CEO Mark Jensen said the company’s investments in its new acquisition Perry County Resources have sparked an ‘immediate improvement’
The Indiana company’s latest acquisition is Perry County Resources in Hazard, Kentucky, which was acquired through a bankruptcy sale
With operations in eastern Kentucky and West Virginia, the Fishers, Indiana company extracts, processes, and sells metallurgical carbon to the steel industry. Its latest acquisition is Perry County Resources in Hazard, Kentucky, which was acquired through a messy bankruptcy in 2019.
The coal market is currently soft with coal commanding a price of about $70 per ton. But American Resource’s management now projects its 2020 coal production will fall in the range of 2 million to 2.2 million tons.
Proactive sat down with American Resources CEO Mark Jensen to get his views on the outlook for the Perry County Resources acquisition as well as the state of the metallurgical coal market.
What drew the founders of American Resources to the metallurgical carbon industry?
We were attracted to the sector due to the projected growth of the infrastructure market as well as the chance it gave us to use our skills as turnaround consultants who specialize in fixing failing businesses by pushing them to embrace modernity and introduce much-needed simplified business models.
Taking a plunge into this business is a challenge that we are excited to tackle – though it’s one that has come with resistance from the industry. Workforce talent was another driver that we quickly saw when we got involved in the sector. We view the men and women we work with as family.
When you first got into the carbon industry, did you think you would achieve the growth which you have seen to date?
No. There have been a lot more opportunities than we originally projected when we first got into the industry fourteen years ago. This fact also throws up a challenge as the capital markets have tightened at the same time and restricted the industry’s ability to raise capital. But even with limited funding, we are proud of the platform of assets we have put together and excited about “flipping the switch” on some of our mines to bring them into production over the course of this year and next.
How has the industry changed since you first dipped into it 14 years ago?
Dramatically. There have been countless bankruptcies of coal companies over the last ten years. In fact, I can only think of three other operators in Appalachia that employ over 200 people that haven’t filed for bankruptcy over the last ten years. Another issue that should be stressed is the fact that thermal and metallurgical coal are two completely different products used for entirely different purposes, and the divergence between the two has never been wider. The legacy coal industry has done a horrible job of branding them and differentiating one from the other. My view is that legacy players in the wider coal sector are unwilling to accept the demise of thermal coal. Thermal coal is burned for utility generation or energy while metallurgical coal, what we produce, is critical in the steel-making process.
What are your thoughts on the thermal coal markets?
We think that market is extremely challenged and will continue to decline in the United States. While thermal coal accounted for about 40% of global electricity generation last year, reaching an all-time high, its importance has continued to significantly decline as part of the energy mix here in the US. Thermal coal has lost the PR battle and is struggling to compete against natural gas. When we buy complexes that contain metallurgical and thermal coal, we work immediately to close the thermal coal mines and relocate those assets and then put our focus on rehiring at metallurgical operations. Metallurgical carbon, we believe, will be a growing market as infrastructure projects requiring steel are in demand.
Why mine metallurgical carbon in the United States?
It’s simple. We have some of the highest-quality metallurgical carbon in the world. When using steel for infrastructure purposes, you need the strongest and safest steel. That is what we help provide.
Also, the mines that are in the United States are some of the safest and most efficient. We have to look at the human factor of producing products, especially metallurgical carbon. Steel is not going away. That is why we need people to get behind the mines in the United States who are willing to focus on metallurgical carbon.
You have grown substantially through acquisitions and organic growth as well. What is your model for M&A? What is the latest acquisition you have made and do you anticipate future acquisitions?
Our model is to acquire assets, strip them to their bones and then restart them in a more productive format. There are always a number of naysayers who surface during this very short restructuring period of roughly six months, as many folks don’t like change. Ultimately, our goal with any operation is to provide sustainable jobs that are supported by those profitable operations over time.
Our latest acquisition, Perry County Resources, is a high-quality pulverized coal injection (PCI) semi-soft metallurgical product that we acquired through a really messy 363 bankruptcy sale in late-2019. It was an asset we were interested in for a few years given its potential. We predicted this operation would require a six-month restructuring plan and that forecast is still pretty accurate.
Looking ahead, we do not have any additional acquisitions slated as we have an attractive base of assets and we intend to focus on bringing those online over the next year or so.
What was the opportunity you saw in Perry County Coal, especially given that it was on a run rate of losing $36 million or more in 2019?
We saw a complex that was running in an outdated fashion with major legacy costs, which is the case with all of our acquisitions. We also saw a company that was overburdened by legacy costs which triggered its fall into bankruptcy. There was no other way for Perry County Coal to fix its problems other than bankruptcy. One of its biggest problems was a lease with one of its land owners, Kentucky River Properties; this forced the company under its prior ownership to pay unbelievably high lease minimums for the last twenty plus years, which completely taxed its operations and ultimately, its work force as well.
We were able to look past those issues and realize that the underlying bones of the operation were solid. Its workforce was accomplished and its coal quality was very good. We spent the first two weeks after the acquisition discussing our plan with employees for turning around and “right-sizing” the operations to be more conducive to the current smaller market for raw materials serving the infrastructure space. We worked through scenarios that involved streamlining Perry’s operations to make them more efficient and flexible. We’re in a position where we want to be able to profitably reduce coal production in response to varying market conditions, but we still want to have the capacity to ramp up production in expanding markets. That is what we have done at all of our complexes throughout eastern Kentucky.
How was your restructuring plan at Perry County Resources received by the local community?
After spending the first two weeks after the acquisition formulating our strategic plan of action with workers on how to tailor Perry’s operations to adapt to the current market for raw materials used for steel making, we worked through various scenarios. We really focused on working with the talent there to make sure it was the best plan we could put in place for longevity and for the employees. In the end, we felt as if we had the support from the men and women at Perry who were conducting the work. The plan has transformed Perry from a broken business into a much heathier operation that can successfully operate throughout all parts of a market cycle.
Pushback to that plan didn’t come from Perry’s workforce. It came from groups like Kentucky River Properties who were making millions off the operation while it was hemorrhaging cash over the years.
The folks at Kentucky River Properties didn’t care if Perry had money to buy tools or equipment for the men, all they cared about was their hefty royalties. It didn’t help that they were extremely connected in the region and threw up roadblocks at every step during our restructuring process. We felt the battle against them was one worth fighting though. If we caved to their influence, the men and women of the community had zero chance of working at these mines in the coming years. The roadblocks haven’t been helpful to us and our desire to create jobs. Instead, they drained us of capital and resources that we would rather have spent at the operations themselves. Having said that, we believe our restructuring is all but complete. We are working on a transaction that will bring an operator in to take control of Perry’s operations and slowly ramp up coal production to create great jobs for the community of Hazard, Kentucky. We want the obstruction these companies are creating to end, so Perry’s workers can just go about their work.
What other problems did you encounter when you took over Perry County?
When we assumed ownership of Perry County Resources, it was evident that capital had been drained from the operation. The complex endured years of underinvestment, which meant the equipment and facilities were either woefully inefficient or inoperable. We started investing in its operations and we saw an immediate improvement. Our future “go-forward” plan includes a capital budget to continue to make sure this investment offers better production and output.
Perry’s initial complex was comprised of a pair of deep mines and a prep plant. We immediately put one mine on the market, as part of our plan, because there was no way both mines could be made profitable in today’s market. We wanted to find a buyer that was capable and who would rehire at the mine after assuming control to help the community. We are excited to have signed contracts with a buyer and hope to close pursuant to the terms of the contract. Additionally, we knew our restructuring plan would take six months to execute and to get to a place where we would have Perry in a position to begin hiring again. Thankfully we are just about there.
To what extent has American Resources taken a hit recently from the restructuring of Perry County?
The warnings we received about the influence of select parties with ties to Perry County Resources were definitely correct and made things challenging for us. We have also faced the problems that every other coal producer has faced over the last three months given the short term uncertainty in the carbon markets, which basically evaporated in December and January. We believe this situation stems from uncertainty over the US trade bill as well as the import embargos coming out of China. Ultimately, we agree that there is some necessity to the trade wars and think in the long-term, they are going to be good for the United States. However, the uncertainty they created in the short term caused some short-term issues. Thankfully, we are starting to see a thaw in the market and market chatter for the balance of 2020 is very positive.
That being said, the challenges we have faced created from all the events we’ve discussed can and will be overcome. We have an amazing team on the ground and our focus is making sure we preserve these jobs for the community and for our shareholders.
Despite everything, does American Resources Corporation want to keep the mines running in Perry County?
Yes! We want these men and women to have jobs in the area and in their home towns. We want to work with them to continually make the mines better operations. The market for jobs in this region is really challenging. We are willing to work with anyone to find solutions to the unemployment problem and ensure these men and women can sleep in their own beds and work in their home towns. We also welcome with open arms the support of the government in providing assistance to make sure mining jobs stay in Appalachia; and so do the more than 200 men and women who want to help us start these mines back up.