Westar Mining object of market speculation

Is a restructuring, redemption, or all-out takeover at hand for holders of preferred shares of Westar Mining (TSE)?

Recent market action would suggest that the street thinks something is in the works. Westar’s preferred shares have risen from the $7-level following the April meeting which turned down the restructuring proposal, to the more recent $13-level. Trading volume for the week ended Jan. 5 was a respectable 155,450 shares.

Speculators point to the possibility of Westar Group, which owns 66.6% of the common shares of Westar Mining, selling its stake and the purchaser subsequently redeeming the preferred shares. CP (TSE) is cited as a good fit for Westar’s mining operations because of its ownership of Fording Coal and rail links to the coast.

There are 1.79 million preferred shares of Westar Mining outstanding with a par value of $25 and over $8 in accumulated dividend arrears. Other speculation includes a new restructuring agreement which would offer preferred shareholders a better deal than the last agreement.

Westar President Peter Dolezal scoffs at the notion, saying that restructuring negotiations with secured creditors are on-going but that no definitive agreement has been reached and that the company has not been approached by any purchasers. He notes that secured and unsecured debt ranks senior to the preferred shares and is in excess of $400 million. Westar has been attempting to reschedule its debt for over three years now.

In addition to the large debt, Dolezal notes that the aged truck- shovel fleet at the company’s two coal mines requires replacing, with capital costs likely to be in the order of $75 million over the next few years. The large debt and future capital cost requirements would make a takeover unlikely without some form of restructuring.

The previously proposed restructuring, which required 75% approval by the preferred holders, was voted down in April, 1989. The restructuring gave the preferred holders the option to receive, for each preferred share held:

a) one common share of Westar Group and a unit entitling the holder to receive a common share on each anniversary of the agreement up to and including the fourth anniversary, plus six shares on the fifth anniversary, or

b) seven common shares of Westar Group.

With Westar Group trading in the $1-per-share range at the time, the deal was worth about $7 per preferred share.

Westar Mining operates two coal mines in southeastern British Columbia, producing eight million tonnes of metallurgical coal and 1.2 million tonnes of thermal coal in 1988.

Because of the volume of coal produced, the company is leveraged to coal prices. “Coal bulls” point to this factor and cite the potential gains if the price of coal rebounds from its current level of approximately US$55 per ton for metallurgical coal. This is substantially below the US$100 per ton level of the early 1980s.

Westar Group owns 66.6% of the company’s common shares with the balance held by a consortium of 10 Japanese companies. Loss for the year ended Dec. 31, 1988, totaled $7.6 million while the loss for the nine months ended Sept. 31, 1989, totaled $3.9 million.