That is potentially a good trade but the bonds are 144A. If I was BlueMountain I would be buying up the equity here and settle but does that count as inside info? Perhaps... Perhaps not...
This is a interesting situation. How do you view the drop in illmois Basin coal spot price and its effect on cashflow ? Since opearting leverage works both ways.
https://www.quandl.com/data/EIA/COAL-US-Coal-Prices-by-Region
TIA
Current ILB coal pricing is where all their competitors are under water. ILB coal pricing has been at these levels for half of 2015, yet they still generated substantial free cash flow and covered interest expense 3x. I've tried to picture an environment (in the next few years) where ILB pricing sinks to a point where they're violating debt covenants. It's really hard to get there unless their operating expenses suddenly increase by 50%.
Here is an older WSJ article that describes the Foresight advantage pre-IPO:
http://www.wsj.com/articles/foresight-energy-bets-that-theres-gold-in-coal-1403042566Demand 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.
I think that backdrop leaves them fairly well positioned. They've sold 22 million tons in 2014 and 22 million tons in 2015. Before they dropped guidance, they also seemed confident about getting close to 21 million tons in 2016. Given they have capacity for over 30 million tons (existing capex is already built into the 30 million tons of capacity) I don't think the actual business operations is going to hurt the financial results even with the Deer Run mine fire. But if they have to sell some assets in bankruptcy and Deer Run has no buyers/keep burning then I think costs start moving up quickly and current ILB pricing can kill any profitability. It's part of the reason why I think the bondholders don't want to take this into bankruptcy as a loan to own. What are they going to sell to repay the $300 million term loan without killing the rest of the company?
Most of my research indicated full cycle ILB pricing in the $40's. There's some pressure at the moment from low nat gas and zombie coal players ignoring depreciation to keep mining for cash flow but that doesn't mean utilities will suddenly abandon coal on their roughly 250 scrubbed plants. If a full cycle price is in the $40's then I'm not too worried about pricing in the $20's that will persist long enough to hurt FELP earnings and trip covenants. It's possible but not very likely.
I should also note that Murray has been purchasing Columbian mines to blend with ILB coal and sell into the export markets. They have below market contracts with the export terminal in Louisiana (that Cline used to own before selling to SunCoke Partners in exchange for cash, seller financing, and SXCP units) so if that ends up successful then the short-term ILB pricing is less of a worry. That said, the export terminal is an option on the ability for Foresight and Murray to sell outside the domestic markets. I just thought I would mention it in case people thought this was only a domestic coal play. Murray and Cline are fairly savvy about looking ahead several years. Too bad they didn't hire better lawyers at the time of the FELP change of control.
There are also some various supply cost curves out there. This presentation from Foresight in late 2014 has a slide with various mine cash costs (slide 7). I don't think you need to make a bet on the commodity price here, you just have to assume pricing will average "something" over the industry supply curve. The difference in a "little something" and "a lot something" is the difference between a 5 bagger and a 10+ bagger assuming minimal dilution. I'm certainly not trying to make a bet that coal goes up but even if pricing stays here they shouldn't be violating any covenants.
https://coaltrade.org/wp-content/uploads/2015/09/Mike_Moran_Foresight.pdf