Solid Energy Interim Results

For Announcement to the Market

21 February 2012

Summary Highlights
• Profit of $70.3 million, a 56% increase on the first half of 2010 ($45.2 million).
• Record first half coal sales of 2.36 million tonnes (Mt), up 9%.
• Coal production of 2.06 Mt for the half, in line with last year.
• USD coal prices up 31% on last year, despite softening throughout the period.
• Long-term growth strategy on track. Key project milestones being realised.
• Outlook: second half profit expected to be substantially down due to weakening international coal prices and the stronger New Zealand dollar.

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MEDIA RELEASE

21 February 2012

Good financial result in toughening market, volatile short-term outlook
In a toughening international market, Solid Energy’s $70.3 million profit for the six months ended 31 December 2011, up 56% on the same period last year (2010: $45.2 million), is a good result which was boosted by carryover volumes and strong prices, says Solid Energy Chairman, John Palmer.

“The volatile global economic environment put volumes and prices under increasing pressure by the end of the half year. We expect these conditions to continue in the short to medium term. This, coupled with a high New Zealand dollar, will significantly reduce the prices and revenue we receive in New Zealand dollars in the second half of the 2012 financial year,” Mr Palmer says.

The half year result was boosted by three shipments carried forward from the 2011 year due to damage at the Port of Lyttelton following the June earthquakes. Strong global coal prices at the beginning of the half year and good production performance at Stockton Opencast Mine were other major contributors to the result.

At 2.36 Mt, coal sales for the half year were up 9%, a record first half result (2010: 2.17 Mt), boosted by product stockpiled due to shipping delays at the port caused by the June earthquakes. Coal exports were 1.23 Mt, up 6% on the previous corresponding half year (2010: 1.16 Mt), with New Zealand coal sales up 12% to 1.13 Mt, (2010: 1.0 Mt).

In February 2012, Solid Energy agreed to buy Cargill’s 49% share of Spring Creek Mining Company. Solid Energy may consider a new partner at Spring Creek Mine after Cargill’s global decision to exit coal production.

In the first half the company met a number of key milestones in delivering its long-term growth strategy in its Coal business and New Developments projects. Mr Palmer says the company is on track to deliver three key projects in the next period: commission the Mataura domestic-scale briquette plant, at an expected cost of $29 million, produce first syngas at the $22 million pilot underground coal gasification plant in the Waikato and produce and export electricity into the national grid from our $27 million Huntly coal seam gas demonstration plant. The $30 million ventilation shaft development at Huntly East Mine is on schedule to service the northern extension of the mine from the end of 2012.

The company paid a dividend of $30 million on 30 September 2011. Mr Palmer says that given the volatility and significant softening of international coal markets, the company has not declared a further dividend at this time.

Financial Review
Earnings before Interest and Taxation (EBIT) for the half year were $104.0 million, up 50% from $69.4 million in the first half of the 2011 financial year.
The Port of Lyttelton was temporarily damaged as a result of June earthquakes and as a result, three coal shipments were deferred into this financial year, resulting in an increase to EBIT of $19.8 million.
Prices and Foreign Exchange: International coal prices remained high in the first quarter of the financial year due to the final impacts of the Queensland floods. Over the remainder of the period prices have tracked down as a result of weaker markets. Overall export coal prices were up 31% on the previous corresponding half year, increasing EBIT by $58.2 million. The stronger New Zealand dollar against the US dollar, partially offset by foreign exchange hedging, reduced EBIT by $12.1 million.

Volume: Excluding carryover shipments, coal sales volumes were 43,000 tonnes higher for the period, increasing EBIT by $3.3 million.
Costs: Cost of sales, exploration and other costs increased year on year by $34.6 million. The company continues to build capability at all levels to support our strong long-term growth strategy. It is also advancing strategies to retain staff across the business against significant on-going escalation of personnel costs, caused primarily by the commodity boom and an overheated mining industry labour market in Australia. Exploration costs increased by $4.9 million to $15.7 million. The company has ramped up exploration drilling on the West Coast.

Tax Expense: The group tax expense increased by $9.7 million to $28.7 million on higher earnings.

Underlying Earnings: Underlying Earnings for the half year were $75.6 million, up 72% from $43.9 million in the first half of the 2011 financial year.

A provision of $8.5 million (before tax) for a legal claim in relation to a former mine contractor has been made in the period. The amount is based on management’s best estimate at 31 December 2011 of the possible costs in relation to the claim. This amount has been excluded from Underlying Earnings. The matter is proceeding to arbitration and is expected to be settled by 30 June 2012.

Impairments have also been excluded from Underlying Earnings.

Capital Management and Funding: Total assets at 31 December 2011 were $1.2 billion, up $190 million on the same time last year. The increase is due to a continued capital programme focused on existing operations as well as new technologies to maximise shareholder return and long-term value. Gearing was 31% (2010: 26%) with total debt of $245 million at the end of the period, comprising bank debt of $175 million and Medium-term Note issues of $70 million. During the period $115 million of existing banking facilities which were due to expire in November 2012 were extended out over periods up to six years. An additional $100 million of new facilities is being placed with existing banks for periods up to five years. Funding costs have increased due to increased debt levels.

Cashflows: Operating cashflows in the half were equivalent to last year at $91 million. The movement in working capital was adverse due to timing of customer receipts, although this was offset by increased cash receipts from higher prices. Capital investment in the half year totalled $77.5 million compared with $48.3 million for the same period last year. Of this, $47.8 million related to sustaining our current operations and $29.7 million to growth initiatives.

Production: At 2.1 Mt, coal production was in line with 2010. Production at Stockton Mine was up 8% in the half to 871,000 tonnes. Production at Spring Creek Mine was down 28% to 200,000 tonnes as the mine is now developing the next five-year extraction block.

Production at Huntly East Mine has been reducing over the last year, down 14% for the half to 169,000 tonnes due to harder mining conditions in some of the extraction blocks. Coal production is expected to be back to plan in the second half of the year. At Rotowaro Mine production was down 6% to 577,000 tonnes during the transition from HWE Mining to Stevenson Mining Ltd as operator of the mine. Production at New Vale Mine in Southland was up 10% to 156,000 tonnes. Production growth at our underground coal mines is being constrained by 20% employee turnover but we are increasing our trainee miner intakes combined with bonding arrangements to slow the turnover rate.

Wood pellet production in the December 2011 half year increased by 14% to 25,000 tonnes. Sales volumes increased by 5% to 23,000 tonnes in the half year with continued strong sales growth due to new commercial customers and exports of premium bagged fuel to the European winter residential market. Biodiesel production for the half year was 989,000 litres, up 27%, with sales volumes down 2% to 934,000 litres.

Outlook

John Palmer concludes: “We are actively managing the business to minimise the impacts of a weaker international coal market and to maintain performance. We are expecting further weakening of international coal prices from current levels in the short term due to lower Chinese demand for coking coal for steelmaking. Profitability in the second half is expected to be down substantially on the first half result.

“Unlike the 2008 global economic downturn when prices rebounded relatively quickly in the following year, we expect the current slowdown could be significantly prolonged, impacting on the full year result and the first half of the 2013 financial year. While the short-term economic environment will continue to drive volatility in international coal markets, we remain confident in our long-term demand outlook which is strong and unchanged.”

Segment Results
Revenue EBIT
2011 2010 Change 2011 2010 Change
Coal 520.6 417.0 +25% 136.3 105.4 +29%
Renewable
Energy 16.7 12.8 +31% (7.5) (7.9) +5%
Corporate & Other 0.3 0.2 - (24.8) (28.1) +12%
Total 537.6 430.0 +25% 104.0 69.4 +50%

Consolidated Income Statement
2011 2010
Half Year Ended 31 December NZ$’000 NZ$’000
Revenue 537,617 430,044
Cost of sales (429,287) (353,114)
Gross profit 108,330 76,930
Other income 2,216 1,317
Exploration, evaluation and development (15,725) (10,776)
Shared services and administrative expenses (14,544) (13,451)
Impairment reversal / (impairment) 855 1,328
Results from operating activities 81,132 55,348
Realised and unrealised gains on derivatives 27,781 17,554
Finance Income 1,590 202
Finance expenses (11,432) (10,788)
Net finance benefit 17,939 6,968
Share of profit/(loss) of jointly controlled entities (49) 1,898
Profit before income tax 99,022 64,214
Income tax expense (28,737) (19,035)
Profit after tax 70,285 45,179

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