The insolvency of OKD, the Czech Republic’s only hard coal miner, is slowly beginning to register in north Moravia, the country’s industrial heartland.

During meetings on May 6 in the regional capital Ostrava, the country’s third largest city and its zelezna srdce (iron heart), Prime Minister Bohuslav Sobotka repeatedly had to reassure local mayors, unions and business people that the government was ready to help, in particular by funding requalification programmes for the 13,000 workers whose jobs are now at risk.

But for some miners the likely end of their way of life is hard to comprehend. “They are in denial,” one politician tells bne IntelliNews after the meetings. “They ask, ‘Why should we do something else? We want to mine coal’.”

“People are shaken,” Josef Stredula, president of the Czech-Moravian Confederation of Trade Unions, tells bne IntelliNews. “People want to believe in the future but are without information.”

OKD could be the Czech Republic’s most costly industrial failure. The miner declared itself insolvent on May 3 – a filing approved by a court on May 9 – after the government refused to inject cash to tide the company over until coal prices recover.

But coal prices were just the trigger. The miner had been loaded with debt, stripped of cash and non-core assets by its previous owners, Czech financier Zdenek Bakala and his partners, rendering it unable to service its huge debts after prices halved compared to 2011 levels.

OKD’s collapse could knock 0.4 percentage point from the country’s GDP and cost the state budget CZK33bn (€1.2bn), according to Deloitte, the company’s advisers. In the Moravia-Silesia region, it estimates immediate closure would cut employment by 4% and GDP by almost 5%.

Adding insult to injury

OKD currently employs 9,800 permanent workers and 2,700 contract staff. Under the loss-making company’s previous proposal for a gradual restructuring, half the group’s mines would be closed over the next two years. Paskov mine would be shuttered in early 2017, and Lazy and Darkov mines’ underground operations would cease in early 2018. CSM North mine would be significantly downsized but it would continue operations, together with CSM South and CSA.

Now, even if the company continues operating as a going concern, these closures look like being accelerated. OKD could employ less than half of the permanent workers by the end of next year. Adding insult to injury, redundant workers are also likely to only receive the statutory three-month severance pay, rather than the up to 12 months in their contracts, as there is no money for that.

The Deloitte report estimates that around one-quarter of the workers would be able to find new jobs. However, judging by other mining wind-downs, the deep miners themselves will struggle to find suitable jobs. Those that do face pay cuts of more than a third from their current monthly gross wage of CZK28,000. Social Democrat cabinet ministers are pushing for redundant workers to get an CZK8,000 a month top-up pay for up to three years, but this is being opposed by their centrist coalition partner, billionaire Finance Minister Andrej Babis.

In the whole Moravia-Silesia region, a further 13,000 jobs at the company’s 1,200 suppliers are at risk, according to unions. This is at a time when the future of two of the region’s biggest industrial employers, steelmakers ArcelorMittal Ostrava and Vitkovice, are already in question.

“Under pressure are more than 25,000 jobs,” says Stredula of the OKD collapse, in a region that had 46,000 jobless at the end of 2015, according to the Czech Statistics Office, and the highest concentration of structural unemployment in the country.

The consolation for the Czech Republic is that much of the coal industry’s downsizing has already been done, with OKD only employing 12% of the 105,000 workers it had in 1990. In neighbouring Polish Silesia, the hard coal mining industry still employs almost 100,000, around a quarter of the 400,000 workforce it had when communism collapsed. “Our situation is much more comfortable,” Industry Minister Jan Mladek tells bne IntelliNews. “We are approaching the final stage.”

Moravia-Silesia has also begun to successfully diversify away from coal and steel. Since Hyundai started mass production at its plant at Nosovice in November 2008, an automotive cluster has grown up which now employs 20,000, Pavel Juricek, CEO of automotive group Brano, tells bne IntelliNews. He says the cluster has had long-term problems recruiting workers, and has had to bring in labour from Slovakia and Romania. They are now ready to take on 1,000 workers in the first phase of the government’s planned requalification programme.

Cents in the dollar

The prospects are bleaker for OKD’s shareholders and creditors. According to its insolvency filing, OKD has trade and financial debts of CZK17.3bn (€728.6mn) but assets of only CZK6.7bn. In addition, the government estimates that if all the mines are closed, the company will have to pay CZK5.9bn in severance pay and wind-down expenses. This all compares with the CZK70bn that, according to Czech media, Bakala and his partners took out the company during their 11 years in charge.

In a note on May 9 withdrawing its ratings, Moody’s Investors Service said the insolvency of New World Resources (NWR), OKD’s London-listed parent, was only a matter of time. “Moody’s expects that this administrative process will ultimately result in the liquidation of OKD and the entire NWR group,” it said.

Shareholders put £1.265bn into the company during its IPO in London, Warsaw and Prague in May 2008, £1.08bn of which went straight into the pockets of Bakala and his partners. The shareholders are now certain to lose everything.

“It is expected that there will be very minimal or no returns to the shareholders of NWR Plc,” NWR said in a statement on May 4 when it asked for trading to be suspended on the Prague Stock Exchange.

Even bondholders look like being left just holding a handful of cents in the dollar, giving them total potential losses of upwards of half a billion euros.

The Ad Hoc Consortium (Ashmore Investment Management Limited, Gramercy Funds Management, and M&G Investment Management Limited) – which has been in control of the company since February, when Bakala’s group gave up their shares – hold an estimated 65% of the group’s more than €350mn of debt and around 60% of the company’s voting shares. They already took part in a debt restructuring in 2014 in which bondholders wrote off €325mn of debt.

Shareholders and bondholders look to have little chance of getting any money out of Bakala, a once well-respected banker close to the revered dissident turned president Vaclav Havel. He has lived for a long time now outside the Czech Republic in his various houses around the world, though he maintains philanthropic and extensive media interests in the country. Today he ranks as one of the country’s most hated men.

Looking for excuses

The bondholders have continually attacked the government for refusing to negotiate, let alone help, but ministers argue that they did not want to throw money at a company brought to its knees by its previous owners.

“We were very careful to show that we were not providing public support,” says Mladek. “They tried to use us as an excuse not to declare bankruptcy.”

A source close to the industry ministry puts it more bluntly: “They thought they could squeeze us, that the government was scared shitless of bankruptcy. It was a very wrong strategic assumption. If they had filed for bankruptcy four months ago, they would have been in a much better position.”

A representative of the Ad Hoc Group did not respond to a request for a statement.

Now the company has run out of time and money. Mladek says it will run out of cash in June, which could require the state to step in immediately to provide operational financing. “What is crucial is that there is some kind of financing to maintain basic operations,” he says. “The main priority is to ensure that the mining is not stopped immediately and that there is a gradual process of firing people”.

The insolvency court will have to decide whether to put OKD in reorganisation or liquidation. Either way, the industry ministry is preparing Diamo, the state-owned uranium miner, to acquire the uneconomic mines and close them down, leaving the healthy part of OKD to continue operating and eventually be sold. Even so, government officials admit that the mines will probably only be viable for another seven years.

For the ruling Social Democrats, who dominate the region, achieving a smooth decline of the hard coal mining industry could eventually even be painted as a success. An uncontrolled collapse of mining, however, could be very damaging, not least because Sobotka when finance minister privatised the remaining state shares in OKD in 2004 for a suspiciously low price.

“If we manage this process, there will be no damage,” says Mladek. “If it goes in an uncontrolled way, it will be difficult.”