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Royal Energy gaining steam as one of few buyers in busted coal market

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Essential Energy Insights - February 2021

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Six trends shaping the industries and sectors we cover in 2021

Six trends shaping the industries and sectors we cover in 2021


Royal Energy gaining steam as one of few buyers in busted coal market

Despitefire sale pricing, coal companies still struggle to attract buyers, but hasemerged as one of thefew eager to bank onthe right coal assets.

RoyalCOO Ian Ganzer said his company is trying to get of the curve and evaluate wherethere might still be value incoal. He said there are not currently many buyers in the market, soRoyal is carefully combing the sector for certain coal assets the companybelieves are distinguished from coal that struggles to move in today'soversupplied market.

"Themarket for coal assets is without a doubt a buyer's market," Ganzer saidat the 24th Annual Coal Properties and Investment Conference hosted by Platts. "There'san incredible amount of projects and assets for sale. … We think over the next12 to 18, perhaps 24 months, there will be a number of tranches of additionalassets that come tomarketplace."

Royalspecifically is looking for niche markets with specific quality, chemistry and sizingspecifications. He said they hope to find underserved and new markets forcertain coals while also taking advantage of consumers concerned that largetraditional suppliers filing for bankruptcy could become less reliable.

Ganzersaid Royal is handpicking assets at a "steep discount" with potentialfor a lucrative upside.

"We'rebuying these assets cheaper than we could create them ourselves," Ganzersaid. "We're trying to take advantage of this time to buy assets atdiscount to historic value. We are trying to create a deleveraged,organizationally flat platform that is the right for this marketplace."

Hesaid that if the market improves, many of these assets will be prepared to pushmore coal into the market, but added Royal is not banking on a quick turnaroundin coal.

"We'relooking for accretive assets that can cash flow in today's marketplace,"Ganzer said in an interview with S&P Global Market Intelligence. "Needlessto say, those assets are hard to come by. They're few and far between, but wehave some seen we think with proper adjustment."

WhileGanzer said he hears about potential buys and projects through many channels,the company is also digging through bankruptcy auctions. Ganzer said there are "literallydozens of projects" available and added Royal has considered assetsoffered at bankruptcy auctions from JamesRiver Coal Co., AlphaNatural Resources Inc., and Walter Energy Inc.

"Ourprocess is pretty — I wouldn't say we're doing anything magical," Ganzersaid. "The only difference we're making is in previous markets you couldjust push tons into the marketplace. We're trying to do things a littledifferently. We're trying to establish markets with customers and find coalsand qualities and logistics that fit that customer base."

From health care to realestate to mining

Accordingto a 2013 annual report filed with the SEC, Royal was first organized inDelaware as Webmarketing Inc. in 1999. The company later revived its charterand changed its name from Webmarketing to World Marketing Inc.

"[RoyalEnergy Resources] was organized in 1999 and attempted to start a web-based marketingbusiness for health-care products," the annual report states. "Thehealth-care products business had no revenue and was discontinued in 2001 andthe company remained inactive until July 22, 2005 when it commenced its realestate business."

Inthe 2013 filing, Royal disclosed that the current state of the real estatemarket lead the company to "to concentrate the majority of its resourcesin energy projects." That annual report also disclosed that Royal executeda 1-for-500 reverse stock split on Oct. 1, 2012.

Atthe time of the 2013 filing, Royal was pursuing gold, silver, copper and rareearth metals mining concessions in Romania, Bulgaria and Canada and miningleases.

"Ifsuccessful, the company plans to concentrate its efforts to develop these properties,"that filing states. In 2011, the company formed subsidiary S.C. GoldenCarpathan Resources S.R.L. in Bucharest, Romania, to acquire and develop miningconcessions. At that time, the company reported CEO and CFO Jacob Roth was theonly active employee with Royal.

Accordingto a 2015 filing, E-Starts Money Co. acquired enough shares for its controller,William Tuorto, to become CEO, interim CFO, secretary and treasurer of Royal.

"Sinceacquiring control of the company, Mr. Tuorto has repositioned the company tofocus on the acquisition of natural resources assets, including coal, oil, gasand renewable energy, seeking to acquire high quality assets at distressedpricing in today's fragmented energy markets," the filing states.

The2015 filing shows that Royal opened two private offerings made exclusively to "accreditedinvestors." A June 8 offering of 1 million shares of common stock forproceeds of $2.5 million was later increased to 3 million shares for $7.5million, netting the company $4.5 million by August 2015 and an additional $3.0million by mid-October 2015.

Asof the time of its last annual filing, Royal also had an offering of $30million in convertible notes at 6.75% interest that was later decreased to $25million, still pending.

Accordingto the filing, as of Aug. 31, 2015, the company was composed of just oneemployee, Tuorto. On Oct. 13, 2015, two employees were added, the CEO and vicepresident. A president was added, but at the time of the filing was compensatedas a consultant pending ongoing acquisitions.

Thefiling includes a going concern warning and indication the company hadpreviously had no revenue and relied on its CEO and loans to fund operations.It also disclosed there was a limited market for its stock, currently tradedonly on the OTC Bulletin Board, and noted that Royal has "no operatinghistory in the coal mining industry" investors can use to evaluate likelyperformance.

In2015, Royal boughtCline Group LLC'sGatling mining complex, a set of two mines in West Virginia and Ohio. Earlierin the year, the company acquired BlazeMining Co. LLC, WellstonCoal LLC, GS Energy and BlueGrove Coal LLC, all based in McDowell County.

Blazewas acquired from Wastech Inc., a company in which Tuorto's father is anofficer and director and where Royal's CFO is also a director. Royal'spresident and secretary, Ronald Phillips, is the manager and 10% owner inWellston. Blue Grove and GS Energy were acquired from Ganzer and his father foran agreement that included stock shares and appointment to the COO role.

Charging forward with Rhino

Changingcourse somewhat from its strategy of picking up individual assets, Royalrecently acquired thegeneral partner of Rhino ResourcePartners LP. As of Rhino's recent annual report, the companycontrolled an estimated 310.1 million tons of thermal and 53.5 million tonsmetallurgical coal reserves in Central Appalachia, Northern Appalachia, theIllinois Basin and the Western Bituminous region. Rhino 3.4 million tons of coal in2015.

Royalacquired controlling interest of Rhino for a total cash consideration of just$3.5 million and in a separate transaction acquired the general partner ofRhino for aggregate consideration of $1 million. Ganzer said the acquisitionwould be accretive and give Royal a platform to drop assets.

"Welook forward to utilizing Royal's insight and market strategies that willprovide new relationships and business opportunities for Rhino to grow our cashflow in the future," saidJoe Funk, president and CEO of Rhino's general partner.

Royallater entered into a securities purchase agreement with Rhino executing afurther $9 million securities purchaseagreement for an even larger stake in the company.

"Werealized they already had in a place a lot of the things we were looking for,"Ganzer said. "They had a management team in place that already existed, sothey had checks and balances. They have done a pretty good job of right-sizingtheir business relative to the market. They deleveraged the company prettysuccessfully."

He saidRoyal plans to expand the portfolio of coal Rhino sells including moving someof the coal Rhino currently markets as thermal coals into met and specialtycoal markets.

Allthe capital raised so far for Royal has been private. Ganzer said, generally speaking,"coal projects are still a tough sell."

"Mostof your banks andfunds and institutions, stuff like that, that historically invested in coal arestepping away for either economics, or political or environmental reasons orthey've been burnt," Ganzer said. "A lot of these companies gotbehind these big coal companies when things were great and the publicly tradedcompanies had a hard time adapting to the current pricing environment.

"So,generally speaking, it's a very challenging sell. … It's still a verychallenging market and people aren't super excited about coal projects. We feelwe are, if not at, hopefully near the bottom and we're buying at the righttime."

Platts and S&PGlobal Market Intelligence are owned by McGraw Hill Financial Inc.