On Tuesday, in connection with the revised national budget, the Norwegian government presented Proposition 118 S, defining the terms of an emergency assistance package for Store Norske The legislation proposes the government pay 295 million kroner to acquire Store Norske's land and infrastructure, and that the state assume 100 percent ownership of the company by buying the 0.06 percent of shares that are now privately held.
In addition, the coal company will receive a loan of 205 million if Parliament approved the bill as submitted. The interest rates would be between 12.45 and 17.45 percent due to their high risk.
The consulting company Deloitte evaluated the commercial issues relating to the application for the emergency loan. In the assessment, the company points out it is necessary with new excavation work in the new Lunckefjell mine to ensure the company is fiscally functional by 2016, but that depends on a significant increase in coal prices. That risk must be reflected in the interest rates, the company advises.
Store Norske Administrative Director Wenche Ravlo said she supports the assessment.
"It is a high-risk loan and there is a high probability that the full amount may be lost," she said. "It should be priced accordingly. The government may not make any difference, it may be seen as subsidizing."
Risk of liquidation
The risk lies in Store Norske's reliance on higher coal prices as it resumes its work at Lunckefjell. To save money and allow for restructuring, the company decided last year decided to stop further entry work into the mine, but by 2016 the company is depending on coal there as something to operate on To avoid a delay, entry work must start in the autumn of 2015. "Any such entry in Lunckefjell is necessary to continue operating after 2016 and will require significantly increased coal prices to be implemented in 2015 and an even larger increase in 2016 – because SNSG will then incur an additional period of entry without production," Deloitte wrote in its analysis for the Ministry of Trade, Industry and Fisheries.
The consulting firm also notes that bankruptcy or a controlled liquidation of Store Norske Spitsbergen Grubekompani, a subsidiary of Store Norske Spitsbergen Kulkompani, may be the outcome.
The government takes this assessment further in its proposal to Parliament:
"If market conditions do not improve, there is great risk that coal operations at SNSG by the end of 2016 may be dismantled," the legislation states.
The problem for Store Norske is when it made a round of cuts where about 100 of 340 employees were let go, it was projecting a sustainable operation with a coal price of $75 dollars a ton. The current price is $15 a ton less than that.
The proposed legislation by the government also points this out and states that operating beyond 2016 depends on improved market conditions, and the coal company successfully restructuring and finding new markets for specialized high-quality coal used by the metallurgical industry.
The government states that because the future prospects for coal in Svalbard are uncertain it will consider how the state can contribute to the restructuring of the Svalbard community, which will also be reflected in the redrafting of a "white paper" defining policy goals for Svalbard.
Numerous parties have been involved in the assessment of the state-owned coal company after the board of directors in January asked for emergency loans of 450 million kroner – 400 million to continue coal operations and 50 million to develop new business models through a subsidiary known as Store Norske Development (SNU). The conclusion after the review was that the company's capital needs are even larger. As a result, the trade ministry recommended an assistance package of 500 million for coal operations without considering the 50 million kroner loan to SNU.
"The proposal helps to solve a difficult situation for the company," said Monica Mæland (Conservative Party), head of the ministry. "At the same time the state gets ownership of key properties. It is important to maintain both economic activity and a settlement in Svalbard. The mining by Store Norske is a contribution to this."
That means Ravlo needs to succeed. Both Ravlo and Arild Olsen, the union steward for Store Norske's employees, emphasized the content of the proposal to Parliament does not deviate from what the parties agreed during the negotiations that ended in April.
"This is entirely consistent with what we've been talking about all along, but now it states that in the bill," Ravlo said. "That is the goal that we must put every effort into now."
Does she feel comfortable with the situation?
"There is nothing that is comfortable in the situation there is now and our job is do what we can," said Ravlo, adding she is pleased with the agreement.
"It is a good solution out of the situation we are up in and it's been a tough negotiation," she said. "Now we know how we should respond and we have reached a good solution."
"We have taken down the costs and the company has show an ability to survive, so I have confidence. But much of this will obviously depend on getting the premium qualities and we have realized this," said Olsen, referring to the work of processing the coal to achieve higher prices.
It is primarily here the difference between $60 and $ 75 a ton can be realized.
"I feel that there is still willingness for the company to survive, but it is clear that people are troubled," Olsen said, adding he agrees with the ministry's warning about liquidation:
"It is actually just a further clarification of what we have said all along, that the job is nowhere near done."
Nor does Longyearbyen Mayor Christin Kristoffersen (Labor Party) expect the challenges are over, reemphasizing a point she made after Mæland's press conference in late April announcing the recommendation of a bailout package.
"A decision can't change a market situation," said Kristoffersen, adding she is happy work on a new business plan for a future industrial structure in Longyearbyen is has been completed and the process is underway.
How much progress can be made in the short time before the end of 2016?
"The important thing for me is that our work is valued and that local community is at the forefront of the changes that may come even more quickly," she said.
"We have worked with respect for such potential problems throughout," Kristoffersen added. "We are prepared, but we will have to further intensify our efforts."
Translated by Mark Sabbatini