In case you missed the news, Ambre Energy—the Australian firm behind two of the three remaining coal export projects in the Pacific Northwest—is selling its North American coal business to the company’s largest creditor, a risk-hungry private equity firm called Resource Capital Funds. Ambre will realize just $18 million from the sale, even though it claimed as recently as last fall that its North American coal assets were worth between $200 and 400 million.
Over the past several days, we’ve started to see Ambre Energy’s PR strategy emerge: the firm’s North American executives are now crowing with delight that their operations are being unloaded at fire sale prices! After all, they now say, handing your business over to your creditors is a sign of financial strength, not weakness. So a story in the Longview Daily News quotes Bill Chapman, CEO of Ambre’s Millennium Bulk Terminal project, spinning the sale by saying, “The news is all good,” and implying RCF’s purchase shows that investors remain excited about the financial prospects for coal exports. And Everett King, president and CEO of Ambre Energy North America, bragged: “Their interest is validation: RCF likes the projects.”
This raises a question: Is RCF’s purchase of Ambre’s coal operation really a sign of financial strength for the company’s coal export plans?
I think the best way to answer that question is simply to quote from Ambre’s own financial disclosures—which show that the firm was running out of money, laden with debt, and had no reasonable hope of raising capital before it defaulted on its loans from RCF.
Ambre was running out of money, laden with debt, and had no reasonable hope of raising capital before it defaulted on its loans.
More importantly, the company had been trying since 2012 to raise money from anyone other than RCF. The company even tried to raise money by selling off individual assets. Yet Ambre found no audience for its overtures: no buyers, no lenders, and no new source of capital. Finally, this past July, RCF cut Ambre off, refusing to provide them with any more money…a move that set up Ambre for the financial crisis it now faces.
In short, Ambre is selling its North American operations because the firm is deep in debt and out of options, and is essentially handing over its assets to its chief creditor in lieu of declaring bankruptcy.
What follows are direct quotes from a 24-page document prepared by Ambre’s management and submitted to the Australian Securities and Investments Commission (or ASIC, the Aussie version of the SEC). The document paints such a dismal picture of Ambre’s financial struggles, and the struggles of US coal companies more generally, that it could easily have been written by a harsh critic of the financial viability of Northwest coal exports.
Since the original document accessible from ASIC is just a Xerox with no searchable text, I’ve typed out the key sections verbatim, with some emphasis added.
In a section describing why the sale price for Ambre’s North American coal assets was so much lower than the company claimed a year before, Ambre’s management wrote:
[C]ertain developments have severely affected the assumptions on which the valuations were made, including:
- International thermal coal price. From a price of US$90.55/metric ton on 31 July 2012, the benchmark Newcastle FOB price for 6000 kcal/kg NAR coal has continued to fall as follows:
31 July 2013: US$76.75/metric ton
29 July 2014: US$70.15/metric ton
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This decline reflects what industry analyst firm Wood Mackenzie has described as a substantial oversupply of thermal coal in the seaborne market, despite continued growth in demand and volumes traded. Wood Mackenzie predicts this oversupply will not be rectified until 2019/2020. Further, there is uncertainty as to how much further prices will fall in the meantime, with the Newcastle benchmark having declined still further to US$63.89 as at 31 October 2014.
This has had a negative impact on the value of virtually all of the AENA [Ambre Energy North America] assets, but particularly the International Coal Marketing and Trading business, and the MPP [Morrow Pacific Project] whose projected operating costs per ton are significantly higher than the MBTL [Millinnium Bulk Terminal – Longview] Project.
A comparison of the reduction in the market capitalisation during the last 3 years of the following listed coal companies is indicative of the impact of the falling coal on the sector:
- Permitting delays.On 18 August 2014, the Oregon Department of State Lands decided to deny a removal/fill permit for the construction of the proposed dock for the MPP at the Port of Morrow, as earlier foreshadowed by the Governor of Oregon. This permit denial is presently the subject of an appeal by AENA, but the uncertainty created by this action together with the delay in the commencement of exports (the IER) assumed 1.75 Mt of coal would be exported in 2015) has significantly reduced the valuation of the MPP…The valuation of the MBTL Project has been negatively impacted by delays to the timetable for the completion of the Environmental Impact Statements required under both State and Federal laws. The forecast commencement of exports in 2017 (12.5 Mt) now seems highly unlikely.
- US Clean Power Plan. On 2 June 2014 the US Environmental Protection Agency, under President Obama’s Climate Action Plan, proposed their Clean Power Plan to reduce carbon emissions from power plants. While the plan has yet to be finalised, it is likely to place additional burdens on coal-fired power plants in the USA, and ultimately reduce demand for thermal coal. This has had a negative impact on the valuations of the Decker Mine and Black Butte Mine.
- Additional Financial Accommodation. In addition to the liabilities noted in the above table, AENA has subsequently incurred further liabilities through various forms of financial accommodation, as follows:
(i) letters of credit totalling US$20 million provided by RCF V to AENA…
(ii) an unsecured advance to AENA of US$5 million under a US$10 million bridge loan facility provided by RCF V; and
(iii) letter of credit for US $7.5 million provided by RCF VI…
The directors believe that these factors have all contributed to a significant reduction in the net value of ANEA from that…provided to shareholders in December 2013.
In a section in which Ambre’s board of directors recommends that shareholders approve the sale of Ambre’s assets to RCF, the board describes the company’s dire financial situation as follows:
- Since deferring an initial public offering of the Company’s shares on the Australian Securities Exchange planned for mid-2012, the Company has struggled, in the face of a sharply deteriorating thermal coal market, to raise the capital required to fund the operations of AENA, that is, the development of its US port projects, the optimisation of its US coal mining assets, and the implementation generally of its US coal export strategy.
- During that time, the only source of capital the Company has been able to secure has been from its major shareholder, RCF V. This is the case despite various attempts to raise equity and debt from third parties, and more recently, to raise cash by trying to sell individual assets that are not required for the Company’s core business. All of these attempts have ultimately been unsuccessful.
- As noted in paragraph 29(a) above, thermal coal market conditions have continued to deteriorate as each new cash injection from RCF V has been exhausted.
- In July 2014, as remaining cash reserves were once again being depleted, RCF V confirmed that it would not be able to provide any further funding to the Company.
- The directors believe that in the current market, the Company will not be able to raise from other parties the additional capital needed to fund the operations of AENA while waiting for market conditions to improve.
- The debts owing to RCF V under its most recent bridge loan and RCF VI in connection with repayment of the Korean Lenders will mature on 31 December 2014 and 28 February 2015 respectively. It is highly unlikely that AENA (or the Company) will be able to refinance or repay these debts on time. If AENA fails to repay these debts on time, this will trigger a default under AENA’s other finance facilities, including the RCF Loan;
- If non-associated shareholders do not vote in favour of the transaction, a termination fee of US$1.5 million plus expenses will be payable to RCFV and RCF VI (collectively) under the terms of the Stock Purchase Agreement;
- The directors believe that the consideration offered by RCF V and RCF VI for the common stock of AENA, that is, the payment of US$18 million cash by RCF VI, the 121.5 million Ambre Energy shares held by RCF VI, and an ongoing free-carry interest in AENA, is not unreasonable in light of the substantial reduction in the value of the AENA assets which the directors believe has taken place, as set out in paragraph 30 above.
- The sale of AENA to RCF V and RCF VI will enable the Company to extinguish all of its debts, but retain an ongoing, carry-free interest in AENA which cannot be diluted by the issue of any further shares to the RCF V or RCF VI or their affiliates until after a liquidity event has crystallised the Company’s right to class A common stock in AENA. The interst in AENA may be diluted by the issue of shares to a third party other than RCF V or RCF VI (or their affiliates).
In a passage describing the financial consequences if shareholders do not approve the sale of Ambre’s assets, the board of directors warns of an impending default that would trigger a messy financial meltdown.
If the selective share buy-back does not proceed…AENA will be required to repay the debt owing to RCF V and a termination fee as described in paragraphs 34(f) and 34(g) above. If AENA (or the Company) does not repay this debt owing to RCF when due, this will trigger a default under AENA’s debt facilities, including the RCF Loan.
These disclosures, among others, point to a clear conclusion: Ambre Energy faced imminent bankruptcy; its coal export assets were worth a small fraction of what Ambre had paid to acquire them; and nobody but RCF, the company’s main creditor, was willing to take those assets off of Ambre’s hands.
And while it’s awfully hard to spin that as good news, I’m certain that Ambre’s PR machine will keep trying.