Mission Coal Co. LLC took advantage of a down cycle in global metallurgical coal markets to snatch up U.S. mines from struggling coal companies, only to find the bargain mines fraught with issues that would force the company into its own bankruptcy only a few years later and potentially put those assets back on the market.
The Tennessee-headquartered metallurgical coal company with assets in West Virginia and Alabama had a total cash balance of just $55,000 as of its Oct. 14 voluntary petition for bankruptcy and is now exploring a bankruptcy sale of its assets, according to the declaration of Kevin Nystrom, the chief restructuring officer for Mission Coal. Despite the metallurgical coal market rebounding, Mission has faced a number of operational challenges since its subsidiaries started scooping up coal assets in 2015, and now the company says the sale of all or substantially all of its assets is the primary focus of its bankruptcy reorganization.
Mission was formed in early 2018 by combining and consolidating the operations of Seneca Coal Resources LLC and Seminole Coal Resources LLC, both consisting of assets acquired by ERP Environmental Fund Inc in distressed asset buys in 2015 and 2016. The company amassed the cheap mines from what is now Cleveland-Cliffs Inc. as it exited the U.S. coal sector and acquired assets from Walter Energy Inc. for no consideration other than assuming the liabilities associated with those mines as Walter went through a bankruptcy process that would result in the more streamlined Warrior Met Coal Inc.
"With substantial unmined reserves, a promising met coal market dawning and readily actionable investments available to realize the potential of the debtors' mines, Mission Coal was positioned to become a profitable, efficient entity," Nystrom wrote.
The bargain mines Mission expected to operate in what actually did become a booming metallurgical coal market proved to be more expensive than they seemed. According to the bankruptcy declaration, the same "market forces that allowed for the sale of these assets at such a discount also drove them into disrepair." Many of the acquired assets were in need of "enormous upfront capital infusions" and Mission Coal spent approximately $28 million upgrading mining operations it still believes has potential to be viable as of the date of its bankruptcy petition.
Executive targets of 6.5 million tons of coal production in 2018 were drastically cut to 4.5 million tons due to adverse mining conditions and transportation disruptions, Nystrom told the court. Only 2.1 million tons of coal had been produced by the company's mines as of September.
The company has also struggled to secure lending to get it through its financial woes. A third party contacted 20 entities that routinely provide debtor-in-possession financing, of which nine agreed to enter into nondisclosure agreements related to a potential deal. All of the lenders expressed concern about providing financing and all of them ultimately declined. The company is currently negotiating financing terms with its first lien lenders for an approximately $50 million financing facility.
Nystrom said Mission has not had enough time to establish the business relationships and firm reputation it needs to survive. For example, many vendors are imposing stringent terms on new coal companies after being burned in other coal company bankruptcy reorganizations.
"This results in a constrained market and a near holding pattern for Mission Coal, who is frequently subject to disadvantageous business terms and unable to substitute its vendors' services with less expensive alternative providers," Mission Coal wrote.
Mission is asking the bankruptcy court for quick relief. The company has said it needs a hearing by Oct. 16 in order to authorize payroll obligations to be distributed by Oct. 17. Mission employs approximately 1,075 people on a full- or part-time basis.
About 96% of the coal revenue generated by Mission is from metallurgical coal sales, according to the filing. Export sales account for about 55% of the company's coal sale revenues, with 10 customers accounting for about 77% of the company's 2017 coal sale revenue.