Mechel sells Bluestone assets back to Jim Justice, at sharply lower price

Russia-based commodities producer Mechel OAO (MICEX: MTLR, NYSE: MTL) said Feb. 18 that it has closed a deal to sell Mechel Bluestone Inc., including its mining operations, to a company owned by the Jim Justice family.

The deal includes: an immediate cash payment of $5 million; royalty payments on coal mined and sold in an amount of $3.00 per ton; and a portion of any future sale of the company and/or its assets of 12.5% of the sale price if within five years of transaction close or 10% of the sale price after year five, but before year ten. Notable is that Mechel bought these metallurgicial coal-producing operations, mainly in southern West Virginia, from Justice in 2009 at a vastly higher price. That was when the met coal market was a lot hotter than it is now.

In addition, as part of the transaction, the parties agreed to terminate all claims against each other, including their unresolved dispute related to the calculation of a contingent payment obligation arising out of the 2009 transaction in which Mechel obtained the Bluestone assets from Justice.

“As part of the revised development strategy we continue disposing of non-core and non-strategic assets. With the market situation being what it is, mining at Mechel Bluestone’s mines and open pits is not profitable. The company’s average annual net loss since 2012 was around $60 million. Selling Mechel Bluestone will not only enable us to avoid these losses, but also takes some $140 million of liabilities off the Group’s balance sheet and allows us to avoid over $160 million worth of legal risks. The sale will allow us to focus the freed cash flows on servicing the company’s debt,” said Mechel OAO Chief Executive Officer Oleg Korzhov.

Court dispute centered on ‘contingent’ coal reserves

A Dec. 12, 2014, procedural decision in that litigation, being pursued in a Delaware court, said the parties had agreed on a schedule that called for a May 2015 trial.

Said that court order about the underlying dispute: “In 2009, plaintiffs Mechel Bluestone, Inc., and Mechel Mining OAO (jointly, ‘Mechel’) acquired entities that owned certain coal properties and associated assets in West Virginia (the ‘Bluestone Properties’) from defendants James C. Justice Companies, Inc., James C. Justice II, James C. Justice III, Jillean L. Justice, and James C. Justice II, as Trustee of the trusts James C. Justice II GRAT No. 1 and James C. Justice II GRAT No. 2 (collectively ‘Justice’). Mechel acquired the properties pursuant to an Agreement and Plan of Merger dated as of March 16, 2009 (the ‘Merger Agreement’). Before the acquisition, to assist in determining the purchase price, Weir International, Inc. (‘Weir’) prepared a report estimating the base volume of coal reserves on the Bluestone Properties. Justice believed that the report understated the amount of coal reserves and argued in favor of a greater volume.

“To resolve the disagreement, the parties provided in the Merger Agreement that if additional coal was discovered on the Bluestone Properties within two years (the ‘Contingent Reserves’), then Mechel would pay Justice additional amounts (the ‘Contingent Payment’). The Merger Agreement called for Weir to assess the volume of any Contingent Reserves in accordance with applicable professional standards and using the methods employed in its initial report.

“By letter dated September 7, 2011, Weir identified approximately 60 million tons of Contingent Reserves on the Bluestone Properties (the ‘Weir Letter’). Under the Merger Agreement, this volume of Contingent Reserves would equate to a Continent Payment of approximately $165 million. Mechel disputed the determination made in the Weir Letter, contending that it failed to satisfy the relevant provisions in the Merger Agreement.

“On January 2, 2014, Mechel filed this action. Count I of the complaint seeks a declaratory judgment that (i) Justice failed to satisfy its obligations under the Merger Agreement, (ii) the Weir Letter did not satisfy the Contingent Payment provisions under the Merger Agreement, and (iii) Mechel does not owe Justice any Contingent Payment. Count II asserts that Justice breached the Merger Agreement by not acting in accordance with the declarations demanded in Count I. Count III seeks a decree of specific performance compelling Justice to act in accordance with the declarations demanded in Count I. Count IV alleges that Justice committed fraud because it knew or should have known that Weir Letter provided false information about the Contingent Reserves.”

Notable is that James Justice II is the patriarch of the family and is generally known as Jim, while his son James Justiice III, known as Jay, is also involved in the business.

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.