SEATTLE--(BUSINESS WIRE)--
The following letter was sent today to Westmoreland Coal:
Charles Frischer
4404 52nd Avenue NE
Seattle, WA
98105
July 26, 2015
Mr. Keith E. Alessi, CEO
Westmoreland Coal Company
9540 S.
Maroon Circle, Suite 200
Englewood, CO 80112
Dear Keith,
Since I filed my latest 13-D ownership statement on July 8, 2015, in
which I disclosed owning 1,205,700 shares or 6.7% of the Westmoreland
Coal Company, the price of the common stock has fallen from $17.50 per
share to $13.88 as of this past Friday. This decline accelerated even
after you had a one-hour conference call in which you carefully tried to
explain to the shareholders why the shares of Westmoreland are selling
at levels far below intrinsic value. The market reaction to your
conference call was for the shares to lose almost 15% of their value.
Clearly, the public shareholders do not appreciate or understand the
strength of the investment story.
For example, on Friday’s conference call the analyst from BB&T asked if
the company was going to issue equity to help fund the San Juan
acquisition. While you did not rule out issuing equity for potential
acquisitions, the marketplace misunderstood your response. Based on the
balance sheet and the upcoming Kemmerer drop-down mentioned on the
conference call, the company has the ability to close on this
transaction with a combination of available cash and lines of credit.
Therefore, no equity will be required to close the San Juan deal.
My interpretation of your comments in regards to issuing equity is that
you would consider issuing equity in Westmoreland Coal if it resulted in
the company being able to buy an additional asset, not the San Juan
asset. In fact, I take your comments to mean that the only condition in
which you would issue equity is to purchase an additional asset, which
would result in a massively accretive transaction to shareholders. Once
again, the market is misunderstanding your comments.
On the basis of the current situation, I call upon the Board of
Directors to take the following actions immediately:
1. Explore an immediate sale of the company for a price in excess of
$31 per share. Based on the capital markets, private-equity company
investment requirements, and the extremely long-term nature of our
contracts, this price represents a minimum price that the company should
expect to receive. In fact, it is possible and likely that the number
will be higher. This would represent a 123% premium to the current share
price.
The $31 price expectation is based on several facts. The company stated
in its June 12th presentation to investors that free cash
flow per share after debt service for 2015 is expect to be $3.27 at the
mid-point of guidance. Westmoreland generates an additional 35 cents of
income via ownership of shares in Westmoreland Resources. This results
in $3.62 per share free cash flow for 2015. In addition, the company
reported this past Friday on the conference call that the Coal Valley
export facility is losing approximately $18 million per year due to the
commodity nature of that asset. Those contracts expire at the end of
2017; therefore, while the company can expect to lose an additional $45
million over the next 30 months, the cash flow at Westmoreland will
increase by another $1.00 per share staring in 2018.
Finally, Westmoreland is under contract to purchase the San Juan mining
assets from BHP. The misunderstanding of the facts behind this
acquisition is another example of the market not appreciating our
business. This is going to be a great acquisition with a minimum 7-year
contract length. Since this transaction is not yet closed, the
management at Westmoreland has been prudent not to disclose the details
behind this deal. That said, a number of analysts have provided some
educated guesses about the value of this acquisition and believe the
contribution might be an additional $1.00 per share in cash flow staring
in 2016. Instead of giving Westmoreland credit for a great acquisition,
the market is now punishing us for an alleged equity raise, which will
never happen.
The math for the $31 minimum price is straightforward. 2015 expected
cash flow per share is $3.62. Westmoreland can expect an additional
$1.00 per share from the San Juan transaction, and in 2018, the Coal
Valley loss will be removed. The resultant cash flow per share in 2018
is therefore $5.62. Using a seven times free cash flow multiple and
deducting the $45 million operating loss from Coal Valley for the next
30 months yields a $36.84 per-share value. A more conservative multiple
of six times cash flow yields $31.22 per share. This value does not
include any consideration for the ROVA assets, which in 2019 can likely
be sold for another $2 or $3 per share. Nor does it include any value
for the carbon activation facility projected to come on line by 2018.
Projected 2018 per-share cash flow
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Current 2015 mid-point per-share cash flow guidance
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$
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3.27
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Contribution from Westmoreland Resources
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$
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.35
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Income per share from San Juan acquisition starting in 2016
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$
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1.00
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Removal of per-share loss from Coal Valley at end of 2017
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$
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1.00
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2018 cash flow per share
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$
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5.62
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2. Add two additional members to the Board of Directors at
Westmoreland Coal who are large shareholders. While I am willing to
be one of those two members, there are many qualified investors who
control more than 250,000 shares and would provide valuable advice and
consent.
3. Send a list of current shareholders to my attention.
4. Schedule a 4-hour investor day during the month of August to
fully and completely outline the investment merits of Westmoreland Coal
to your existing and potentially new shareholder base. The investor day
will actually save management critical time and energy because it will
be an opportunity to address all investors at once, as opposed to having
a never ending slew of 1- and 2-hour phone calls with individual
investors.
5. Create a new investor-relations position at Westmoreland
Coal/Resources who can address issues from shareholders without
taking up the valuable time of executive management.
6. Immediately accelerate negotiations to change the Westmoreland
Coal line of credit/revolver to allow a buyback program. This will
allow the company to opportunistically reduce the share count. Based on
my 2018 free cash flow projections, the company is selling for 2.5 times
2018 free cash flow. Purchases of Westmoreland stock at current levels
make spectacular investment sense.
The coal industry in general is suffering from a multitude of problems
related to their over-reliance on commodity-based pricing. Unlike
Westmoreland, the other coal companies in the United States generally
have over-leveraged balance sheets related to previous acquisitions in
which they expected both met and thermal coal prices to be far in excess
of current levels. The increased production from Australian mines and
the devaluation of the Australian currency have put additional pressure
on many coal companies based in the United States. The economic slowdown
in China has also dramatically impacted commodity prices. Peabody Energy
bonds are trading at levels that imply a bankruptcy or restructuring is
likely in the next 1 to 3 years. Many other players in the space are
currently in pre-bankruptcy or will likely be there shortly.
Against this dismal backdrop Westmoreland Coal stands in sharp relief.
Westmoreland has an average of 10-year contracts for its coal. We employ
an entirely different business model in which we are partners with our
utility customers, who burn our coal on a cost-plus, cost-protected or
geographically protected structure. As a result of our distinct model,
the effective price per million BTU for our utility partners is less
than $2.00. In fact, in your most recent presentation, you detailed that
company-wide, the breakeven with natural gas was $1.68 per million BTU.
We are unique, and the market is not able or willing to value our
exceptional model. In light of this, I request that you immediately take
action on the steps outlined in this letter.
Sincerely,
Charles Frischer
View source version on businesswire.com: http://www.businesswire.com/news/home/20150727005302/en/