Today, ten organizations sent an open letter to Ross Bhappu, a partner at Resource Capital Funds, calling on him to drop his firm’s investment in Ambre Energy, the company behind two of the proposed coal export terminals in the Pacific Northwest.
While JP Morgan Chase and Bank of America make headlines almost daily, Resource Capital Funds (RCF) is far from a household name. However, this small Denver-based private equity firm is now at the center of a controversial plan to build new coal export terminals and sell publicly-owned coal overseas.
Resource Capital Funds is a self-described “mining-focused private equity firm” that prides itself in its providing strategic guidance to the management teams of the companies in which it invests. Since 2011, RCF and Ross Bhappu have played an important role in keeping the financially troubled Ambre Energy afloat.
Bhappu’s early involvement in Ambre Energy was best documented in a 2013 report from Sightline Institute, 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…
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). A review of Ambre’s financial statements suggests that an infusion of cash from Resource Capital Funds may have saved Ambre from bankruptcy at the end of 2011—and allowed the company to pursue its risky coal export ventures. Dr. Bhappu’s venture capital fund put up the Aus$60 million in capital, plus a separate $25 million loan, that allowed Ambre to take possession of Level 3’s coal mines in November 2011. A month later, RCF injected an additional Aus$10 million into Ambre, after another investor pulled its money out of the company. And in December 2012, Bhappu’s firm expanded its earlier Aus$25 million loan to a line of credit totaling $50 million—$30 million of which Ambre had used by late December 2012.
Since Caveat Investor was published, Ambre’s financial situation has gone from bad to worse. Facing losses up to $30 million in a six month window, the company has since abandoned any plans to build mines or facilities in Australia, shed its coal-to-liquids division and canceled plans to build a terminal on the Gulf Coast. It failed to attract the $70 million required to settle its lawsuit with Cloud Peak and buy out the Decker coal mine. And Ambre has yet to receive any necessary permits for its two proposed West Coast coal export terminals, as already unprecedented public opposition continues to grow.
Ambre Energy’s PR team has pointed to the fact that all start-up companies can take a while to get on their feet and the coal industry assures us that there is abundant demand for US coal overseas and Ambre’s export terminals represent real economic development opportunities for local communities, even if it will take a few years to get construction underway. However, despite the coal industry’s best spin, the emerging Wall Street consensus seems to be that coal exports are a financially risky bet.
Over the past year, financial institutions such as Citibank, Deustche Bank, Bernstein, HSBC, and Goldman Sachs have issued analyst reports painting a bleak outlook for the seaborne coal market. 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.”
With Wall Street giving export proposals the coal shoulder and community opposition mounting, Ross Bhappu and RCF seized an opportunity to take control of Ambre Energy. Last month, Ambre Energy’s shareholders approved a deal that would boost RCF’s share of the company from 19.9 percent to 26.5 percent, and give RCF the option of further increasing its share to 55 percent. 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. The alternative was insolvency.
In other words – while established coal companies suffer major losses and Wall Street firms issue warnings about the shrinking global thermal coal market, Resource Capital Funds is cementing its position as the lifeline for a struggling coal start-up with long odds for success. And with that role, comes added public scrutiny.
That’s why ten organizations wrote today, urging Dr. Bhappu to heed the environmental, financial, and reputational risks of developing coal export terminals and mines and withdraw RCF’s investment in Ambre Energy. The open letter details several risks to Ambre Energy’s coal export proposals, including unprecedented public opposition, unacceptable health and environmental impacts, and challenges to existing coal mining infrastructure.
Resource Capital Funds involvement also raises new questions for communities, regulators, and elected officials in the Pacific Northwest and Interior West. If coal export terminals and mines are too risky for the banks that once happily bet on subprime mortgages and a housing bubble, and are now the domain of risk-hungry private equity firms and flailing coal companies, should we be allowing these folks to take a gamble with our health and environment?