‘HCCL balance sheet worrying’
HWANGE Colliery Company Limited (HCCL) this week released its interim financial results for the half year ended 30 June 2016, which paint a sad picture about the performance of the strategic entity.
While management projects the company as a going concern, after narrowing losses to $22,7 million from $44 million, a look into the firm’s balance sheet tells a different story.
The company’s persistent losses have chewed shareholder value, as reflected by a decline in total equity since 2013. Total equity dropped from $106.62 million recorded in 2012 to a negative $77.83 million in 2015, previous reports indicate. Shareholders equity as reported is now negative at $ 106 million. Shareholder value as in the reported balance has been wiped out.
The company’s liabilities at $310 million shockingly outweigh the $61.4 million assets value by 408 percent, which shows the company is technically insolvent, a state of inability to pay one’s debts.
By zeroing in on the balance sheet again it is evident that the colliery’s liabilities are increasing exponentially thereby putting the company at high risk despite efforts to protect it.
For instance, the financial report indicates that between December 2015 and June 30, 2016 the liability burden rose by $23 million from $287 million to $310 million.
The company owes substantial amounts to its different creditors who include workers, finance institutions and suppliers. Experts say this debt burden creates a serious problem in the economic value chain especially considering that trade creditors in the private sector, for example, also have obligations to meet such as labour and taxes. Citing alleged mismanagement, workers are demanding that the company be placed under judicial management while management insists on having scheme meetings with its creditors in order to come up with a document that stipulates the structure of the scheme and a proposal to liquidate creditor claims. While management approached the courts for protection against bankruptcy it has missed its own target to meet with creditors more than two times.
As a result of accumulated losses, the company has failed to honour its obligations including those incurred after being granted protection from agitated creditors. The company is failing to support its continuing concern activities including paying employees. The cases the company has lost in litigation amount to over $40 million. The deteriorating balance sheet does not support the alleged management position of going concern capabilities.
It appears there is a dire need to control further accumulation of the debt burden which continues to expose the firm. Given this outlook it remains unclear how the colliery will make itself attractive to finance houses.
Board chair Mr Winston Chitando has highlighted some plans meant to improve operations at Hwange going forward. The plans are anchored on the proposed scheme of arrangement that is yet to be finalised. The scheme include cost restructuring, revitalising open cast and underground mining, coke production and anticipated business from Hwange Thermal Power Station expansion as well as coal bed methane gas opportunities.
These projects require substantial funding and in the circumstance of a non bankable balance sheet it is prudent that management looks at more prudent options as borrowing is not an option. Resuscitation of underground mining alone requires $6.3 million, said Mr Chitando. He added that the company was also in talks with some finance entity to secure $7.5 million working capital and an additional $3.5 million from another bank.
Ironically, this is a company that last year received a $32 million boost in production through a Government guaranteed loan. The equipment was officially commissioned by Vice President Phelekezela Mphoko mid-2015 and has not yielded positive gains in output, recent reports show. The report is conspicuously not reporting on progress made to get the equipment to contribute to the performance of the company.
As Mr Chitando puts it, “The company has been facing challenges in meeting scheduled repayments on loans and leases owing to liquidity challenges”. Moreover, as part of ZAMCO loan agreement, Hwange Colliery was obliged to insure all its movable assets and stocks valued at $15 million as part of collateral for the $14.8 million loan. The company is yet to insure these assets, again due to liquidity constraints. These statements reflect that the company is not on a recovery path, it is choking under debt commitments.
The company is also set to restructure its balance sheet with the largest shareholder, the government, which holds 37 percent equity, agreeing to restructure short-term obligations amounting to $87.9 million into long term financial instruments, a move which is expected to relieve the company from its constrained working capital position. The balance sheet restructuring effort has been on the cards for the past three years.
Further, the company expects to gain leverage of up to $7.5 million from coal supplies to the power stations yet in the past it has admitted to inadequate supply to the same as evidenced by its suppressed average output.
Hwange Colliery’s core business revenue from mining has been going down from $30 million in June last year to $20 million in the same period this year due to depressed production. The figure accounts for 33 percent decline. A corresponding drop is noticeable in coal supplies to ZPC as well as industrial coking coal. Sales of major products, coal and coke, have been dropping with subdued commodity prices also contributing to the fall in revenue.
The estates division has also not been spared, more so given the background of a $2 million scam involving paid-for supplies that were never delivered to the company as revealed in an internal audit report released recently. Prominently missing in the financial report is the explanation and comments on the input of the contractor Mota Engil, which has been doing the bulk of the work and is owed millions of dollars.
This has become a familiar script for the miner, which has somehow become a symbol of corporate inefficiency despite getting all the support from the major shareholder, the government.
Other major shareholders include Nicholas Van Hoogstraten with 31 percent equity through various vehicles and Mittal Steel Africa with 10