Hwange Colliery needs more than a financial reboot

Hwange Colliery needs more than a financial reboot

HARARE, April 11 (The Source) – Hwange Colliery Company’s latest set of financial results raise questions about its going concern status and the ability of its major shareholder, the government, to engineer a turnaround of the coal miner.

Given its financial history in the past five years, and its precarious balance sheet which shows total liabilities exceeding total assets by $168 million, lenders are unwilling to extend any financial assistance, chairman Winston Chitando conceded.

“The Company during the year faced serious liquidity challenges with financial institutions and creditors unwilling to extend lines of credit,” said Chitando in a statement accompanying the company’s 2016 financial results.

The shortage of working capital to purchase critical inputs and spares has constrained the company’s capacity utilisation with total raw coal mined declining by 37,78  percent to 969,153 tonnes relative to 1,557,567 tonnes in 2015.

Hwange has been in financial crisis for so long that it seems a trick of the mind that it remains in operation.


Financial review 2012-2016

Revenue has been dropping in the last three consecutive years on the back of low production volumes worsened by inadequate working capital.

On average, revenue has been declining by 11 percent every year since 2013. The  worst was in 2013 when revenue dropped 40 percent to $39,9 million from $67,6 million in the previous year.

The colliery has been also recording an operating loss since 2013, implying serious operational efficiency. In 2013 the company recorded an operating loss of $40,4 million from its last operating profit in the past five years of $7,1 million in 2012.

The company last recorded a net profit in 2012 of $3,1 million, followed by a net loss of $30,9 million in 2013. The figure has stood at $115,1 million and $89,9 million in the past two years respectively.

Between 2013 and 2016, the company had accumulated losses of  $258,6 million and had a negative equity position of $167,6 million as at December 31, 2016.

Total assets valuation has fallen dramatically, from $256 million in 2012 to $182,7 million in 2016 while liabilities have more than doubled to $360,4 million in the same period.

Debt overhang overshot as borrowings trebled in 2016 to $91 million from $29,8 million in the previous year following the major shareholder, government’s efforts to bailout the ailing company through issuance of treasury bills.

The government, through the ministry of finance issued treasury bills of $41 million and $18,2 million in settlement of the MotaEngil debt and RBZ/PTA Bank loan, respectively.


Cost cuts

The company said it has implemented a cocktail of aggressive cost reduction initiatives to curb an unsustainably high cost structure and mitigate production inefficiencies mainly focused on cutting administrative expenses.

Chitando said these cost reduction initiatives include reduction of managerial staff by 30 percent, adding that in the period between October 2016 to March 2017, management salaries were reduced by 50 percent while non-managerial employees were on short time work (2 weeks every month)  resulting in a reduction in the wage bill by 50 percent.

The company also instituted measures for establishment of a contracts administration and procurement policy to minimise the cost base as well as reinforcing corporate governance.



The company believes there are enough opportunities to ensure its survival, including commencement of exploration drilling, coal reserves and resources estimation at the Lubimbi West coalfields later this year. A similar exercise is planned for at the Western Areas coalfields while the 25 years’ coal supply agreement with ZPC’s Hwange Power Station should guarantee a ready market.

Additionally, the expiry of the Build, Own, Operate and Transfer (BOOT) agreement with Hwange Coal Gasification Company will imply the Colliery’s takeover of the coke oven battery by mid-2017, allowing it to fully control the unit and expand its operations.


Analyst’s view

The Colliery’s debt alone, before taking into account borrowings, exceeds total assets. Current liabilities of $237 million versus total assets of $182,6 million imply that even if all of its assets are liquidated, they won’t be able to cover short-term creditors.

As Chitando noted, the company is not in a position to qualify for a loan from a reasonable financial institution, all things considered.

Government’s efforts to bailout the struggling mining concern are relatively piecemeal given the level of indebtedness.

Even the conversion of short-term debts to medium and long-term may not the solution given the company has already proven over the years that it does not have the capacity to improve its operations.

Gross losses of $37,8 million in 2016 and $33,8 million in 2015 are proof of the inefficiencies in its overall production scope which means the company is not even able to make a profit after deducting the costs associated with providing its services.

Opportunities available to the Colliery as well as coal bed methane gas prospects require an investor with the technical and financial muscle to exploit them.

Hwange is on the verge of collapsing under the weight of poor strategic thinking on the part of its owners. Given the paucity of its own resource pool, government should give private investors a chance if the company is to survive.

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