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Has time run out for Penrice?

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Local chemicals company Penrice went into voluntary administration late Friday after negotiations with possible new lenders ended.

Rising debt, attempted restructures of the business and a rocky couple of years have taken this once thriving manufacturing business to the edge.

The company’s last three bids to borrow more money and refinance its existing debt have failed.

On Friday, it was time to call the doctor.

In a late release to the market, Penrice Chairman, David Trebeck said: “Notwithstanding the company’s considerable efforts over the last six months and the likely prospect of three potential financing syndicates proceeding, a suitable refinancing has not been achieved.”

While still putting a positive spin on the company’s future, the reality was hard to ignore.

“We are confident that our three businesses – Penrice Quarry & Mineral, Penrice Bicarbonate and Penrice Lime businesses – will together provide a platform for strong growth in the future.

“In these circumstances, the board believes that the most appropriate course of action is to appoint an administrator to endeavour to allow the business to continue to trade and to achieve the necessary refinancing to continue the business turnaround.”

But how will an administrator raise finance when the company can’t?

Penrice’s salt supplier, Ridley Corporation, issued a statement Monday morning that it had not been paid the $1.07 million it claims to be owed.

“Ridley will actively pursue with the administrator its rights under the original long-term take or pay contract and the recovery of the debt of $1.07 million currently owing from Penrice in respect of prior year brine sales,” it said.

Penrice’s debt has increased markedly in the last few financial years.

In 2012 the company negotiated a $97 million senior debt facility which included an extension of a previous $67.8 million facility to August 2017, with interest on that facility to be capitalised and not paid.

In August 2013 it’s full year financial results showed an underlying net loss after tax of $21.4 million (FY2012: $6.7 million) and statutory net loss after tax $50.1 million (FY2012: $63.6 million).

It also showed net debt had increased to $112.1 million.

An auditor’s report released in February stated that the company’s liabilities exceeded its assets by $58.7 million.

Penrice has struggled for the last four years, unable to compete in new global economic conditions.

The company has been making soda ash at Osborne since the late 1930s, when it was better known as international chemical giant ICI.

It couldn’t have been in a better location.

Power generation was – and still is – alongside their plant.

The main ingredients for soda ash (salt and lime) were also nearby.

The salt came from Dry Creek – those mountains of white that you see on your left when driving north out of Adelaide on Port Wakefield Road.

The lime comes from a mine at Angaston and is efficiently shipped to Osborne by rail.

In 1993, a few years after the soda ash business was carved off from ICI and bought out by a private consortium of former executives at the plant – it was hard to see anything that could go wrong with their grand plans.

“We are creating a thoroughbred; a purpose-built organisation to excel in the soda ash business,” Penrice managing director Stephen Smith told business magazine ICIS Chemical Business at the time.

The Penrice plan involved investment, acquisitions, restructuring and cost cutting to turn ICI’s discarded Australian operation into a world leader.

Penrice was the fifth largest producer in the world.

In 1993, the Australian dollar was valued at 66 US cents.

In those days – and for some time since – the notion that our dollar would surpass the US dollar was fanciful.

In the early years, the dollar did Penrice a great favour, slumping to 50 cents by mid-2000 and touching 48 cents in 2001.

When it bounced back in the mid-2000s, it was still in the healthy range of 75 cents.

Penrice decided to float on the stock exchange and confident investors were happy to buy in at around $2.

The world, however, was about to change.

In the initial reaction to the Global Financial Crisis in early 2009, our dollar went back to 61 cents, but as Australia’s resource strength kept it ticking over, so did the dollar rise.

It was 80 cents again by June 2009, 90 cents by early 2010 and hit parity in November 2010, double what it had been a decade before.

In the two years since it has dipped back below 90 cents, but never for long; today its still sits above 93US cents.

Penrice couldn’t compete.

Energy costs were also rising in Australia adding a double hammer blow to the Penrice equation.

There was a third factor – the world’s biggest supplier of soda ash is the USA company Ansac.

Ansac is a cartel of the three producers, FMC Wyoming, Inc., Tata Chemicals North America Inc. and OCI Chemicals Corporation.

Twenty years ago, when the US/Australian dollar fluctuations were hurting the US producers’ ability to sell cheaply in Australia, the cartel was able to negotiate preferential transport rates from Wyoming to the West Coast, and from there to Australia.

Today, the equation is the opposite and Ansac has a major advantage over Penrice.

In early 2013 Penrice flew the white flag and decided to end its 87-year run as a producer of soda ash.

It entered into a deal with Ansac to but soda ash produced in the US rather than make it locally.

At least 60 jobs at the Osborne plant were gone.

Penrice blamed taxes and government policies for their decision.

In 2014 Penrice is a mere shadow of the chemicals manufacturer that dominated the landscape at Osborne.

It still owns a limestone quarry in the Barossa Valley, but its value would have changed after its decision to stop manufacturing soda ash.

In December last year, Penrice Managing Director Guy Roberts remained upbeat.

“Penrice’s business transformation has incurred some one-off capital and cost overruns in the first quarter as the new chemicals plant was commissioned, however in the second quarter the benefits of the company’s new business model are beginning to show,” Roberts said.

“The soda ash losses of the past have been stopped with the closure of the soda ash plant.

“The bicarbonate plant is running at planned production rates with bicarbonate sales also in line with plan.

“In the new lime business, the new lime plant is running at planned production rates, with sales commencing and market acceptance building in line with expectations.

“This is a transition year aimed at bedding down the restructure and a raft of operational and sales changes and things are progressing.”

Roberts promised good years ahead.

“Despite the under budget first quarter bedding down the restructure, Penrice still expects improved earnings in FY2014, subject to economic conditions.

“FY2015 will still be the first full year of earnings uplift following the business transformation of  FY2013, with a forecast upside to the current year.

“Penrice continues to seek to restructure its existing debt load. Further updates will be given when appropriate to do so.”

The prospective new lenders had a long hard look at the books – and it appears they don’t share the company’s enthusiasm.

It’s hard to see how Penrice can work its way out of this hole.

Which raises one very big question – who will pay to remediate the Osborne site, home to chemicals manufacturing and by-product dumping since the 1930s?

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