Oxford Resource Partners LP's strongest selling point is the coal miner's generous dividend, but the payout may not be as rich as promised and little of the money raised in its initial public offering will go to grow its operations. Oxford, which excavates coal used in electricity generation from surface mines in Northern Appalachia and the Illinois Basin, hopes to raise about $166.25 million in its IPO next week.
-- Most IPO proceeds going to pay debt, partners, fees
-- Steam coal prices expected to remain low: analyst
The Columbus, Ohio-based company has locked up sales contracts for the next two and a half years and is hoping to pay a nine percent dividend amid flat coal prices. That is high for any company but especially for a coal miner. "Certainly the dividend payment is going to be a draw but at this point I don't believe the deal has the right footprint to make it attractive for investors," said IPOfinancial.com President David Menlow.
Oxford's net income plummeted in the three months ended March 31 compared with a year earlier, and the company is spending more cash than it is making from its operations. Oxford warned in a regulatory filing earlier this month that it may not be able to pay its planned quarterly dividend. It said it would need to generate about $36.7 million in surplus cash a year to make the payments, a far cry from the $16.1 million generated in the year ended December 31.
Coal generates about fifty percent of US electricity. While it is expected to remain the nation's top power fuel for decades, the industry faces curbs on sulphur dioxide and nitrogen oxide emissions and at least a chance of more sweeping restrictions from Congress.
Meanwhile, sales of steam coal, used in electricity production, are struggling on a cost basis, said Jeff Wilson, a mining expert at Richmond, VA-based Wilson Energy Advisors. Steam coal is selling for around $64 per ton, according to the industry newsletter Coal & Energy Price Report. Oxford cut the expected price range for its IPO by $1 in an amended filing on July 2, in what could be a sign of investor hesitancy.
Another potential worry for investors is that of the $154.6 million in expected net proceeds from the IPO, only $22.1 million is going to grow the business. The rest is being used to repay debt and expenses, pay partners, pay out an advisory agreement, and for working capital. Oxford is also planning to borrow an additional $86 million for the same purposes.
Oxford and lawyers for the company did not immediately return calls for comment. Underwriters on the offering are being led by Barclays Capital and Citigroup. The shares are expected to trade on the New York Stock Exchange under the symbol "OXF."
Also on deck for next week are digital whiteboard maker SMART Technologies Inc, which hopes to raise about $600.1 million; business software maker Qlik Technologies Inc, which hopes to raise about $100.8 million; and 3D movie technology maker RealD Inc, whose technology was used in the hit movie Avatar. It hopes to raise about $150.5 million.