Atlantic Coal: A busy and eventful year paves the way to success in 2011

It looks like a big boy’s toy - caterpillar tracks and a giant shovel. And at £3.5 million it’s not cheap.

Just ask Atlantic Coal (LON:ATC), which in April took delivery of a Liebherr R9250 19.6-yard bucket hydraulic excavator.

Believe it or not this was a defining event for Atlantic, which by acquiring this impressive piece of kit was able to significantly increase production of anthracite coal at its Stockton pit in Pennsylvania.

It has been a busy and eventful year for the company and its chief executive Steve Best as he has dealt with a series of obstacles and legacy issues.

In that period the group raised £2.1 million in two separate cash calls, the larger of which (£1.7 million) will be used to upgrade the facilities at Stockton.

The past two years have been a struggle financially, Best concedes. But there is light at the end of the tunnel and the just vague promise of some significant strategic progress in the next 12 months.

We will talk more about the big picture ideas later and specifically Best’s aim to be a consolidator.

But first ought to look at the fine detail and in particular two financial transactions that have put Atlantic on sounder footing.

The first was to re-finance its £1 million convertible loan agreement for a further year, which gives the company’s management breathing space to consider its options. But with a coupon of 13.75 percent it could prove expensive to ponder the alternatives too long.  

The second and more important deal was the one announced earlier this month. This was the sale of US$2.4 million of Atlantic’s debts to a company called Mayford, which is controlled by Best and his family as well as fellow director Adam Wilson.

Mayford paid a “cut-price” US$1.5 million for the loan note formerly held by America’s GE Capital, which looks opportunistic on Best’s behalf. And it is, but not for the reasons you might think.

According to the Atlantic boss there was a very real chance the debt could have fallen into the hands of an unsympathetic creditor, or worse a rival.

In fact finding the proceeds so quickly to buy the loan was a challenge for Best, and he sees the Mayford transaction as temporary, or a “bridging solution”, as he calls it.

The plan soon is to offer the company’s major investors the opportunity to buy a slice of the debt on favourable terms by investing in Mayford.

And there is a very big upside to Best and Wilson owning the debt. It is that certain restrictive covenants will be relaxed immediately. Specifically, the company will be allowed to borrow money against its assets, which means finance should be cheaper and easier to come by.

“I’ve been dealing with GE for the last five years,” the Atlantic chief told Proactive Investors.

“And they went along with us where we hadn’t reached our targets – we’ve had problems getting the right equipment on the site and we listed just at the beginning of the downturn where normal lines of debt finance disappeared overnight.

“They were more than helpful with us and had bigger problems of their own to sort and been very good. But it came to a head. They said they had to move on. So we agreed with them to buy them out of their loan, which we did for US$1.5 million.

“That note could have been bought by anyone.  It is common practice in the US for notes to go up for sale and it could have gone into the hands of one of our competitors.

“That’s why I pulled the rabbit out of the hat to get the money from various people to bridge the loan. We will then offer it to larger investors in Atlantic.

“We are not looking to capitalise on the loan note to the detriment of the company.”

Best describes the anthracite the company unearths rather colourfully as the “caviar of coal”.  Atlantic’s product is selling at between US$95 and US$145 a tonne and costs around US$85 to mine.

For the uninitiated, anthracite is a hard, very high-grade coal, sold for wider profit margins than other coals.

It is predominantly used for heating homes or industrial uses such as making steel and titanium, filtering water, tinting glass and turning beer bottles brown.

More importantly there is a ready domestic market and a thriving overseas customer base for the product.

Despite a series of setbacks, analysts expect production to be around 100,000 clean tons this year, rising to 200,000 in 2011. And Atlantic’s efforts have been helped by the purchase of that new bit of kit mentioned in our introduction.

“(The excavator) is good news for the company as it has enabled them to increase the raw coal mined each quarter this year, a trend we anticipate will continue into the fourth quarter,” said Fox-Davies analyst Peter Rose in a recent research note.

“Currently the mine is operating on two shifts a day, five days a week taking advantage of strong demand for coal.”

The market for anthracite in Pennsylvania, meanwhile, has tightened considerably following the closure of a neighbouring mine, which has actually left Atlantic struggling to meet demand.

“Normally stocks are built up in summer and run down in winter. This situation is expected to continue for at least 18 months, and this is placing upward pressure on anthracite prices,” Rose explained.

“To underline this, two of the three best months for raw coal production were July and September, the next best month being June.

“Production was only down in the August month due to a bearing failure on the screen, which necessitated the plant being shut down.”

The Fox-Davies analyst predicts Atlantic’s turnover this year will be US$11.8 million, rising to US$21 million in 2011, delivering EBITDA of US$10.7 million.

Creating a profitable cash generative business has always been only phase-one for Best, who originally set out to be a mine consolidator in Pennsylvania.

And this is still the aim, although the Atlantic CEO is guarded on just how he will fulfil this strategy with no obvious source of cash to fund these deals.

Yet he seems upbeat and confident of his ability to make things happen.

“I’ve always said that Atlantic coal has got to be a consolidation play,” Best says. 

“What I like about Pennsylvania is there are more sites and opportunities than we need fulfil our ambitions.

“You could easily produce one million tonnes and have no problems selling it.

“The worst case scenario is we will produce 170,000 tonnes of clean coal from Stockton (next year) where we are already committed to selling to existing customers.

“That will throw out a decent amount of money. If our bigger picture idea comes off it will change the whole perspective of the company.

“Plan B is we acquire perhaps one site or two on our own.”