- 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, six of ten directors are over the recommended retirement age of 65 (in some cases over the age of 70).
- Questionable financial decisions. Walter Energy currently has $2.3 billion of debt, largely accumulated during the acquisition of Western Coal during 2010. Audley Capital 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 Capital believes that a thorough and disciplined review of SG&A costs is needed. Based on Audley Capital’s analysis, SG&A costs at the Company are higher than Walter Energy’s U.S. peer group and savings of at least $10 million per quarter ($40 million per year) should be feasible. Such cost reductions could equate to $200 million of incremental value at a 5.0x multiple, the ultimate goal being a reduction of SG&A costs of $40 million per annum.
Audley Proposes New Board Members For Walter Energy
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