The rapid deterioration in the global economy at the end of last year dashed the half year profit expectations of government coal miner Solid Energy.
The state owned enterprise today reported a net profit for the six months to the end of December of $78.4 million, compared to a loss of $2.8 million a year earlier.
Chairman John Palmer and chief executive Don Elder said the result for the latest period, while still a record, was far below earlier projections.
Although revenue for the half year more than doubled to a record $516m, events in December reduced profits substantially, they said.
The net profit was hit by impairment adjustments of $37.4m, made as a result of an uncertain and volatile outlook for both export andNew Zealand markets.
Solid Energy is to pay a $25.5m dividend in March to the Government.
Mr Palmer and Dr Elder said the strongest export market conditions in Solid Energy's history created record coal prices throughout most of 2008.
Revenue and profits were both ahead of plan through to October, but in November customers began to defer export shipments and seek substantial price reductions, and every planned December shipment was deferred, they said.
A downward trend was expected to continue through 2009 and into 2010.
Steel makers worldwide had cut production by up to 30 percent. Current export coal spot prices were down by more than 50 percent and contract export prices were likely to follow. A similar pattern was expected in this country.
Impairments included $19m for losses expected in closing out foreign exchange contracts.
The rapid devaluation of the New Zealand dollar against the US dollar created significant mark to market losses on Solid Energy's forward foreign exchange contracts, even though the company remained within normal treasury policy for foreign exchange hedging through the period.
With decreasing sales volumes and prices, the company also had surplus foreign exchange contracts at the end of the period.
A review of Solid Energy's biodiesel business, considering a significant decline in diesel prices and changes in legislation, resulted in a $6.1m impairment, Mr Palmer and Dr Elder said.
Weak near-term gas prices and lower gas flow rates than previously assumed led to a write-down in the company's investment in coal seam gas by $6.3m.
The value of the New Vale opencast mine in Southland, bought in 2007, was written down by $6m due to a combination of mining costs higher than expected and market growth slower than planned.
Solid Energy's export revenues would not benefit from the significant fall in the New Zealand dollar this financial year, and only partially benefit in the 2010 year, due to the company's forward foreign exchange cover. Falling export prices and deferral of shipments were compounding the matter.
Higher debt levels and a resulting significant increase in funding costs would have a marginal effect this year, but a greater impact next year, Mr Palmer and Dr Elder said.
"We are fortunate to have entered this downturn with a relatively strong balance sheet."
The short term outlook was highly uncertain and volatile. Reduced export demand and prices would significantly reduce revenues and profits in the near term.
In the past year major operating expenses and capital expenditure were incurred to secure future production and to meet environmental, health and safety and other key objectives.
"We are already committed to a number of important capital projects that will create a significant draw on our balance sheet over the next two years during which our operating cash flows will be much weaker than anticipated and our debt position will increase significantly," Mr Palmer and Dr Elder said.
Projects had been re-prioritised its projects. Production was being reduced at some locations, and capital spending was being cut by slowing and deferring projects in a range of areas.
"However, we currently retain confidence in our long-term expansion and diversification strategy, which is driven in particular by expected continued growth in China and India."
