Stockton mine plant 'sensible' investment: OAG

Stockton mine's $123.6 million coal handling and processing plant significantly contributed to Solid Energy's debt levels, but the project was a sensible business decision, according to an investigation by the Office of the Auditor-General (OAG).

Its report said the plant had been estimated to cost $128m, and funding it significantly contributed to the company's debt levels.

The plant screened and washed coal that Solid Energy had extracted but which was not yet suitable for sale. It filtered waste and maximised the market potential of the coal.

In December 2008, the Solid Energy board authorised the plant's construction.

The OAG wanted to know whether board had enough information to authorise the expenditure, whether it understood the risks associated with the project, and whether it appropriately monitored the project.

The OAG concluded management provided good information to the board to allow it to make a fully informed decision.

Before approving the investment in the plant, Solid Energy had carried out a pre-feasibility study and a feasibility study.

It had obtained independent external reviews of the plant design and cost estimates, equipment installation rates, and contractor charge-out rates.

The board had considered the risks associated with the project.

At each board meeting, management provided a report on how the project was progressing. Each report discussed any issues or "red flags" associated with the project, how management was responding to risks, progress against schedules, and financial costs.

Finally, Solid Energy carried out a post-investment review of the project looking at the overall cost and actual performance compared with that expected in the business case.

The review concluded that the final cost of the project, $123.6m, was below the budgeted $128m.

The actual commissioning date (April 2010) was before the planned commissioning date (July 2010).

Cash flows from the project had significantly exceeded business case forecasts, and the "payback" for the project was achieved in 15 months, rather than the anticipated 28 months.

The OAG was told that, without the plant, Solid Energy would have struggled to continue to operate successfully in the depressed coal market.

The $123.6m plant was the largest component of capital investment in Stockton Mine during the period 2008 to 2010.

The OAG said that in its view the Solid Energy board received the necessary information from management to appropriately consider, approve, and monitor the project, including its risks.

The board understood and managed those risks.

Pellet Plant

However, the OAG was less convinced by Solid Energy's Taupo wood pellet plant, which it also reviewed because the investment was outside Solid Energy's core coal mining business and involved significant capital spending of $33.9m.

Solid Energy's risk management for the Taupo wood pellet plant lacked enough consideration of the worst-case scenario in respect of the product's target market, the OAG said.

The OAG also found Solid Energy did not consider the worst-case scenario in respect of coal prices.

"Solid Energy did actively consider a range of coal price scenarios and debated these. The board and management also reacted to changes in the coal price...But the significant drop in coal prices in July 2012 was never anticipated, so Solid Energy was not alone."

However, the company had a more optimistic view of future coal prices than others in the industry.

The investment decisions made by the board and management, and the continued operation of Spring Creek Mine, meant that Solid Energy was not in a financial position to react to the sharp and large drop in coal prices.

The Solid Energy experience showed the need for clear communication between shareholders, the board and management, the OAG said.

"We found insufficient clear communication between Solid Energy and its shareholders. Good communication is essential for the board and shareholding ministers to make good decisions and for monitoring agents to provide support for that decision-making."

The Solid Energy proposal to expand and grow its business into a national natural resources company typified the communication problems. The board believed the proposal was "audacious" and put it to the shareholders for initial review. Officials did not support this proposal, but the lack of support was not clearly communicated to the company by the shareholders.

"Instead, communications were interpreted by Solid Energy as indicating that there was no support 'at that time', rather than as a message to abandon the idea."

Good risk management also required a sceptical mind-set, the OAG said.

"We found that Solid Energy did not give sufficient attention to possible downside risk in its planning and forecasting. Nor did it think about a worstcase scenario and develop a contingency plan for dealing with the unlikely."

The board and management needed to include relevant industry experience. From 2008 to 2012, there was only one board member and one member of senior management with mining experience.

- By Kim Fulton and Lee Scanlon of the Westport News

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