Pike River: 'Simple plan' beset by problems

Rich coal seams under the Paparoa Range beckoned investors and developers for decades. Photo / Greg Bowker

From the outset the plan at Pike River was bold but simple.

A seam of some of the best coal there is - visible in the side of a cliff - was there for the taking and the world wanted it.

All the Pike River company had to do was bore a roadway tunnel through the Paparoa Range to meet the seam of 54 million tonnes, use the plentiful West Coast rain to cut the coal and then wash it out of the mine. From there it would be exported to Asia where its hot, clean burning properties were highly prized and could fetch a fortune.

Even if the company mined less than half the known reserves it would be worth $4 billion over 18 years and there was the lure of even more in deeper seams.

But the tunnel needed to be bored into a granite alpine range - described as "tiger country" by one executive. Costs ballooned, the company had to return to shareholders and banks for more money, shipments were delayed and the market lost faith.

In spite of striking tunnelling conditions worse than imagined, plain bad luck, repeated overpromising and underdelivering, those in charge remained confident the original, simple plan would work.

Even after the blasts that tore through the mine over the past week, and the death of 29 workers, those hopes have not been completely destroyed.

Some analysts say that with so much uncertainty, the mine and the company could both be doomed. But those at the helm are not giving up.

Following a board meeting, the company revealed it had insurance cover of up to $100 million to cover business interruption and work was starting on lodging a claim.

Pike River chairman John Dow said before that meeting the mine still could have a future.

"I don't think it's ended - the assets have been impaired in ways that haven't been quantified but it's not finished - far from it. The asset [the coal] has hardly been touched - You've just got to push on," he said.

"That day will come - it might be this year, it might be early in the new year it just depends on how long it takes to get back into the mine and get our boys out."

After the meeting on Wednesday, when news of the second blast had been broken to families, he was approached by relatives who wanted to carry on.

"A number of big burly miners came up to me and said 'we've got to rebuild this mine - we've got to do it for our boys.' While that might have been a bit of bravado that sentiment reflects a wider one where plenty of people think we should do it again," said Dow who was appointed following a boardroom shake-up just before the company was floated in 2007.

"We're not making any decisions like that as a company because there are things we don't know yet - you fix the things that have been damaged downstairs, you allow for a period of healing and then you think about going back."

So far $290 million has been spent on the mine, up from the estimated $170 million at the time of listing.

Dow insists, in spite of ending up attracting criticism from even its most ardent supporters earlier this year, the project up until last week's tragedy was well executed. He concedes the scale of the task was underestimated.

"We had problems geologically and it cost a bit more than we planned. The execution was more difficult than we planned. The concept of digging in from the Grey Valley side and going up the slope of the coal was a bold concept and because it was a new coal mine it had the very best of equipment, new ideas, new planning."

The company would not be saddled with 100 years of environment neglect around old workings.

"We had world's best practice and part of the attraction for [chief executive] Peter Whittall was to start from scratch, build your own mine and put your stamp on it. This was a chance for the New Zealand mining industry to show the country we had something special."

That view is echoed by locals, including mining journalist Gerry Morris who says it was the pride of Greymouth.

"The way the Greymouth community got behind it was incredible. The town is very proud of Pike River."

Before the disaster it just reached its peak workforce of 180, pumping wages of $13 million a year into the community, leading to respending locally of around $78 million.

Planning for the mine began in the early 1980s by New Zealand Oil & Gas. For decades, the Brunner and Paparoa seams visible on the west-facing escarpment had been admired from tens of kilometres away.

During a visit to the site by the Herald in 2008 Whittall's predecessor Gordon Ward explained how he and NZOG board members would bushwhack their way up the Grey Valley to mull over a site for a tunnel entrance into the ranges.





A mining licence was granted to NZOG but as the Timberlands-owned land was transferred to the Department of Conservation in the 1990s, access arrangements had to be negotiated and strict conditions set as the project also bordered the Paparoa National Park.

This took seven years but in 2004 Conservation Minister Chris Carter granted consent, saying "this mine does represent an intrusion into an area of high conservation values and a decision on whether to allow it to go ahead has been a very difficult one to make because of this".

The trip to the mine illustrates how tough the conditions were. During the site visit, ancient rimu trees were being ripped out and burned on privately owned land as it was converted to dairy farms on the border of the DoC estate Pike had driven a road through.

The road had to twist its way around the most valuable of the trees and their roots. Under the terms of the consent it was envisaged any trace of the operation - with a footprint in the bush of less than 20ha - must be ripped out, land rehabilitated and trees replanted when the mine was shut.

While Pike River early this year admitted to minor pollution of a stream, it has won praise for its pest eradication work and picked up a DoC award for its commitment to eradicating pests and its environmental record. But it was the tunnelling that provided most headaches for Pike. Contractors McConnell Dowell almost immediately struck problems which gobbled up the budget and led to cost overruns.

The tunnellers used the drill and blast technique to bludgeon their way into the gneiss rock, using tonnes of low explosive. But the rock was more fractured than expected. The ceiling and walls of the 4.5m high and 5.5m wide tunnel had to be secured by fine mesh bolted into the rock, and in places lined with sprayed-on concrete 15cm thick.

By July 2008, tunnellers had inched their way through the Hawera Fault, a potentially gas prone area of heavily fractured rock. Three months later the 2.3km tunnel hit its target - the Brunner seam.

But the problems were far from over. In February last year, the main ventilation shaft collapsed, requiring more than $7 million in repairs.

Workers hit hard rock rather than the expected coal in a roadway area at the head of the tunnel and mining machines broke down, requiring expensive repairs.

While tunnelworkers were battling with brutal underground conditions, money was running short. The company was forced to go back to investors four times. In March 2008, it raised $60 million in a rights issue and US$30 million in a convertible bond issue and in April 2009 it raised $45 million in a rights issue and share placement.

In May this year it was back in the market with a $10 million share placement and a $40 million rights issue. In September NZOG agreed to the $25 million short-term funding facility which, following the blast, has been extended to February of next year.

Pike River scratched out some coal using traditional methods but its hydro-mining technique, using supercharged waterblasters to attack the coal seam and then wash it out of the mine in sluice pipes, only started in October - more than two years later than hoped.

One analyst described Pike River Coal as "serial offender" at overpromising and underdelivering. Market frustration built.

By October, Ward who had led the project for 14 years, had left the company and he was replaced by Whittall who had worked as the general manager of mines for five years.

One of Whittall's first acts was to recalibrate expectations. Production targets were almost halved and he told investors at the company's annual meeting during the week before the blast that he would take a more conservative approach.

"Now it's time to be more realistic in our approach and forecast production at rates which we have a realistic chance of achieving."

Another analyst said it was Whittall's time.

"His experience is more in the operations side. From an investing perspective if your problem is with hitting production you want a hands-on guy to hit targets. When you've got two or three other operations and you're looking at buying and expanding that's when you need a more corporate guy."

So what are the chances of the survival of the company - which has just one mine which nobody can enter because of the risk?

This week a Bloomberg survey of analysts didn't hold out much hope for the operation which was costing about $6 million a month to operate.

"It's their only operating asset, and it's shut, and it's going to be shut for the foreseeable future," said Cameron Peacock, of IG Markets in Melbourne."You can't see it opening any time probably within the next six to 12 months. The near-term future is going to be pretty bleak," he said.

"If I were a Pike River shareholder, I'd be saying that investment's gone, unfortunately. Down the track, in six to 18 months, when things are cleared, you might be able to extract some value."

Macquarie Group said it while it was early, it cut 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."

NZOG holds 29.4 per cent of Pike and other shareholders include customers Gujarat NRE of India, with a 7.1 per cent stake, and Saurashtra World Holding Private with a 5.5 per cent stake. As at July 2, New Zealand institutional investor Accident Compensation Corp held a 4.9 per cent stake and New Zealand Superfund had 1.7 per cent.

Local Gerry Morris says there are a fair few Coasters among the small shareholders. "You can stand on Mackie St in Greymouth and hear the town quietly sobbing. Not just for the victims but for the pride that they had in the mine."