And another one bites the dust…
Starting six years ago, Washington and Oregon found themselves besieged by a flotilla of massive, well-financed companies hell-bent on building coal export terminals to feed Asia’s allegedly insatiable appetite for coal. But the coal industry’s vision of a robust export market turned out to be a mirage: starting in early 2011, international coal prices peaked and then collapsed for five consecutive years. One by one, as the Asian coal bubble deflated, the export projects folded, the smart money fled… and the few remaining hangers-on sank into insolvency, many of them weighed down by their massive, ill-timed bets on coal exports.
But yesterday marked the end of that era: Arch Coal, the second largest coal company in America and last big name remaining in the coal export game, gave up the ghost. The company handed over its 38% share in the proposed Millennium Bulk Logistics Terminal in Longview, Washington, to the project’s last remaining supporter, Lighthouse Resources—a company that used to be called Ambre Energy North America until a financial collapse forced Ambre to cede its assets to its investors.
Arch itself declared bankruptcy in January, so it had to post details of its abandonment of Millennium on the company’s bankruptcy docket. (Here’s a pdf link to the original document.) Astonishingly, Arch got no money at all in return for “selling” its interest in the coal terminal. All Arch got out of the deal was a guarantee that Lighthouse would absolve it from all liability for the project, plus an option to use 10% of the port’s future capacity—if the port is ever completed, that is. Heck, Arch didn’t even get a price break on the port space, just an agreement that it would pay the same rate as other customers. And it’s likely that the option is worthless anyway: rival coal company Cloud Peak Energy has a similar option, but the company’s annual report shows that its auditors forced Cloud Peak to count that option as having zero economic value.
In a spin-soaked press release, Lighthouse portrayed Arch’s rush for the exits in the most positive light possible. Lighthouse expressed delight and confidence in taking full ownership of the project: Arch’s exit was simply “a logical next step in Arch’s involvement in Millennium!” The doublespeak would make Orwell blush.
Peeling back the layers of spin, though, it’s clear that this is a humbling defeat for everyone involved in Millennium. Arch Coal’s regulatory filings show that Arch had spent $57.5 million on Millennium by the end of 2015—a $25 million initial investment in 2011, followed by further cash advances totaling $32.5 million over 5 years. A previous bankruptcy filing showed that Arch paid $2 million to Millennium just in the 90 days leading up to the company’s bankruptcy; and its most recent filing admitted that weekly payments were ongoing. Given the dismal outlook for coal exports, the bankrupt company simply couldn’t bear the ongoing cost of keeping the project alive.
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So in the end, Arch’s managers ponied up about $60 million to play in the Northwest coal export game and walked away with nothing but a worthless option, a handshake, and a promise that they wouldn’t be sued for their trouble.
Arch’s exit leaves precisely one player left in the coal export game in Washington and Oregon: Lighthouse Resources, which now stands as the only backer of Millennium and which also hopes to resuscitate its nearly-defunct Morrow-Pacific project in Oregon. Lighthouse owns a pair of struggling coal mines, one in Wyoming and the other in Montana, and its entire business model hinges on exporting coal into seaborne markets that are now badly oversupplied with cheap coal.
Lighthouse, in turn, is owned and controlled by Resource Capital Funds (RCF), an international private equity firm registered in the Cayman Islands. As we detailed a few years ago, RCF is a vulture capitalist firm that swoops into risky minerals projects all over the world, making big promises to nearby communities—and then swoops out as soon as it can find a bigger sucker. But although they’ve tried for years to find new investors to take Lighthouse off their hands, so far the biggest sucker at Millennium has been RCF itself, which has had to keep trickling money into Lighthouse just to keep the firm from going under.
There’s no telling whether RCF will want to keep Lighthouse alive or if it will soon pull the plug. Either way, the lessons of Arch’s exit from Millennium are clear: coal exports are now a sucker’s game, and the only investors who are still involved in the Millennium coal export terminal are the ones who can’t walk away.