Pike River Coal May Be `Worthless' After Fatal New Zealand Mine Explosion

Pike River Coal Co. faces an indefinite production shutdown at its New Zealand mine after two gas explosions that police say killed 29 workers.

“It’s their only operating asset, and it’s shut, and it’s going to be shut for the foreseeable future,” said Cameron Peacock, a market analyst at IG Markets Ltd. in Melbourne. “You can’t see it opening anytime probably within the next six to 12 months. The near-term future is going to be pretty bleak.”

New Zealand Oil & Gas Ltd., Pike River’s largest shareholder, this week had its biggest share drop on record after resuming trade following last week’s first explosion. Prime Minister John Key said yesterday he expects cabinet next week to approve a commission of inquiry into the blast.

Pike River, which expected to get NZ$4 billion ($3.1 billion) in export sales from the mine, slumped 14 percent to 61 Australian cents in Sydney on Nov. 19 before trading was halted. The company fell 4.4 percent to 88 New Zealand cents at the Wellington close on the same day. The stock was suspended on both exchanges Nov. 22.

“Given the high level of uncertainty regarding the nature of the incident, it is impractical to usefully discuss its potential value implications,” Macquarie Group Ltd. said in a note, cutting its recommendation to neutral from outperform. “However, it must be highlighted that a possible result is the current equity of Pike River Coal could become worthless.”

Mine Options

Pike River will hold a board meeting tomorrow to consider options for the operation, Chief Executive Officer Peter Whittall told reporters in a televised press conference in Greymouth today. It would be “at least days” until anyone could enter the mine and sealing it is an option, though not the first or second choice, he said. As a mine engineer and manager Whittall said he expected the operation could re-open. “There’s still 50 odd million tons of coal there.”

New Zealand Oil & Gas owns a 29 percent stake in Pike River, while India’s Gujarat NRE Coke Ltd. owns 7.14 percent and Saurashtra Fuels Pvt. has 5.5 percent. Wellington-based Pike River, which owns New Zealand’s largest premium coking coal resource, last month fell by the most in two years after slashing its full-year production target.

“It was a new mine with all new infrastructure,” Arun Kumar Jagatramka, chairman of Gujarat NRE Coke, said Nov. 22 in an interview. “Underground mining involves some challenges that are beyond human control.”

Bonds, Loans

New Zealand Oil & Gas, whose shares rose 5.6 percent to close at 94 cents at the 4:45 p.m. close Wellington time, had paid about NZ$82 million for its stake in Pike River, according to a Nov. 23 regulatory filing. The carrying value of the investment was NZ$77 million at June 30. The value of the company’s funding to Pike River, including bonds and loans, was equal to about 16 cents a share, it said.

“The secured creditors of Pike River Coal Ltd. have agreed to a stand-still period of 90 days,” Wellington-based New Zealand Oil & Gas said today in a statement.

Two mines in the Moura district of Queensland state in Australia were sealed after mine explosions in 1975 and 1994 killed a total of 24 miners, whose bodies weren’t recovered, according to the Queensland Department of Mines and Energy website. The bodies of 12 miners killed in a 1986 explosion at a third mine in the district were recovered, it said.

Seal Sections

Pike River may seal off sections where the explosions occurred after flooding the mine with inert gases such as nitrogen to starve any fires and make the mine safe for re-entry, said Andrew Harrington, an analyst at Patersons Securities Ltd. in Sydney, who visited the project about a year ago.

“There’s so much capital invested, and it’s such an employment opportunity in the area that, if the mine is recoverable, despite the history, there’s plenty of income and salaries to be made, that people will go back in,” he said.

Pike River, with a NZ$357 million market value, had NZ$21 million in cash and near-cash items and NZ$43 million debt as of June 30, according to Bloomberg data. The company was forecast to have net income of NZ$3.1 million this fiscal year, according to the median of three analyst estimates compiled by Bloomberg. This was estimated to rise to NZ$80 million in fiscal 2012.

“It is possible that the suspension could remain in force for a number of months given the seriousness of the incident and promised government inquiry,” Macquarie said in the Nov. 23 report. “We intend to clarify with management, at a later stage, the existence and extent of any insurance cover in place at the mine.”

‘Too Hard’

The mine was forecast to produce 320,000 to 360,000 tons of coal in the year through June, the company said Oct. 19. That almost halved an April forecast and was caused by equipment and road construction delays. Pike River needs to refinance a NZ$25 million loan before Dec. 15, Deutsche Bank AG said Oct. 20.

“A lot is unknown at the moment. We still don’t know what happened, we don’t know conditions inside the mine,” Jason Familton, an analyst at First NZ Capital Securities Ltd. in Wellington, said. “There are lots of questions that need to be answered. Until then, it’s just too hard to assess.”

New Zealand, which has an estimated 15 billion tons of coal reserves, exports to India and Japan as well as the U.S. and China. Pike River had agreed sales contracts with international customers for as much as 90 percent of output for the life of the mine, Whittall, who took over the top job in September, said in a presentation this month.

Asian Demand

Demand from Asia drove fourth-quarter coking prices up 62 percent from a year earlier to $209 a ton, according to a benchmark contract between BHP Billiton Ltd. and Japanese steelmakers JFE Holdings Inc. and Kobe Steel Ltd. Goldman Sachs Group Inc. last month raised its average price forecast for next year by 4 percent.

Pike River began construction of the mine near Greymouth on the nation’s South Island in September 2006 and exported its first coal in February this year, a year late after problems with equipment and a rock fall in a ventilation shaft in February 2009. Sales could total NZ$4 billion over the life of the mine, based on 17.6 million metric tons of saleable coal, a price of $136 a ton and historical exchange rates, the company said in the presentation.

“If I were a Pike River shareholder, I’d be saying that investment’s gone, unfortunately,” IG Markets’ Peacock said Nov. 23. “Down the track, in six to 18 months, when things are cleared, you might be able to extract some value.”

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To contact the reporter on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net

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