International Coal Part 1

**teenvestor** Wed Mar 08, 2006 11:35 pm

International Coal Part 1
International Coal Analysis

The explosion happened at 6:30 on January 2, only 40 minutes after the mine had been cleared for its first shift after the New Years weekend. Two carts had gone down; all 14 miners on the second cart made it back, but the 13 on the first did not.

The cause of the explosion is argued about; some say lightning near the mines ignited volatile gases, others say changes in barometric pressure caused methane to pool in mines, something that happens frequently during winter mining.

We all know the rest. Early delays set the rescue back, a specialized rescue crew was not called until 8:04, MSHA (Mine Safety and Health Administration) was not reached until 8:30. MSHA and rescue crew did not arrive on site until after 10:30, four hours after the explosion.

The miners had air purification equipment with them that could give them oxygen for seven hours, but the carbon monoxide content of the mine forced the rescue crew to wait 12 hours. After this the crew reached the mine, then mis-communicated that 12 miners were alive and only one was dead; as you know the vice versa had happened; only one remained alive.

I believe that this accident, coupled with other troubles has temporarily depressed International Coal’s stock, Wilbur Ross, inspired management and other factors, which will be discussed, will act as a long term catalyst for International Coal pushing up the stock price in the long term. First, I will talk about ICO’s business.

Horizon Natural Resources filed for bankruptcy protection under chapter 11. Less than a year later, in November, Horizon filed once again for protection, because of negative earnings. In August of 2004 International Coal purchased the Horizon assets in a public auction.

At the end of March 2005 International Coal entered a complicated merger with Anker Coal Group, which puts International Coal as the parent company of Anker Coal Group and CoalQuest.

Here is the overview of ICO’s business, according to the prospectus:
We are a leading producer of coal in Northern and Central Appalachia with a broad range of mid to high Btu, low sulfur steam and metallurgical coal. Our Appalachian mining complexes, which include 11 of our mining complexes, are located in West Virginia, Kentucky and Maryland. We also have a complementary mining complex of mid to high sulfur steam coal strategically located in the Illinois Basin. We market our coal to a diverse customer base of largely investment grade electric utilities, as well as domestic and international industrial customers. The high quality of our coal and the availability of multiple transportation options, including rail, truck and barge, throughout the Appalachian region enable us to participate in both the domestic and international coal markets. Due to the decline in Appalachian coal production in recent years, these markets are currently characterized by strong demand with limited supply response and elevated spot and contract prices.
The company was formed by WLR and other investors in May 2004 to acquire and operate competitive coal mining facilities. Through the acquisition of certain key assets from the bankruptcy estate of Horizon the WLR investor group was able to acquire high quality reserves strategically located in Appalachia and the Illinois Basin that are union free, have limited reclamation liabilities and are substantially free of other legacy liabilities. Due to our initial capitalization, we were able to complete the acquisition without incurring a significant level of indebtedness. Following this offering, we expect to retire substantially all of our long-term debt and will be strategically well-positioned. Consistent with the WLR investor group’s strategy to consolidate profitable coal assets, the Anker acquisition further diversifies our reserves.
As of January 1, 2005, we owned or controlled approximately 315 million tons of metallurgical quality coal reserves and approximately 572 million tons of steam coal reserves. Based on expected 2005 production rates, our Northern and Central Appalachian reserves could support existing production levels for approximately 35 years and all of our reserves could support existing production levels for approximately 49 years. Further, we own or control approximately 707 million tons of coal resources.
Steam coal is primarily consumed by large electric utilities and industrial customers as fuel for electricity generation. Demand for low sulfur steam coal has grown significantly since the introduction of certain controls associated with the Clean Air Act and the decline in coal production in the eastern half of the United States. Metallurgical coal is primarily used to produce coke, a key raw material used in the steel making process. Generally, metallurgical coal sells at a premium to steam coal because of its higher quality and its importance and value in the steel making process. During 2004 and the first quarter of 2005, the demand for metallurgical coal increased substantially as the global demand for steel increased.
For the year ended December 31, 2004, we sold 18.4 million tons of coal, of which 18.2 million tons were steam coal and 0.2 million tons were metallurgical coal. Our steam coal sales volume in 2004 consisted of mid to high quality, high Btu (greater than 12,000 Btu/lb.), low sulfur (1.5% or less) coal, which typically sells at a premium to lower quality, lower Btu, higher sulfur steam coal. We generated total pro forma revenues of $673.8 million and $84.2 million of pro forma EBITDA for the year ended December 31, 2004.

According to the prospectus for International Coal’s IPO, ICO’s objective is to, “…increase shareholder value through sustained earnings and cash flow growth(75).” International Coal outlines four key strategies through which they believe the above task will be achieved:

· Maximize profitability through highly efficient and productive mining operations.

· Leverage owned and controlled reserve base to generate substantial internal growth.

· Capitalize on favorable industry fundamentals by opportunistically marketing coal.

· Continue to focus on improving workplace safety and environmental compliance.

I believe in International Coal’s objective and think this will be achieved in the future.

The Business model description repeatedly mentions Wilbur Ross (WLR). Wilbur Ross created the company through multiple different investments.

Wilbur Ross worked for over 20 years as an adviser to companies that were going to file for bankruptcy. He managed a private-equity fund with Rothchild Investments, but this fund prevented him from buying any bankruptcies the firm was advising, this was one in every three deals. Ross was tired of this and left Rothchild to open his own hedge fund.

In 2000 Ross opened WL Ross & Co. with $440 million in invested money and 4 other top managers. This is the fund he continues to employ the capital of today.

Wilbur Ross appeared on the Forbes 400 list for the first time last year – the first time his net worth eclipsed one billion dollars. He has amassed that through his peculiar investing method.

The investing method Ross employees is commonly referred to as “vulture investing,” or the nicer term, “distressed investing,” that his he buys companies most people think are dead, usually after they have gone bankrupt, or lost a terrible lawsuit.

He uses his years of experience on dealing with bankrupt companies to help better analyze them now. I believe he now gravitates toward buying companies that are bankrupt so he can institute new ways of working for the business, with no pension, union or health care. Because of this he is hated by the UMWA (United Mine Workers of America), and criticized by many writers, and sometimes, former officers of the companies he has taken over.

One way he has been able to force a company into bankruptcy before taking it over is by buying all of its debt, while at the same time buy the majority of shares to force it into bankruptcy.

Next Week I will continue with part two.