Audley Capital Advisors LLP (“Audley Capital”) announced today that a related Audley investment fund recently notified Walter Energy, Inc. (NYSE: WLT) (TSX: WLT) (“Walter Energy” or “the Company”) that it will nominate five candidates for election to the Company’s board of directors at its upcoming 2013 Annual Meeting of Shareholders.
Audley Capital believes that Walter Energy 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. 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. 1
Audley Capital points 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, 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 Capital has identified a number of initiatives to seek 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.
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