Walter curtails Willow Creek, preps for proxy battle

VANCOUVER – Walter Energy (WLT-T, WLT-N) is curtailing operations at its Willow Creek mine in northern British Columbia until metallurgical coal prices improve, the fifth met coal mine Walter has curtailed in the last 18 months as the company works to contain costs in a struggling sector. In the meantime, a battle for control of Walter’s boardroom is brewing.

The last two years have not been kind to Walter Energy. In 2011 the company acquired Western Coal for $3.3 billion, a merger that created the world’s largest publicly-traded pure play metallurgical coal producer. Since then, however, Walter’s share price has tumbled, falling from $130 two years ago to less than $30 today.

That share price slide sparked a boardroom battle. British hedge fund Audley Capital Advisors is advocating a new set of director to fill half of the seats at Walter’s boardroom table, alleging that the current board has “consistently failed to deliver shareholder value as a result of questionable financial decisions and poor management.” Shareholders will have a chance to vote for or against Audley’s nominees at the AGM in April.

Audley points out that WLT share have lost 73% of their value since April 2011, underperforming most major indices. More specifically, Audley notes that Walter has missed consensus earnings expectations for six of the last eight quarters, has churned through four CEOs in the last five years, has a board of directors that is aged and lacks significant mining experience, and is carrying too much debt as a result of poor judgment in how to carry out the Western Coal acquisition.

Walter’s board fired right back at Audley’s accusations. To start, Walter’s chairman Michael Tokarz and CEO Walter Scheller pointed out “troubling aspects” to Audley’s proxy statement, including serious omissions about its nominees’ backgrounds such as unmentioned insider trading charges and deficient governance.

The current board also points out that it has made significant progress in reducing costs and improving Walter’s overall performance since recognizing that change was necessary 18 months ago, which is when the company brought Scheller on board to lead a revamp effort. In Scheller’s time at the helm Walter increased production 35% while reducing reportable injuries, reduced its average met coal cash cost of production by 20% between the fourth quarter of 2011 and Q4 2012, curtailed production at low margin mines, transitioned two mines from contractor-operated to owner-operated, tightened capital spending, maximized cash flow, and enhanced the company’s management team.

As part of its cost-cutting revamp, Walter has been curtailing operations at its smaller mines. In mid-March the company announced the accelerated closure of its North River underground mine in Alabama, previous to which Walter had curtailed or idled the Aberpergwm mine in South Wales and the Gauley Eagle  and Maple mines in West Virginia.

Willow Creek is the latest victim of Walter’s cost-cutting measures.

“The current price environment for met coal dictated that we curtail production at Willow Creek in order to ensure we generate a sufficient economic return in mining the high-quality met coal reserves at the site,” said Scheller in a statement. “Given the tremendous progress that has been made in the cost structure at the mine, when we see signs of sustainable market pricing conditions we would expect to ramp up production.”

The company did not provide details about the degree of curtailment, aside from saying that 250 of the mine’s 350 employees will be affected. Walter did say that Willow Creek will continue with limited operations so support the company’s nearby Brule mine, which sends its coal to Willow Creek for processing.

Those employees might be out of work for some time. In the last week of March, the spot price for premium low-volatility hard coking coal softened by another US$4 per tonne, bringing it down to approximately US$155 per tonne. A few weeks earlier the spot price sat at US$173 per tonne.

News of the Willow Creek curtailment sparked a 96¢ gain for WLT shares, which closed on the last day of March trading at $28.94. That is only slightly above the company’s 52-week low of $27.77, a far cry from its 52-week high of $68.25. Walter has 62.5 million shares outstanding.