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Company: Contura Energy, Inc. (CTRA)
Companies: Contura is a major supplier of metallurgical ("met") and thermal coal. The company has coal mining operations in Pennsylvania, Virginia and West Virginia. It supplies both metallurgical coal for making steel and thermal coal for generating electricity. The Met Coal business is the largest producer of coke products, which are an important part of steel production. The Met Coal business accounts for more than 75% of the company's total sales. The thermal coal is mainly sold to the domestic power generation industry.
Market value: $ 118 million ($ 6.45 per share)
Activist: MG Capital Management
Percentage ownership: 5.8%
Average cost: $ 4.33
Activist Comment: MG Capital is an investment company that has been led by Michael Gorzynski since 2011. Gorzynski was previously an analyst at Third Point for five years and now appears to be taking a page out of Dan Loeb's book. Gorzynski's only other 13D filing came in early 2020, when he was able to set up for two directorship mandates on the six-person board of directors at HC2 Holdings after nominating a full list of six directors.
On October 7, 2020, MG Capital sent a letter to the company's board of directors expressing its belief that the company will only be able to fully reverse its year-long tailspin if it accelerates and accelerates its intended exit from the thermal coal business half of the six people refresh the blackboard. MG Capital found that Legacy Directors John Lushefski, Daniel Geiger and Albert Ferrara Jr. in particular lack the expertise and skills to support a turnaround in today's emerging energy economy. MG Capital has agreed to share the proposed candidates with the company and hopes that a company representative will get in touch with them quickly. They end the letter by telling the company that, while this is not their first choice, they are ready to appoint directors to the Board of Directors ahead of the 2021 Annual Meeting if the incumbent Board of Directors forces them to do so.
Behind the scenes
Gorzynski is familiar with Contura Energy – its predecessor Alpha Natural Resources acquired Massey Energy, a company Dan Loeb worked for in 2005 when Gorzynski was an analyst at Third Point. Over a decade later, Gorzynski was involved in restructuring the company after emerging from bankruptcy in 2016. In connection with the company's bankruptcy, it was split into two main companies – Alpha Natural Resources and Contura Energy; However, the companies merged again in 2018 to form Contura Energy.
The company hired a new CEO, David Stetson, in July 2019. MG Capital believes it has done an excellent job in the difficult market environment this year. You support his decision to leave the thermal coal business and are impressed with his focus on containing costs and reducing debt. They just believe he deserves a board that better supports the direction he's headed.
Half of the company's board of directors was inherited from its predecessor before bankruptcy, and MG Capital is questioning many of the decisions that board of directors made. For example, the sale of the Powder River Basin, one of the largest coal mining areas in the US, was botched, which resulted in the assets being returned to the company. Instead of focusing on deleveraging, the company bought back shares at peak cycle prices while the three directors regularly sold their own personal holdings of Contura shares.
MG Capital points out that this board has seen a tremendous destruction of shareholder value – since hitting its all-time high of $ 81 per share on September 23, 2018, the company's stock has fallen 90% and for the past 1 and 3 years The stock returned -66.41% and -86.66% versus 16.46% and 34.25% respectively on the S&P 500. MG Capital is also disappointed that board members, despite the asset closure, taking employee leave of absence and overseeing the destruction of hundreds of millions of dollars in wages.
MG Capital is committed to refreshing the board to support management's focus on coking products, various efficiency benefits, cost reduction, cost competitiveness and debt settlement that may eventually allow the company to resume its buyback program.
If this leads to a proxy battle, MG Capital should have a decent chance of winning – ahead of its final annual meeting, ISS recommended that the company's shareholders withhold votes for a staggering 50% of the board of directors and the three directors MG Capital had selected got out the highest number of withheld votes at last year's annual meeting (Lushefski-29%; Geiger-17% and Ferrara Jr.-35%). While this may look like an ESG campaign, MG Capital is not an environmental activist. This is just one situation where increasing shareholder value is directly in line with strengthening the company's ESG practices.
Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets.