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Westmoreland,Coal,Gets,A,Letter, (And,It’s,Full,of,Bad,Ideas), , Sunday,,August,2,,2015, , Prepared'by:'Nathan&Yates,&M.S.F.&|&Director&of&Research,|,
[email protected]' ' Why'We’re'Writing, Westmoreland!Coal!(WLB)!received!a!letter!on!July!26th!from!Mr.!Charles!Frischer,!an!activist! investor!and!GP!of!LF!Partners.!LF!Partners!owns!around!6.7%!of!Westmoreland!common!stock,!and!Mr.! Frischer!openly!published!a!list!of!suggestions!for!the!coal!company’s!board!and!management!team!to! review.!We!provide!our!opinion!of!the!letter!in!this!research!note.!
! The'Forward'View, It’s!a!joke.!Period.!Mr.!Frischer!is!definitely!not!(insert!name!of!your!favorite!activist!investor! here).!Out!of!six!ideas!presented!to!Westmoreland!Coal,!only!#4!and!#5!merit!consideration:! “4.#Schedule#a#4,hour#investor#day#during#the#month#of#August#to#fully#and#completely#outline#the# investment#merits#of#Westmoreland#Coal#to#your#existing#and#potentially#new#shareholder#base.#The# investor#day#will#actually#save#management#critical#time#and#energy#because#it#will#be#an# opportunity#to#address#all#investors#at#once,#as#opposed#to#having#a#never#ending#slew#of#1,#and#2, hour#phone#calls#with#individual#investors.”# 5.#“Create#a#new#investor,relations#position#at#Westmoreland#Coal/Resources#who#can#address#issues# from#shareholders#without#taking#up#the#valuable#time#of#executive#management.”## Recommendation!#3,!“Send#a#list#of#current#shareholders#to#my#attention,”!is!simply!an!attempt!to! undermine!the!company’s!executives.!Idea!#4,!“Add#two#additional#members#to#the#Board#of#Directors#at# Westmoreland#Coal#who#are#large#shareholders,”!is!designed!to!install!Mr.!Frischer!on!the!board!along! with!another!likely!activist.!Suggestion!#6,!“Immediately#accelerate#negotiations#to#change#the# Westmoreland#Coal#line#of#credit/revolver#to#allow#a#buyback#program,”!would!be!crazy!for!a!company!
purchasing!mines!in!the!middle!of!a!buyer’s!market!for!coal!assets.!Reducing!Westmoreland’s!equity! funding!would!also!tilt!the!capital!structure!more!toward!debt,!and!that!would!raise!the!firm’s!cost!of! capital.!The!coal!industry!doesn’t!need!another!debtZburdened!business,!of!course.!(See!ACI,!ANR,!BTU,! WLT!etc.)!Negotiations!for!this!demand!might!well!fail,!too.! By!far!the!worst!idea!in!the!Frischer!letter,!however,!is!#1.!Its!summary!reads:!“Explore#an# immediate#sale#of#the#company#for#a#price#in#excess#of#$31#per#share.”!Why!is!that!a!bad!effort!to!pursue?! Let!us!count!the!ways!!We’ll!present!six!of!our!reasons!in!order!to!match!the!format!of!the!letter! Westmoreland!received.! 1.& Who$would$buy$Westmoreland?#There#is#no#U.S.#coal#company#making#acquisitions…#except# for#Westmoreland!#Arch,#Alpha#and,#to#a#lesser#extent,#Peabody,#are#struggling#to#survive.# These#firms#couldn’t#buy#Westmoreland#at#its#current#share#price.#A#Cloud#Peak#Energy#(CLD)# and#Westmoreland#merger#would#be#interesting,#but#Cloud#Peak#is#the#smaller#business.#The# Big#4#global#miners,#BHP#Billiton#(BHP),#Glencore#(GLNCY),#Rio#Tinto#(RIO)#and#Vale#(VALE),# have#the#cash#but#not#the#interest#in#American#coal.# 2.& $31$a$share$is$too$high$of$a$price.#Mr.#Frischer#presents#some#rough#calculations#in#his#letter# in#order#to#justify#the#price#target#he#proposes.#We#don’t#agree#with#his#forecast#of#$5.62#per# share#of#FCF#in#2018,#and#his#“conservative”#6X#FCF#multiple#in#a#sale#doesn’t#seem#likely.#A# 100%#return#on#the#stock#isn’t#going#to#happen#through#an#acquisition.# 3.& The$Westmoreland$MLP$is$just$getting$ready$for$action.#Selling#out#now#would# significantly#impact#the#value#of#the#MLP,#at#least#for#awhile.#Westmoreland#Resource# Partners#(WMLP)#is#a#key#asset#to#damage.# 4.& Westmoreland’s$management$team$is$better$than$the$management$of$any$remotely$ possible$buyer.#Handing#the#company’s#keys#to#somebody#else#would#be#stupid.#It’d#be#like# trading#the#coal#version#of#Steve#Jobs#&#Friends#for#average#executives!# 5.& Since$the$market$is$pessimistic$about$the$coal$industry$right$now,$why$would$the$ acquirer$risk$its$own$stock$price?#Buying#Westmoreland#wouldn’t#unlock#any#immediate# benefits#from#the#deal.#In#fact,#the#purchaser’s#shares#would#probably#get#hammered.# 6.& The$problem$with$Westmoreland$is$perception,$not$the$company’s$actual$operations.# (Here,#we#agree#with#Mr.#Frischer.)#Assuming#we’re#correct,#why#is#selling#the#firm#the#only# solution?#With#patience,#we#believe#that#the#market#will#understand#the#Westmoreland#story.# In!summary,!Mr.!Frischer!is!trying!to!fix!a!temporary!problem!with!an!irreversible!“solution.”! That’s!wholly!unnecessary!in!our!opinion.!Forward!View!is!confident!that!mispriced!securities,!such!as! WLB!stock,!are!eventually!revalued!properly.!Our!firm!is!actually!based!on!that!idea.!Westmoreland’s! shares!will!richly!reward!longZterm!investors…!no!(company)!purchase!necessary!!!
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Disclaimers!&!Disclosures! Analyst(Certification:(I,!Nathan!Yates,!certify!that!the!views!expressed!in!this!publication!accurately!reflect!my!personal! views!about!the!subject!companies!and!their!securities.!I!also!certify!that!I!have!not,!am!not,!and!will!not!be!compensated! directly!or!indirectly!in!exchange!for!expressing!any!specific!recommendation!in!this!report.! ! Recommendation( Expected(Return(%(or(Range( Strong#Buy# Speculative#Buy# Hold# Underperform# Sell#
Shares#are#expected#to#deliver#alpha#of#at#least#10%# Shares#are#expected#to#generate#at#least#5%#of#alpha,#but#significant#risk#remains# Shares#are#expected#to#match#the#market's#return# Shares#are#expected#to#underperform#by#at#least#5%#on#a#risk,adjusted#basis# Shares#are#expected#to#underperform#by#at#least#10%#on#a#risk,adjusted#basis#
! Required(Disclosures:!Nathan!Yates!may!or!may!not!own!long!or!short!positions!in!securities!mentioned!in!this!report.!As!a! matter!of!principal!and!ethics,!he!will!not!trade!for!three!days!in!any!security!to!be!mentioned!in!any!report.!Occasionally,!the! time!gap!between!a!personal!trade!and!an!unanticipated!event!may!be!less.!There!is!no!known!affiliate!ownership!in!subject! companies!of!this!report.!The!firm!does!seek!to!sell!research!descriptions!to!publication!corporations.!No!other!known! conflicts!exist.! ! Important(Disclosures:!Forward!View!Consulting!employs!various!equity!valuation!methodologies!to!develop!investment! ratings,!target!prices!and!conclusions.!Certain!risks!to!our!ratings,!target!prices!and!ultimate!investment!conclusions!exist! which!include,!without!limitation,!a!company’s!failure!to!achieve!financial!results,!product!risk,!regulatory!risk,!general!market! conditions!and!volatility,!interest!rates,!political!factors,!acts!of!God,!terrorist!activities!and!changing!economic!conditions.! Forward!View!Consulting!is!not!a!registered!investment!advisor!and!is!not!acting!as!a!brokerZdealer!under!any!federal!or!state! securities!laws.!Notable!compliance!policies!include!(1)!prohibition!of!insider!trading!or!the!facilitation!thereof,!(2)! maintaining!client!confidentiality!(3)!appropriate!use!of!electronic!communications,!amongst!other!complianceZrelated! policies.! ! Disclaimer:!Material!provided!in!this!publication!is!for!educational!purposes!only,!and!was!prepared!from!sources!and!data! believed!to!be!reliable,!but!we!do!not!guarantee!its!accuracy!or!completeness.!We!cannot!and!do!not!guarantee!the!adequacy,! accuracy!or!completeness!of!this!information!or!the!suitability!or!profitability!of!any!particular!investment.!This!publication! does!not!consider!the!specific!investment!objectives,!financial!situation,!or!particular!needs!of!any!specific!person!or!business,! or!any!investment!laws!and!regulations,!regulatory!capital!requirements,!or!other!restriction!applicable!to!investments!by! certain!institutional!investors.!Accordingly,!you!are!responsible!for!your!own!investment!research!and!decisions,!and!should! seek!the!advice!of!a!qualified!fiduciary,!and!perform!your!own!due!diligence!before!investing.!You!should!also!consult!your! own!legal!advisor!in!determining!the!legality!and!consequences!to!you!of!the!purchase,!ownership,!or!sale!of!any!investments.! No!information!in!this!or!any!of!our!publications!is!intended!as!tax,!accounting,!or!legal!advice,!as!an!offer!or!solicitation!of!an! offer!to!sell!or!buy,!or!as!a!sponsorship!of!any!company,!security!or!fund.!Past!performance!does!not!indicate!or!guarantee! future!performance!and!no!representation!or!warranty!is!made!regarding!future!performance.!This!publication!reflects!a! judgment!at!its!original!date!of!publication!by!Forward!View!Consulting!and!is!subject!to!change!without!notice.!The!price,! value,!and!income!from!any!securities!or!instruments!mentioned!in!this!report!can!fall!as!well!as!rise!as!a!result!of!a!host!of! factors!including,!but!not!limited!to,!economic,!financial,!and!political!factors,!interest!rates,!stock!market!volatility,!commodity! price!and!exchange!rate!movements,!weather,!regulatory!changes,!changes!in!credit!quality,!acts!of!God,!or!terrorist!activities.! ! This!file!is!not!for!redistribution.!