VHGI Holdings (OTC.QB: VHGI) announced Jan. 12 that Indianapolis Power & Light, a subsidiary of AES Corp. (NYSE:AE), has entered into a definitive agreement to purchase coal over three years from the Lily Group, which VHGI has a deal to buy.
The agreement calls for IPL to purchase 1 million tons of coal from the Lily Group’s new Landree mine in Indiana and also provides IPL with an option to purchase an additional 180,000 tons in 2013 and 2014.
“This is a major milestone in the progress of VHGI,” said Doug Martin, CEO of VHGI. “This is precisely why we have pursued Lily Group, which owns the Landree mine. Our due diligence indicated that The Lily Group had the ability, infrastructure and opportunity to land major contracts such as this agreement. Based on our projections we are confident that together, we will have additional mining capacity during this period to secure additional high margin contracts for the Landree mine or sell on the spot market, further expanding our profit potential. We are currently in talks with other major utilities to supply them with our coal.”
Martin noted that VHGI Coal is in final negotiations on the financing to complete the Lily Group transaction. One key to getting that financing was the execution of the IPL contract. This contract provides the company with a solid, long-term revenue stream.
Rick Risinger, the President of VHGI Coal and also the owner of Lilly Group, said: “The quality of our coal, the adjacent rail line and the unique location our mine allows us to ship the coal to certain customers in a very competitive manner, giving us a geographic transportation advantage to the local utilities. That is one competitive issue that made us attractive to IPL and we believe it will make us equally attractive to other major companies.”
IPL indicated in a recent filing with the Indiana Utility Regulatory Commission that it had signed a contract with Lily Group that began Jan. 1, but had given in that filing no details about the contract. IPL said that another term coal contract with Indiana coal producer Solar Sources expired at the end of 2011.
Lily Group’s Landree deep mine is located in Greene County, Ind., and was first registered with the U.S. Mine Safety and Health Administration in April 2010.
VHGI on Jan. 6 filed with the SEC a copy of the stock purchase agreement with Lily Group. On Dec. 29, 2011, VHGI Coal, a wholly owned subsidiary of VHGI Holdings, entered into the stock purchase agreement with Lily Group and Paul “Rick” Risinger, the sole stockholder of Lily. VHGI Coal will purchase all outstanding shares of Lily’s common stock for consideration that includes: a 3% secured promissory note, due Feb, 1, 2012 (subject to extension under certain conditions), made by VHGI Coal in favor of seller in the original principal amount of $15m; an unsecured 5% promissory note, due April 6, 2013, made by VHGI Coal in favor of seller in the original principal amount of $2m; and 700,000 shares of a newly created Series A Convertible Preferred Stock of VHGI Coal. The deal also includes an agreement for Risinger to become President of VHGI Coal.
Notable is that VHGI Holdings in its Nov. 14, 2011, Form 10-Q filing sounded a “going concern” warning. “The company has current liabilities in excess of current assets and has incurred losses since inception,” the filing said. “The company has had limited operations and has not been able to develop an ongoing, reliable source of revenue to fund its existence. The company’s day-to-day expenses have been covered by proceeds obtained, and services paid by, the issuance of stock and notes payable. The adverse effect on the company’s results of operations due to its lack of capital resources can be expected to continue until such time as the company is able to generate additional capital from other sources. These conditions raise substantial doubt about the company’s ability to continue as a going concern.”
The Form 10-Q shows that VHGI has in recent years invested in businesses like gold mining rights in Arizona, oil and gas leases in Texas and oil drilling in Tennessee.
In describing VHGI Coal, the Form 10-Q statement said: “VHGI Coal, Inc. is currently soliciting funding for the purpose of completing the acquisition, development and operation of an underground coal mine, which is located on a property owned by Lily. The property, known as Landree mine, is located in Greene County, Indiana in Wright Township. Lily has acquired all of the necessary permits to operate a small surface and underground mine. It has verified reserves of 21 million saleable tons and is in the process of optioning an additional 75 million tons. This process began in 2007, and Lily currently has in place a qualified team of employees, officers, and advisory board members, as well as legal and accounting advisors.”
The Form 10-Q added that Lily has acquired the rights to mine 1,400 acres from Western Pocahontas Properties LP, in addition to the 1,400 acres owned by Lily. A 2010 geology report estimated a total of 21 million tons of Coal III and Coal IV, which is good quality low sulfur, low ash, high Btu, high fusion coal. The depth of the coal ranges from 114 to 220 feet within the property. The Landree property is adjacent to a spur of the Indiana Rail Road Co., which will make transportation to markets worldwide accessible and cost effective. It has also secured a bonded trucking route if it can secure local truck sales.