Ross Bhappu’s risky bet on coal exports
Ross Bhappu has played a quiet but key role in coal export proposals in Oregon and Washington by bankrolling Ambre Energy, the financially shaky company pushing coal exports on the Columbia River. Ambre Energy has a 62% stake in a coal export proposal in Longview, Washington, which the company hopes will one day export more than 40 million tons of coal each year - although the subsidiary pushing the project was caught misleading state officials by claiming that it would only ship 5 million tons a year. Ambre is also behind the Morrow Pacific coal export proposal, a project that would barge coal down the Columbia River and thereby face unusually high costs, according to a report from the Sightline Institute. Ambre Energy has a 50% stake in the export-oriented Decker coal mine in Montana, which has suffered losses and layoffs in recent years and has been the subject of lawsuits between Ambre and co-owner Cloud Peak Energy.
In addition to his role on Ambre’s board of directors as a non-executive director, Ross Bhappu is a partner at Resource Capital Funds, a Denver-based private equity fund that recently increased its control of Ambre Energy. Ross Bhappu’s critical role in financing Ambre Energy was detailed in the Sightline Institute’s February 2013 report, Ambre Energy: Caveat Investor:
Ross Bhappu has played a quiet but key role in coal export proposals in Oregon and Washington by bankrolling Ambre Energy, the financially shaky company pushing coal exports on the Columbia River. Ambre Energy has a 62% stake in a coal export proposal in Longview, Washington, which the company hopes will one day export more than 40 million tons of coal each year - although the subsidiary pushing the project was caught misleading state officials by claiming that it would only ship 5 million tons a year. Ambre is also behind the Morrow Pacific coal export proposal, a project that would barge coal down the Columbia River and thereby face unusually high costs, according to a report from the Sightline Institute. Ambre Energy has a 50% stake in the export-oriented Decker coal mine in Montana, which has suffered losses and layoffs in recent years and has been the subject of lawsuits between Ambre and co-owner Cloud Peak Energy.
In addition to his role on Ambre’s board of directors as a non-executive director, Ross Bhappu is a partner at Resource Capital Funds, a Denver-based private equity fund that recently increased its control of Ambre Energy. Ross Bhappu’s critical role in financing Ambre Energy was detailed in the Sightline Institute’s February 2013 report, Ambre Energy: Caveat Investor:
The past several years have seen Ambre post massive losses, lose virtually all hope of developing its Australian mining project, enter into a contentious lawsuit with its mining partner that ended in a costly settlement, assume hundreds of millions of dollars of long-term cleanup and pension obligations, stumble over new regulatory hurdles, take on high-interest loans, and postpone its most promising export project. These troubles, along with broader challenges in the financial markets, forced Ambre to postpone an initial public offering that it had hoped would raise at least Aus$100 million in desperately needed capital.
All of which raises a question: how has this troubled company managed to keep itself afloat?
The answer is a deep-pocketed financier who now sits on Ambre’s board: Ross Bhappu, a principal at mining-focused, Denver-based venture capital firm Resource Capital Funds (RCF).
Since then, it appears that Ambre has been unable to attract any outside investment besides Resource Capital Funds, and Bhappu has used that to take more control of the company. Ambre Energy’s board of directors approved a deal in December 2013 that would boost Resource Capital Fund’s share of the company from 19.9 percent to 26.5 percent, and give Resource Capital Funds the option of further increasing its share to 55 percent. Details about the deal were reported in The Oregonian: Coal export investor pushes for control of Ambre Energy, its Boardman and Longview proposals:
A major investor is positioning itself to take control of the Australian company trying to build coal export terminals in Oregon and Washington.
A Denver-based private equity firm, Resource Capital Funds, could eventually own as much as 55 percent of Ambre Energy, according to the terms of a deal Ambre shareholders will be asked to approve when they meet this week.
Ambre already owes Resource Capital $110 million. The proposal would allow the equity firm to convert some of that debt into a greater ownership interest.
An independent audit of the deal found that it was “not fair” to Ambre shareholders, but was nevertheless “reasonable,” since they had little other choice. Details about the independent auditor’s report were reported in The Australian: 'Unfair' Ambre offer backed:
Ambre has asked its shareholders to this week approve a deal whereby Denver-based private equity firm Resource Capital Funds will increase its holding from 19.94 per cent to as much as 55 per cent.
In a report to investors commissioned by Ambre, consultancy firm BDO labelled the deal as "not fair" to shareholders, on the grounds they would be financially worse off if RCFR gained control of Ambre.
However, BDO also noted it was "reasonable" for shareholders to accept it on the grounds that investors had little other choice.
If shareholders did not approve the offer, RCF could move on its right to call in a loan to the value of $110 million within 10 days, which Ambre would be highly unlikely to be able to pay.
To make its determination that the deal was not fair but reasonable, the independent auditor assessed Ambre Energy and the prospects for it coal export proposals. As the Oregonian reported in 5 key takeaways about financial struggles at Ambre Energy, company proposing Boardman, Longview coal terminals:
The Port of Morrow project at Boardman isn’t a lock for approval by late 2015. Ambre executives say they’re confident they’ll get state and federal permits by a December 2015 deadline. The company’s external expert isn't as bullish. It estimated the likelihood of meeting the deadline at 50 percent to 60 percent after discussions with Ambre management.
The independent auditor’s assessment also estimated that the value of Ambre shares had fallen to $0.47-$0.95, a drop of 37-69% - since early 2012, when shares sold for $1.50.
The report noted the drop in share value was "not unreasonable" because the entire US coal industry has declined in value. Arch Coal, for example, which has partnered with Ambre for the Millennium Bulk coal export proposal, has lost about 70% of its value since early 2012, and the declining outlook for the US coal industry has been covered by news outlets such as the New York Times: U.S. Coal Companies Scale Back Export Goals and Associated Press: Coal's Future Darkens Around the World. A recent Wall Street Journal article U.S. Coal vs. the World concluded, “Investors in coal might well feel paranoid. But remember: it isn’t paranoia if the world really is out to get you.”
The auditor's report also warned Ambre shareholders that the deal, referenced below as "The Conversion Option" because it would mean Resource Capital Funds converting its loan to more Ambre Energy shares, might make it more difficult to attract other investors.
The auditor's report also warned Ambre shareholders that the deal, referenced below as "The Conversion Option" because it would mean Resource Capital Funds converting its loan to more Ambre Energy shares, might make it more difficult to attract other investors.
Ross Bhappu’s risky bet on Ambre and its coal export proposals will continue to attract more scrutiny. Tens of thousands of people in the Pacific Northwest have rallied, submitted comments, and demanded that their elected officials reject coal export proposals. Goldman Sachs’ January 2014 decision to drop its coal export investment highlighted growing concerns about investments in coal infrastructure. Ten environmental and community organizations wrote an open letter to Ross Bhappu, detailing the risks facing the projects and calling on him to drop his investment in Ambre Energy:
Ambre Energy shareholders have recently approved a deal that will allow your firm, Resource Capital Funds, to take majority control of the company. As you increase your interest in this company and its controversial coal export proposals, you should expect increased scrutiny. We urge you to heed the environmental, financial, and reputational risks of developing coal export terminals and mines and withdraw your investment in Ambre Energy Limited.
Ambre Energy’s proposed coal export terminals in the Pacific Northwest would create health and environmental impacts that cannot be mitigated. Public opposition to these projects, already unprecedented, continues to grow throughout the region, creating significant political, legal, and regulatory challenges to their execution.
Goldman Sachs recently withdrew its investment in Carrix, the company behind the proposed Gateway Pacific Terminal, six months after releasing a report titled, “The window for thermal coal investment is closing.” The emerging Wall Street consensus is that coal exports are a risky bet. And beyond financial losses, your firm could face significant long-term reputational risks by association with these highly controversial projects.
The full letter to Ross Bhappu is available here.
Researchers and activists will continue to scrutinize and expose those bankrolling controversial and risky coal export proposals. If you have information about Ross Bhappu or his risky investments, send us a tip.
Researchers and activists will continue to scrutinize and expose those bankrolling controversial and risky coal export proposals. If you have information about Ross Bhappu or his risky investments, send us a tip.
