Audley looks to shake up direction, board of coal producer Walter Energy

Investor Audley Capital Advisors LLP, saying that coal producer Walter Energy (NYSE: WLT) (TSX: WLT) is underperforming, will nominate five candidates for election to the company’s board of directors at its upcoming 2013 Annual Meeting.

Audley Capital said in a Feb. 19 statement that it believes that Walter Energy – which operates mainly in Alabama, West Virginia and British Columbia, Canada – has high quality metallurgical coal assets in established mining jurisdictions with scope for significant growth, with a market position that should enable it to generate substantial free cash flow going forward.

“However, following the acquisition of Western Coal Corp. in November 2010, Walter Energy has consistently failed to deliver shareholder value as a result of questionable financial decisions and poor management,” Audley claimed. “As a result, Audley Capital believes that shareholders have lost confidence in the ability of the existing Board of Directors to deliver profitable growth going forward. For example, Walter Energy’s share price has fallen 73% since its peak in April 2011, underperforming major mining indices including the MSCI World Metals and Mining Index, which has declined only 33% in the same period.”

Audley Capital pointed to a few areas it believes to be of immediate concern:

  • Consistently missed quarterly earnings guidance over the last two years – Walter has missed consensus earnings expectations for six out of the last eight quarters. In particular the failure to deliver production growth and cost reductions in Canada has disappointed expectations.
  • A “serious” lack of consistent leadership – There have been four CEOs over the last five years.
  • A “stale and out-of-depth” board – Only three of the ten board members have significant mining experience, five non-executive directors have interlocking directorships and six of ten directors are over the recommended retirement age of 65 (in some cases over the age of 70).
  • “Questionable” financial decisions – Walter has $2.3bn of debt, largely accumulated during the acquisition of Western Coal during 2010. Audley believes that the acquisition could easily have been funded by issuing more equity above a price of $100 per share at the time of the transaction and at a time of record coal prices. Instead, shareholders are left with a net debt to book value of equity ratio of 200% for a mining company with a high level of operational and commodity price risk.
  • Insufficient cost controls – Audley believes that a thorough and disciplined review of SG&A costs is needed. Based on Audley’s analysis, SG&A costs at the company are higher than its U.S. peer group and savings of at least $10m per quarter should be feasible.

Audley said it has identified a number of initiatives to improve the governance, financial performance and asset value of Walter Energy over the next 12 months, which will be communicated to shareholders in the coming weeks.

Audley has five candidates it wants on the Walter board

Audley is not seeking to replace a majority of the board, but said it does believe significant change to the composition of the board is warranted given the qualifications of its nominees and the long-term underperformance of Walter Energy.

Julian Treger, Managing Partner of Audley Capital, said: “Our director nominees will bring experience, accountability and a fresh perspective to the Walter Energy board. Once elected, we believe they can substantially and dramatically improve the Company’s ability to operate in the current environment and help put in place initiatives that will enable the Company to achieve its value creating potential over the long-term for the benefit of all shareholders.”

Audley’s slate of directors includes highly qualified mining industry experts, with considerable operating experience. The nominees are:

  • Eddie Scholtz (59), who has over 40 years of experience in the mining industry, primarily in South America and Africa. During his career he spent 37 years with BHP Billiton, where he held a variety of positions, including Managing Director of Ingwe Collieries, BHP Billiton’s wholly-owned South African coal business, now known as BHP Billiton Energy Coal South Africa.
  • Mark Lochtenberg (52), formerly the co-head of Glencore International AG’s worldwide coal division. Lochtenberg spent 13 years at Glencore’s commodity trading concern, overseeing a range of trading activities including the purchase and aggregation of the coal project portfolio that would later become Xstrata Coal.
  • Robert Stan (59), who has been involved in the Canadian coal industry since 1979. He has held senior management positions with several Canadian mining companies, including Fording Coal Ltd., Westar Mining Ltd., Teck Corp. and Smoky River Coal Ltd.
  • Lawrence Clark Jr. (41), who recently became President and CEO of JW Resources Inc., a private operator of thermal coal assets in Central Appalachia, and serves as Managing Member of BalanTrove Management LLC, a corporate advisory business catering to small and middle market resource and energy companies.
  • Julian Treger (50), who is one of the most experienced activists in the mining space. Most notably Treger was the driving force behind the rescue of Western Coal from near bankruptcy in 2007, the restructuring of its management and board, the implementation of its growth plan and its ultimate sale to Walter Energy.

Founded in 2005 and incorporated in England and Wales, Audley provides investment advice and services in connection with investment strategies including hedge funds, private equity funds and co-investment vehicles.

Walter says it’s committed to its current corporate strategy

Walter Energy on Feb. 19 confirmed that Audley European Opportunities Fund Ltd., an affiliate of hedge fund Audley Capital Advisors LLP, sought to advise the company of its intent to nominate a slate of five director candidates. Audley has not communicated with the company about its proposed slate of directors outside of its notice of intent prior to today’s public announcement, Walter noted. Walter said that its board and management team remain fully committed to creating value for all shareholders through the successful execution of the company’s strategy.

The date for the 2013 Annual Meeting has not yet been announced.

Also, Walter announced Feb. 19 that long-time independent director Howard Clark Jr. has retired, effective Feb. 18. “On behalf of our entire Board, I would like to extend our deep gratitude to Howard Clark, whose wisdom and insight have been invaluable resources over his nearly 19 years as an independent director,” said Michael Tokarz, Non-Executive Chairman of Walter.

As a result of Clark’s retirement and Mary “Nina” Henderson’s election, the Walter board will continue to consist of nine independent directors plus the company’s Chief Executive Officer.

“We look forward to the new perspective Nina will bring to Walter Energy,” said Tokarz. “Nina has over three decades of global management experience, in addition to significant leadership and governance expertise gained from serving on the boards of numerous world-class public companies.”

Henderson is the managing partner of Henderson Advisory, a consulting practice providing marketing perspective and business evaluation to investment management firms on the consumer products and food industries. Prior to founding Henderson Advisory in 2001, she was corporate vice president of Bestfoods and president of Bestfoods Grocery. Henderson currently serves as a director of CNO Financial Group. She has served on numerous corporate boards, including Royal Dutch Shell PLC, The Shell Transport and Trading Co., Del Monte Foods Co., The Equitable Companies, AXA Financial, Pactiv Corp. and the Hunt Corp.

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.