John Key's National Party government has signalled that it will privatise state owned assets in its next term in government. The assets it has signalled for sale are mostly the power assets:
1. Might River Power
2. Solid Energy
3. Genesis Energy
It seems like the government intends to retain ownership of the hydro assets for the time being. A government has conducted a study of the value of these assets, and believes that Solid Energy is only worth half of the $3.5 billion attributed to the entity by Solid Energy executives. I tend to agree with Solid Energy. The company has some significant assets, though central and state ownership of those assets can only hinder their commercial value. Consider the projects:
1. Coal resources & Huntly power station - The power station must be worth $300mil alone.
2. Southland lignite resources - important source of feedstock for export coal business given recent developments in compressed coal bricks. I think this resource is very valuable, and the only reason to be conservative is the technology risk. It will assist the government to wait until this technology is proven in Vietnam, where a Vietnamese govt JV with the University of Melbourne is testing the technology on the Red River lignite deposits. I suspect Solid Energy will do its only testwork.
3. Coal seam gas potential - important given the declining availability of offshore resources. This could change however in the next 10 years. This potential is probably worth anywhere from $150 to $500 million.
I can agree that the valuation of Solid Energy is probably a little on the high side; but then it might have assets I am not aware of. There needs to be a closer look. I suspect the government had an accountant study it, and you don't do that. Accountants only look at cashflows and their prospect of being extended. They are too conservative. They cannot see over the horizon. They tend to be an anti-conceptual lot. I remember trying to sell a mining company to a fund manager. He was more interested in the 'advanced' project for which we had a cashflow model than the gold project with very exciting drilling intersections. Today, the 'advanced' project is still on the backburner, and the gold project is being constructed. Why? Because he had no idea about which way commodity prices were going, he had no ideas about technology/development risk, and he was suspicious of anything without a cashflow model. They need quantitative data. Whereas a geologist/mining engineer needs as little as a few well-placed drill holes and some structural information (at the least). Gold is going to $2500/oz. Does he believe it? No. People are sceptical of what they don't understand. Accountants enter the world only with a little life experience and quantitative analytical skills which are dependent upon conceptual knowledge. They are only 'half a brain' really. That is why I studied geology, mining engineering and accounting/finance. My lecturers praised my judgement. But really, it only reflected my life experience up until that point. I was visiting mind sites when I was 14 years old, and I was trading mining stocks since I was 11yo.
If you want to do your child a favour - buy them $1000 worth of stock each in Vital Metals (ASX.VML), MIL Resources (ASX.MGK) and Union Resources (ASX.UCL). Use a lottery game to distribute the stock, to create some competitiveness between them. Soon they will be wanting to get a newspaper run to raise more money to buy more stock. Of course, you could always buy these stocks yourself. You're never too old to learn 'money makes money'. The lesson of timing will take longer to learn. That requires studying charting (i.e. technical analysis).
Why am I suggesting that NZ'ers buy stocks in Australia? The reason is because over the next 15 years the NZD is going to be left behind. Thereafter it will probably start to close the gap, but not before more Kiwis will leave for Australia. The mining industry offers the best exposure to the Chinese/Indian boom, which will go for another 20 years. Why? Because they have a lot of under-utilised labour. That is fueling demand. It will take off again as soon as the global debt inventory is absorbed/recapitalised.