Royal Coal hits a wall on lining up new financing

Royal Coal Corp. (TSX VENTURE:RDA)(FRANKFURT:RLC), which has several coal mines in eastern Kentucky, announced Feb. 22 that it has decided to withdraw a preliminary short form prospectus that was filed on Jan. 17 with respect to a proposed offering of units of the company

The withdrawal is because the company was not able to complete the offering under current market conditions. Royal Coal is does not currently have positive cash flow to meet its ongoing operational requirements and debt service and repayment obligations and requires a combination of additional financing and a restructuring of its existing debt structure to enable it to continue its operations.

In addition, its coal price realizations have been adversely affected by recent weak thermal coal prices. While the company said it is actively pursuing other sources of funds that may be available to fund such needs, additional financing may not be available or at least available under acceptable terms. “If the company fails to raise additional funds and restructure its existing debt it is doubtful that it will be able to continue as a going concern,” Royal Coal warned.

The company said it is using every effort to reduce or delay expenditures, seek additional capital, and restructure or refinance its indebtedness. In addition to seeking to reduce its debt, the company is revising its mine plan with the goal of reaching sustainable profitable operations at its Big Branch mine and phasing in additional production at the Big Branch mine extension and the Sid mine.

Royal Coal and certain of its subsidiaries previously entered into an agreement with Sandstorm Metals & Energy Ltd. and Sandstorm Metals & Energy (US) Inc., providing for certain amendments to the coal production payment agreement dated Nov. 26, 2010. The amendments were conditional on the completion by the company of an equity financing for aggregate gross proceeds of not less than C$5 million on or before Jan. 31, 2012, which did not occur. As a result, the amendment agreement terminated automatically, the amendments did not take effect and the original coal purchase agreement continues in full force and effect, unamended.

Royal Coal did not meet the production levels set out in the coal purchase agreement for the calendar year 2011 and, as a result, is required to pay US$1,018,597 to Sandstorm with respect to the deficiency in the guaranteed minimum cash flows for such period, which it has not done when such payment was due. Without additional financing or Sandstorm’s waiver of any event of default, there is significant doubt as to Royal Coal’s ability to meet its current and future production or cash flow commitments and continue as a going concern.

In addition, if the company does not complete the equity financing on or prior to Feb. 29, all amounts outstanding under its loan agreement entered into on Dec. 22, 2011, with Sandstorm, in the principal amount of US$3,177,829.21, will become immediately due and payable.

Royal Coal said it did not pay the interest owing pursuant to the secured convertible debenture issued to Mercuria Energy Group Holding SA in respect of the period ending on Dec. 31, 2012, when any such interest became or becomes due and payable.

The company said it has been in ongoing discussions with its secured and unsecured creditors, including with respect to possible financing opportunities and amendments, waivers, and continued forbearance on the exercise of any rights (including any enforcement of security), under applicable agreements between the company and such parties. Current discussions include the possibility of converting some debt to equity.

Royal Coal said it has also determined not to continue the contract mining operations it previously announced Dec. 28, 2011, where it would mine and sell the coal at certain leases held by Novadx Ventures Corp. and the Ikerd Group of Companies in Kentucky. That deal included coal from the Flatwoods and Elk Creek mines. In recent weeks, thermal coal fundamentals have deteriorated significantly and Royal Coal determined that it cannot operate the Flatwoods and Elk Creek mines effectively given current available coal prices.

Under its CDR Operations subsidiary, Royal Coal has three surface mines (Big Branch No. 1, Flatwoods and Elk Creek) and the Charlene loadout listed with the U.S. Mine Safety and Health Administration.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.