Something struck me as weird about the Spring Creek closure. Why have they stopped mining immediately even though the future of the mine hasn’t been decided and the miners are still being paid? Why did Solid Energy consider it more economic to pay the miners to leave the coal in the ground than dig it up? The answer has big implications for the government’s mining obsession.
Clearly, Solid Energy expects the coal price to recover in the future and the increased return from leaving the coal in the ground will exceed Solid energy’s cost of capital and the expense of paying miners to do nothing. When you think about it, coal in a developed mine is like money in the bank. The question is just whether you spend that money, dig up that coal, now or later. Solid Energy can be pretty certain that it will earn a lot of interest in the coming years if it keeps its money in the bank, rather than spending it now.
The wider implication of this is: why is the Government in such a rush to dig up our hydrocarbon and mineral reserves? We only get these reserves once. They’re like an inheritance. And we’ve got that inheritance in a very high interest account. Oil, for instance, has gone from US$20 a barrel ten years ago to US$115 today. You would be kicking yourself if you sold any oil in 2002 – you could have just held on to it and made a mint. These trends are only going to continue – oil, coal, gas, minerals are all being depleted rapidly and the long-term price trend is strongly up. Does it make sense to put all your effort into selling now, or sell later for much more money? Solid Energy clearly thinks later is best.
This government, of course, can’t think beyond the end of its nose and just wants to dig it, drill it now. What we’ll do once we’ve sold off our inheritance cheaply – they don’t know and they don’t care.