Czech miner NWR claims its collapse could cost state €1.2bn

Czech miner NWR claims its collapse could cost state €1.2bn
London-listed NWR is pressing the Czech government to contribute to keeping it afloat until coking coal prices recover.
By Robert Anderson in Prague April 7, 2016

The immediate closure of New World Resource’s Czech mining operations would knock 0.4 percentage point from the country’s GDP and cost the state budget CZK33bn (€1.2bn), the loss-making company has warned the government.

London-listed NWR, which was taken over by its leading bondholders in February, is pressing the Social Democrat-led government to contribute to keeping it afloat until coking coal prices recover.

Prices have halved since 2011, rendering several of NWR’s mines uneconomic and leaving the miner barely able to service the huge debt burden racked up by its previous owner, the controversial financier Zdenek Bakala, who also sucked assets and massive dividends out of the once highly profitable OKD mines. NWR will run out of cash to service its debts in the third quarter unless more money is injected.

A trio of big bondholders – Ashmore Investment Management Limited, Gramercy Funds Management, and M&G Investment Management Limited – now controls 60% of the voting rights and two-thirds of the debt. They have given the company a waiver on its debt covenants until the end of June on condition the government makes a binding agreement by the end of April to take part in a rescue. They want the government to pay for the social costs of the mine closures and contribute cash alongside them to stop the company running out of money. 

“We can’t ignore this issue any more,” said a NWR spokesperson. “We need them to immediately attend to this.”

However, up till now ministers have prevaricated, offering only to pay for the social costs of the closures.

Finance Minister Andrej Babis told Reuters that the cabinet would discuss NWR’s mines at its meeting on April 7, though a decision was unlikely. "The primary aim is to keep OKD functional, maintain employment and prevent mass layoffs, with or without owners and creditors," Babis said.

According to an analysis prepared by Deloitte, NWR’s advisers, and delivered to the cabinet this week, a gradual restructuring of the miner – in partnership with the government – would be much less costly than an immediate insolvency at the start of July.

“In the first 18 months the costs would be significantly higher on the production, employment and fiscal side,” David Marek, a director at Deloitte and the author of the report, told bne IntelliNews. “The fiscal costs of immediate closure would be twice that compared to the gradual adjustment of the company.”

According to Marek, the fiscal cost of immediate closure over the same period would be CZK33bn, compared to CZK17bn under gradual restructuring. In 2017 – the peak of the costs – immediate closure could increase the budget deficit by half, from 0.4% of GDP to 0.6%.

Under an immediate closure, the Czech economy would lose CZK110bn of sales in 2016-2022 and CZK62bn of value added. Under a gradual restructuring, the losses would be CZK38bn and CZK19bn respectively.

In the Moravian-Silesian region the consequences of immediate closure would be particularly severe, with employment falling by 4% and GDP by almost 5%. OKD, NWR’s operating company, employs 13,000 workers and a further 8,000 jobs would be lost at the company’s 1,200 suppliers, according to the report.

“Even gradual closure is quite costly,” Marek said, “but immediate closure would create a significant amount of stress, especially at the beginning.”

He said that the report conservatively estimates that a quarter of the workers would be able to find new jobs, though that could be difficult in the depressed Karvina area. “The costs could be even higher,” he stressed.

The gradual restructuring scenario envisages half the group’s mines closing over the next two years. Paskov mine would be shuttered in early 2017, and Lazy and Darkov mines’ underground operations would cease in early 2018. CSM North mine would be significantly downsized, but it would continue operations, together with CSM South and CSA.

Jan Mladek, the industry minister, told bne IntelliNews at the end of March that the Ad Hoc Group of bondholders had offered to inject an extra €35mn into the group and write off a further €470mn of gross debt. But in return they proposed that the government help fund NWR until they can recoup some €115mn of their loans.

“They are asking us to provide an unlimited guarantee,” Mladek said, warning that such an injection of state aid to stop the company running out of cash “might be [needed for] a very long time”.

He said he had suggested instead that the bondholders should just hand the company over to the government. Alternatively, the state could take over the mines during insolvency proceedings.

A spokesperson for the bondholders said Mladek’s figures were “completely misleading” and “taken out of context”