Mine your own business
Foresight launches IPO
Imagine a company that spends less than $20 to produce something that sells for more than twice that amount. Imagine that the company can produce more than 32 million units each year. Imagine, also, that you had a chance to invest.
More than two years after announcing plans to go public, Foresight Energy, the firm in question, on Monday announced that it will sell 17.5 million shares at a per-share price of between $19 and $21, giving investors a chance to own a piece of the state’s largest coal mining company.
The IPO came after a recent flurry of updates to a preliminary prospectus that had languished since 2012. According to paperwork filed last month with the Securities and Exchange Commission, the company has nearly doubled production at its four Illinois mines since 2011, with sales rising from more than $500 million to $957 million in 2013.
Chris Cline, Foresight’s billionaire owner, bet big on Illinois coal nearly a decade ago, buying up reserves on the cheap when the market was weak and figuring that he could undersell competitors. The strategy depended on power plants installing scrubbers so that plants could burn high-sulfur Illinois coal that is easier to mine than reserves in Appalachia and closer to markets than Wyoming coal that doesn’t produce as much energy on a per-ton basis.
Judging by SEC filings, Foresight’s strategy has succeeded. At $19.53 per ton, the company’s production costs last year were among the lowest in the U.S. coal mining industry; priced at $46 per ton on the spot market as of last week, the profit potential for Illinois coal is enormous. Easy access to the Mississippi River and seaports allows exports, and Foresight, which supplies coal to power plants in England and Germany, last year undersold European mines by as much as $15 a ton even with transportation costs, according to a recent story in The Wall Street Journal. The company reports that operating income zoomed from $120.4 million in 2011 to more than $204 million last year.
If nothing else, Cline has proven to be a master of timing, making his fortune in Appalachian mines, then pulling up stakes in favor of Illinois, where mines are booming while competitors in Appalachia struggle with high labor costs, dwindling reserves and ever-tightening environmental regulations. Monday’s IPO announcement came one week after the Obama administration announced plans to cut carbon emissions from coal-fired electrical plants by an estimated 15 percent by 2030. Mining companies and energy companies with coal-fired plants howled, with Peabody Energy, the nation’s biggest mining company, calling the proposal an assault on poor people who need low-cost electricity.
“The proposal would endanger human health and welfare by making electricity – an essential product – scarce and expensive,” the St. Louis-based firm warned in a written statement.
Foresight, meanwhile, remained silent, perhaps because companies seeking to go public are restricted in making statements about their business prior to IPOs. In the past, however, Foresight officials have been quick to complain when things don’t go the company’s way. “It’s a joke,” Foresight CEO Michael Beyer told the Washington Times last fall when the Obama administration announced tough emission standards for new coal-fired plants that will, critics say, effectively ban any new construction.
The recent federal mandate to curb carbon emissions from existing coal-fired electrical plants wasn’t a surprise – the administration had long said that it was going to release a plan -- and those plants would still need a lot of coal under the new rules.
Coal would still provide 30 percent of the nation’s power needs even with mandated emission reductions, according to an EPA analysis. While tonnage burned would be reduced by about 25 percent in 2020, when the emission-reduction plan starts kicking in, U.S. plants would still consume as much as 636 million tons of coal per year, the EPA says. Furthermore, the government says, coal production in Appalachia and western mines would decrease by more than 30 percent while production in the nation’s interior would fall by a relatively paltry 11 percent, and perhaps just 7 percent.
The price of coal will likely fall if the EPA’s plan reaches fruition, but Foresight’s success has always been predicated on producing coal for less money than its competitors. While the federal plan is bad news for the coal industry as a whole, mines are not collectives – Foresight demonstrated that last year when it withdrew from the Illinois Coal Association after the group refused to back the company on its proposal that Illinois plants transferred from Ameren to Dynergy be required to use Illinois coal. Foresight went so far as to offer free scrubbers if the plants contracted with the company for coal. The association remained neutral because Peabody and Arch Coal, both association members, have mines in Wyoming, which provides the bulk of more than 50 million tons of coal that are burned in Illinois power plants each year.
“They (Foresight) got upset because they didn’t think we were representing their interests,” says Phil Gonet, president of the Illinois Coal Association.
While he doesn’t like the federal plan, Gonet said that he doesn’t believe that it will have a short-term impact on mines. And Illinois mines have learned that there is opportunity beyond U.S. power plants, he said.
“Most of the players that remain in Illinois are involved in the international market – that’s where the market is,” Gonet said. “If we can get our coal to New Orleans, we can get our coal to anyplace in the world.”
And so it is not necessarily surprising that Foresight rekindled its plan to go public on the eve of the federal announcement that has sparked doom-and-gloom prophecies throughout the coal industry. If there is to be a winnowing of mines, Foresight, with its low production costs and strategic location, might well end up a survivor, if not a winner.
Contact Bruce Rushton at email@example.com.