely not. And why Air NZand Orcon are probably ok.

    This government is on a hiding to nowhere on asset sales. Why? Because it is driven blindly by ideology whereas the electorate is driven by pragmatism. Even if the government only sells assets that you and I think can reasonably be sold under your criteria, history shows that they will fuck up the all-important details so that our downstream industries and consumers will suffer.

    I’ll share the cost of printing out your criteria and providing a copy for every MP’s office wall.

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  16. beautox (422 comments) says:

    m@tt is talking rubbish. Just because the crown owns the minerals deep down in the ground does NOT mean that they are in the best position to run a mining operation. Governments can’t run ANYTHING properly, or has this simple fact escaped you??

    Sure they have to run some things, but that doesn’t mean that they ever run anything well. Just look at all the things they run – clusterfuckups every single one of them.

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  17. wreck1080 (3,923 comments) says:

    Didn’t SE just buy pike river?

    Whats going on with that if they’re broke?

    How much was the CEO getting paid? I thought the reason for massive salaries was so this doesn’t happen.

    I should also mention , the high kiwi dollar is being blamed as a reason.

    How many more jobs will be lost ?

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  18. gazzmaniac (2,307 comments) says:

    I was going to write a post about how Solid Energy is the old State Coal which came about because of nationalisation of private mines, but Komatua beat me to it.

    I do feel obliged to point out that the coal price is still higher than it was in 2006-2007 when Solid Energy made record (at the time) profits.

    Methinks the same thing is happening here as has happened in certain mines in Australia – the costs began to blow out because of the boom, and the companies moved from lean operations to bloated ones.

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  19. SPC (5,636 comments) says:

    So instead of owning Rail we should go back to subsidising the loss making services run by a private company so they can extract a profit offshore – exploit the infrastructure the taxpayer has invested in of late?

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  20. wreck1080 (3,923 comments) says:

    “I do feel obliged to point out that the coal price is still higher than it was in 2006-2007 when Solid Energy made record (at the time) profits.”

    Yes, but, the Kiwi dollar has risen tremendously. In addition, costs are up.

    As the government were recently saying, companies that couldn’t handle a high dollar shouldn’t be in business. So why doens’t this apply to a state owned enterprise.

    Surely national have to get the boot. But, the alternative is not credible either. What to do!

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  21. libertyscott (359 comments) says:

    I did once point out to Julie Anne-Genter that for a party full of people who despise coal mining, making taxpayers own and effectively subsidise through the poor rate of return, a coal mining company, is counter-intuitive. However, it shows how the socialist ideology trumps environmentalism.

    Of course arguing about privatising Solid Energy separate from all other SOEs is basic unprincipled disconnected thinking. There is no more reason to own Solid Energy than any other business.

    The real reason I understand is that no one wished to buy it at a price that Treasury thought was worth selling it at. There were informal market soundings on this a few years ago.

    Ironically for the Greens, it is Solid Energy that keeps alive the entire West Coast railway system (which is “solidly” profitable with the coal export traffic through Lyttelton). It’s one of the only three bits of the railway network that actually do make a reasonable rate of return on capital. It keeps a branch line from Invercargill in the black as well, but the Greens are lobbying to end all that there.

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  22. trout (939 comments) says:

    I have no doubt that the Chinese, who are aquiring resource assets around the world, would be very interested in buying Solid Energy ‘as is, where is’ but does the Govt. (or the public) have the political will to sell it to them?

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  23. martinh (1,257 comments) says:

    The last thing i want trout is all this dirty chinese communist money buying it while coal prices a low.
    Don Elder stuffed up big time and so did Tony Ryall, coal prices have being declining since the GFC but they didnt notice until late 2011 (Tony Ryall said that they became aware of problems with the coal price and Solid Energy late 2011). FkN overpaid morons wasting my taxmoney on their incompetencies

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  24. martinh (1,257 comments) says:

    You say that the govt shouldnt own a coal company but what sort of a moron doesnt notice the GFC?

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  25. berend (1,711 comments) says:

    DPF: We should have sold Solid Energy years ago.

    Another bailout on National’s watch. I doubt anyone is keeping track of the billions of tax payer money that National has used, following Labour foot steps, to privatise the profits, socialise the losses.

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  26. gazzmaniac (2,307 comments) says:

    coal prices have being declining since the GFC

    Coking coal hit a peak of over $300 per tonne after the Queensland floods of 2011. The decline has been in the last 18 months or so, and there has been a rebound in recent months.

    The price of coking coal was about $A100 a tonne in 2006-7, after having risen sharply from about $A50/tonne. It’s currently sitting somewhere about $A150-200 per tonne.

    I can’t find a reference for this (it’s from memory) but here is a reference to thermal (steaming) coal in Australian dollars over the last ten years.
    http://www.indexmundi.com/commodities/?commodity=coal-australian&months=120&currency=aud
    Thermal and coking coal aren’t strictly comparable, since they have different end uses. A more useful proxy might be iron ore, since the demand for coking coal and iron ore are tied, however both have different (but linked) supply conditions.

    As you are no doubt well aware, the New Zealand Dollar has dropped relative to the Australian dollar in the last five years, so when you look at it in New Zealand Dollars (and you can change the currency very easily) the price difference between 2007 and 2013 is far more evident.

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  27. gazzmaniac (2,307 comments) says:

    trout – Solid Energy is small fry in the big scheme of things.
    Their biggest mine (Stockton, home of the gay snails) produces about 2MT per year, which would be considered a very small operator across the Tasman. Bowen Basin mines are EACH producing around 20-30 MT per year, which is more than the ENTIRE coal production of New Zealand.

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  28. martinh (1,257 comments) says:

    Gazzmaniac i dont get what you are trying to say. The queensland floods had a small short term duration rise for coal prices in Australia but the world price for coal had a dramatic slide in 2008 at the GFC. It did not recover to anywhere near pre GFC prices. So when you say the price difference between 2007 and 2013 is far more evident it seems you agree with me that Solid Energy was making moronic decisions on coal prices that hadnt being seen in years.

    What sort of twits at Solid Energy and the Government did not realise this- The same business mind twits in National who Jenny Shipley hangs around with?

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  29. scanner (340 comments) says:

    Overheads, too many surplus people unconected to the mining process drawing six figure salaries.
    The other factor seems to be a board of directors playing silly games with feelgood projects using the surplus money from good coal prices, most on whom deserted the ship as soon as as they saw the rocks coming, most of these directors had NO experience with any mining, but seemed to be well connected to both political parties in their role as “Professional” directors, aka jobs for the boys.

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  30. gazzmaniac (2,307 comments) says:

    martinh – my point is that even though the price of coal is down from the peak, it’s still higher than it was when Solid Energy was making record profits prior to the GFC.

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  31. martinh (1,257 comments) says:

    Gazzmaniac thats a very good point indeed

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