If you’ve been following the Northwest coal export debate, you’ve probably heard of Ambre Energy—the struggling Australian firm that’s behind two of the three remaining coal terminal proposals in Washington and Oregon. Ambre made headlines back in August, when the state of Oregon denied a key permit for the company’s proposed Morrow Pacific coal terminal project on the Columbia River.
But even if you’ve heard of Ambre, you may not have heard of the company’s main financial backer: a tight-lipped private equity firm called Resource Capital Funds (RCF). Focused on minerals investments, RCF has a truly global reach: it’s registered in the Cayman Islands; maintains offices in Denver, New York, Toronto, and Perth, Australia; and invests in mining and minerals projects all over the world. With more than $100 million at stake with its investment in Ambre, RCF has become the chief financial backer of Northwest coal exports.
And while you might think that having the backing of a global investment firm like RCF would be a sign that Ambre is a solid company with strong financial prospects, you’d actually be mistaken. A review of the firm’s past investments shows that RCF actively seeks out risky projects with a high potential for failure.
Consider, for example, one of RCF’s most notable investments—a high-stakes gamble on a firm called Molycorp.
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In 2008, RCF gave Molycorp capital to buy a rare-earth minerals mine in California, trying to break into a market dominated by low-cost Chinese producers. Molycorp floated an initial public offering (IPO) in mid-2010, with stock selling for $14 per share. Just a few months later, China announced that it was cutting back on its rare-earth minerals exports, sending prices for rare-earth minerals into the stratosphere, and dragging Molycorp’s stock with it. Within a span of 9 months Molycorp stock rose to $70 per share. RCF and two of the firm’s directors rode the bubble upwards, and sold shares near the peak—realizing about $2 billion from stock sales.
But within a few months rare earth minerals prices fell back to earth, sending Molycorps’ stock into the tank. As the stock foundered, Molycorp fell under SEC investigation and disgruntled investors sued both Molycorp and RCF for fraud, alleging that the company had illegally hyped the stock. (The case is still in litigation.) Molycorp’s stock is now trading at a disappointing $1.50 per share.
Put simply, Molycorp was a terrible long-term investment. If you had invested $1,000 in the IPO and held that stock until today, you’d have about $100 left to show for it. If you bought $1,000 of Molycorp stock from RCF near the peak, you’d have about 28 cents left today. RCF and its investors saw handsome returns for their investment, but they didn’t make money by building a valuable, successful company. Instead, they made money by riding a bubble, and finding some suckers to buy their stock before the bubble collapsed.
The stock chart above is surprisingly typical for an investment by RCF. A review of RCF’s investees shows that the firm puts money into volatile, high-risk junior mining companies. Consider:
- AQM Copper: Based in Canada, AQM hopes someday to mine copper deposits in Southern Peru. Listed on the TSX-Venture and BVL exchanges, AQM now sells for 7 cents per share, down from $1 per share in late 2010.
- Bannerman Resources: Based in Australia, Bannerman owns 80% of a uranium mining project in Namibia. Shares currently sell for 6 cents per share, down from more than a dollar a share in 2009.
- Cape Alumina Ltd., which touts itself as “Australia’s leading pure-play bauxite company,” sells for 1.8 cents per share on the Australian stock market, after trading for as much as 50 cents a share in 2010. The company was recently forced to abandon a major bauxite mining project after the Government of Queensland, Australia banned mining on the portion of the project that underlies a wildlife reserve.
- Finders Resources, which is trying to develop a copper mining project in Indonesia and a gold-silver mine in Sumatra, now trades at 14 cents per share, after reaching 50 cents per share in 2011.
- First Bauxite, a Canadian based company hoping develop a mining project in Guyana, now sells for 6.5 cents per share after peaking at $1.40 per share in 2011. According to its most recent quarterly report, the company has no revenue-generating properties and has accumulated $50 million in losses. The company’s financials blandly note: “These conditions along with other matters indicate the existence of material uncertainties that may cast significant doubt about the Company’s ability to continue as a going concern.”
- First Nickel, which operates a mine in northern Ontario, received an infusion of cash from RCF in 2009, when the stock traded at about 12 cents per share. Today its stock has fallen to 2 cents per share.
- Forbes & Manhattan Coal Corp, which operates in South Africa and recently voted to rename itself to Buffalo Coal Corp., has seen its stock price plummet from $5 per share in early 2011 to 14 cents per share today.
- Mirabela Nickel Ltd: Operating in Brazil, Mirabella saw its stock prices fall from more than $3 per share in 2009 to just 7 cents per share. The firm declared bankruptcy in late 2013, with trading halted for months. Just last Friday, the company requested another halt to trading.
I could go on. RCF has also invested in Avanti Mining, Berkeley Resources, Noront Resources, Uranium Resources, and Wolf Minerals—all of which are high-risk mining companies, with volatile stocks that have moved through boom and bust cycles. And while most of these firms are in the doldrums right now, that may not matter much to RCF. The company simply isn’t interested in stable firms whose stock prices increase slowly but steadily. Based on its investment history, RCF actively seeks volatile companies that go through booms and busts. If, out of a portfolio of 10 investments, RCF is able to ride a Molycorp or two to the top of a commodity bubble, the firm’s investors will be willing to ignore all the duds.
And that brings us back to Ambre Energy, the company trying—so far unsuccessfully—to develop a coal export business in the Pacific Northwest. Based on RCF’s history, the substantial investment they’ve poured in Ambre doesn’t signify confidence in Ambre’s long-term business. Quite the opposite: RCF’s investment shows that it was hoping to ride a volatile commodity market in hopes of short term gains. As Businessweek points out, RCF has a three to five year horizon for its investments—meaning that it doesn’t have much of a financial stake in what happens in year six. So an investment from RCF means next to nothing about the long-term financial prospects of a firm like Ambre.
So for residents of Washington and Oregon who are trying to understand what RCF’s investment means for the long-term financial viability of coal exports, the answer is pretty simple: not much. Just because a well-funded private equity firm is putting money into Northwest coal exports doesn’t mean that coal exports are a viable long-term business. More likely, it signifies that coal exports are a risky bet—just the sort of investment that the gamblers at RCF love.