By Alex Tarrant
State-owned mining company Solid Energy, one of the four energy companies earmarked for partial privatisation, is set to be the last of the four sold off due to issues surrounding what the company is worth.
Prime Minister John Key on Monday afternoon said there were issues which first needed to be worked through in relation to the partial sale of Solid Energy under the government's mixed-ownership model policy, but he would not be drawn further on what those issues were.
But interest.co.nz understands the central issue relates to the difference between the market's NZ$1.69 billion valuation of the company, according to analysis by Forsyth Barr, and the company's own NZ$2.77 billion valuation of itself. Parties involved in the partial sale process are attempting to work through the disagreements about the two values.
The large gap between the two valuations relates to Solid Energy's larger potential 'New Energy' projects, which Forsyth Barr analysts did not include in their valuation last year, and how Solid Energy generally viewed future operations, interest.co.nz understands.
The larger New Energy projects include plans to convert lignite to urea and diesel, and underground coal gasiﬁcation. As these projects were only in early stages and required significant levels of further investment, the Forsyth Barr analysts said they treated them as 'potential upside' to their valuation.
"In future, Solid Energy’s planned New Energy projects have the potential to create very signiﬁcant upside. However, we note that equity markets elsewhere have been reluctant to ascribe much value to many of these projects (except coal seam gas)," Forsyth Barr analysts say in their November 2011 valuation report.
"Some of them, particularly coal to urea and coal to diesel, involve substantial capital expenditure in the order of billions of dollars. We have treated these projects as early stage potential upside, and (somewhat arbitrarily) have allowed 20% of a simpliﬁed DCF for each project as a contribution to our overall valuation," they say.
"We value Solid Energy at NZ$1.6bn, or around NZ$25.50 per existing share. NZ$1.2bn of this is attributable to the existing operations, and the rest to the discounted potential of Solid Energy’s planned New Energy developments. The key to value growth will be the success or otherwise of these projects which have the potential to signiﬁcantly increase the value of the company," the analysts say.
Noting Solid Energy's plans to develop projects to convert lignite to urea (fertiliser) and fuel (diesel), the Forsyth Barr analysts said the projects would require signiﬁcant capital expenditure, indicatively around NZ$1.5 billion to NZ$3 billion for the urea project and around NZ$5bn for the diesel project.
'We think it's more'
Meanwhile in its 2011 Statement of Corporate Intent (SOI), Solid Energy said it valued itself at NZ$2.8 billion as at June 30, 2011.
"The valuation is from the perspective of the value-in-use to Solid Energy of its business operations. It does not represent the market value of Solid Energy if it was sold," it says in the SOI.
"The gas development projects and the lignite conversion projects were valued on a reserve multiple basis," it says.
The valuation was based on Solid Energy's internal view of future prices and was not based on market consensus price curves. It was prepared internally by Solid Energy's finance team. The methodology used was the same as a year earlier, which had been externally reviewed that prior year, it said in the SOI.
The government is looking to sell up to 49% of Solid Energy, Mighty River Power, Genesis and Meridian Energy, with Mighty River set to be the first cab off the rank in the third quarter this year.
Asked at his post-Cabinet press conference today whether the government had discussed which company would be second, Key said it would be either Genesis or Meridian. Last year before it was announced Mighty River would be the first company partially sold under the 'mixed-ownership' model, Key suggested it was between Mighty River and Genesis for which was first.
“The issue with Meridian was that it’s got a new chief executive, so there’s some thought whether that should be slightly later," Key said.
Developments on the sale of Air New Zealand shares did not necessarily mean the government sale of its 73% shareholding to no less than 51% would come after the four energy companies were sold.
“Solid Energy’s got some issues we need to work through as well, so we’ll just see how that goes,” Key said.
Asked what issues Solid Energy faced, Key said he was "not in a position to want to run through those today".
Asked whether the issues included Solid Energy's planned lignite developments, Key replied:
“I wouldn’t want to draw any conclusions today.”
Key said the issues were not linked to uncertainty about Solid Energy’s mining operations, nor were they personnel issues.
Solid Energy's Spring Creek mine was shut down by the Department of Labour in February after a number of incidents blamed on faulty engineering.