Cross Posting, Wall Street Journal
Foresight Energy Bets That There’s Gold in Coal
Illinois Miner Raises $350 Million in IPO Despite Industry’s Threats From Regulators, Natural Gas
June 17, 2013
By John W. Miller
The miner raised $350 million in an initial public offering even as coal takes a beating from environmental regulations and competition from natural gas for generating electricity. The company on Tuesday priced 17.5 million shares at $20 apiece, valuing Foresight at $2.6 billion. The shares were expected to start trading Wednesday.
Thermal coal, which is burned in power plants, is the core of Foresight’s business. But coal has been shunned by many utilities in recent years because of emission standards that favor cleaner natural gas. The Environmental Protection Agency this month proposed cutting emissions at existing power plants 30% by 2030. Hydraulic fracturing and horizontal drilling have also produced a gas glut, lowering its price.
“You can still make money in coal if you play your cards right,” says Kristoffer Inton, an analyst with Morningstar Inc. “The new rules could hurt coal, but they’re not a death sentence.”
Foresight officials declined to comment.
The St. Louis company is seeking investors as many other coal companies retrench. Consol Energy Inc., which has mined coal since the Civil War, in December sold five Appalachian mines, representing nearly half its coal output. More than a half-dozen U.S. coal-mining companies have gone under in the last two years.
Others see opportunity. Several New York private-equity firms bid on Consol’s mines and continue to look for coal investments. And Mick Davis, who built up Xstrata PLC as a coal powerhouse, recently founded X2 PLC and has raised several billion dollars to buy and turn around struggling mines. It is looking at properties in South Africa and Australia. Xstrata last year merged into Glencore Xtrata PLC.
Energy experts say coal will be used for decades. The commodity accounts for 38% of electricity produced in the U.S. That is expected to fall by only a few percentage points over the next decade, despite new environmental regulations.
Foresight believes it is well positioned to supply coal because its Illinois mines have thick, contiguous seams and can be mined for one-third the cost of Appalachian mines.
Company founder Chris Cline, a third-generation miner, a decade ago persuaded investors to finance his acquisition of four Illinois Basin mines. Coal from those properties produced two to three times as much as sulfur, which contributes to acid rain, as coal mined in Central Appalachia. But Mr. Cline believed demand would increase once utilities installed scrubbers to reduce sulfur emissions. While total U.S. coal production fell 7% in 2012, it rose 10% in the Illinois Basin.
There are risks, though. Many of Foresight’s customers blend its output with coal from other suppliers that has less sulfur. If power plants can’t find suitable blending coal at the right price, they might switch to natural gas or shut down, Foresight said in regulatory filings.
John Tumazos, a New Jersey investor in mining and metals stocks, says he hasn’t studied the Foresight prospectus but probably wouldn’t invest in coal right now. “I’d be concerned the thermal business is in secular decline because of carbon regulations,” he said.
Meanwhile, lower coal prices and increased spending sent Foresight’s net down sharply last year, to $8.3 million from $125.8 million a year earlier.
Sales rose to $957.4 million from $845.9 million, however. And Foresight predicts that production will reach 24.1 million tons in the year through June 2015, up 34% from 2013.
Demand for Illinois Basin coal generally is expected to increase to 185 million tons in 2020 from 102 million tons last year, according to consulting firm Wood Mackenzie. The firm expects that by 2025 all coal-fired utilities will have scrubbers.
“Somebody’s going to survive, and it’s going to be the low-cost producers,” says Wood Mackenzie analyst Matt Preston. “There’s no reason to expect they’re not going to be profitable for at least the next four or five years.”
Foresight, whose workforce isn’t unionized, controls three of the four most productive coal mines in the U.S. The company said in its filing that it sells a significant portion of its coal under long-term deals. Foresight already has sold 85% of its production for this year and 64% for next.
The company also is looking to increase exports. Foresight, one of the largest U.S. exporters of thermal coal, has exported roughly 36% of its output since 2008. The company opened a barge terminal in southern Indiana on the Ohio River to move coal to New Orleans and from there, to Europe, South America, Africa and Asia. Foresight is the biggest supplier to England’s largest power plant.
—Telis Demos contributed to this article.
Write to John W. Miller at email@example.com