Q&A: Wilbur Ross and the

Sago Mine Accident

Wilbur L. Ross has disavowed responsibility for the January 2, 2006, mine accident at Sago, W.Va., that killed 12 miners, the worst coal mining accident in the state since 1968. In fact, Ross, former owner of Sparrows Point through International Steel Group (ISG), has been knee-deep in West Virginia coal mining since at least 1998 and was closely involved in the financing and bankruptcy reorganization of Sago Mine’s parent company, Anker Coal Group.

This Q and A, conducted with Paul Gallagher of Executive Intelligence Review, offers a detailed picture of what is known about the financial and operational relationship between Sago, Anker, International Coal Group, and Ross. It is based on SEC 10-K disclosure records, stockholder prospectuses, bankruptcy court information, and other data.

– Mark Reutter
reuttermark@yahoo.com
posted 1/21/06

Gallagher: Twelve miners died and one was critically injured in the January 2 explosion at the Sago Mine of Anker West Virginia Coal in Upshur County, W.Va. Anker is owned by the International Coal Group (ICG) of Wilbur L. Ross, a man in the middle of the “globalization” of several U.S. industries. You’ve researched and written about Ross’ investments and speculations in industry. What is his method? What is International Coal Group, and what is Ross’ involvement in West Virginia coal mining?

Reutter: Ross is a New York billionaire who made his name by taking over bankrupt Bethlehem Steel, LTV, Weirton, and several smaller companies between 2002 and 2004, bundling them together, and selling them for an 11-fold profit to Mittal Steel Co., of Netherlands. For 26 years, he was the executive managing director of Rothschild Inc., the U.S. affiliate of the Rothschild family’s merchant banking group, before he formed his own private company, WL Ross & Co., in 2000 to rescue, in his words, industrial companies in trouble.

Since that time, he has formed International Steel Group (ISG) to take over bankrupt steel assets; International Textile Group (ITG) to take over bankrupt textile companies; International Coal Group (ICG) to take over a bankrupt coal company; and, most recently, International Auto Components Group (IAC) to buy bankrupt or financially strapped auto-parts companies.

Ross is the lead investor, but builds up “spit” (investment capital) by tapping into large investment pools, such as Franklin Mutual Advisors run by money manager Michael F. Price; Paulson & Co., a hedge fund specializing in distressed companies; and even nonprofits like the Howard Hughes Medical Institute located in suburban Washington.

He also works closely with international investment banks. Key allies include UBS Securities, the Swiss banking firm, and Lehman Brothers. The banks set up sizable revolving credit lines to help Ross buy these companies out of bankruptcy, then the banks underwrite his IPOs (Initial Public Offerings), profiting as Ross off-loads his holdings to the public at a sizable mark-up.

Outside of these big ventures, Ross holds stakes in many individual companies. One of his longest-held investments is Anker West Virginia Coal, owner of the Sago Mine.

Gallagher: The national media have generally reported that Ross’ ICG took over Anker Coal sometime last year, usually citing November 18, 2005, only two months ago. What is the true story? Can you go through a kind of chronology of Wilbur Ross’ investment and involvement with Anker in particular, and with the Sago Mine?

Reutter: Ross is playing a semantic game. While ICG officially took over the Sago Mine on November 18, 2005, Ross has been active in Anker Coal affairs for close to a decade, according to public disclosure records. In 1998, Ross purchased $40.9 million of senior unsecured debt in the Anker Coal Group through Rothschild Recovery Fund, which he ran as its managing director. Anker opened the Sago Mine in 1999 as well as entered into a mining venture in Alabama that proved to be financially disastrous. (There was an explosion in that mine in December 1997 that caused ruinous losses, although apparently no serious injuries.) By September 1999, Anker couldn’t pay interest on its debt, so in stepped Wilbur Ross.

Ross swapped Anker notes for Anker stock in a “private restructuring,” meaning there was no public disclosure to the Securities & Exchange Commission. But the terms came out in newsletters that track these things: The Rothschild Recovery Fund received $800 principal amount of 14.25 percent new secured notes for each $1,000 principal amount of 9.75 percent old unsecured notes exchanged, increasing annual debt service charges by almost one-fifth. In addition, Rothschild received warrants to purchase 20 percent of Anker’s common stock at the nominal exercise price of $0.01 per share.

Over the next year, Rothschild Recovery Fund forked over some additional cash and got more cheap Anker stock. By April 2001, WL Ross & Co. (successor to Rothschild Recovery) controlled 46.6 percent of Anker’s stock and Ross was sitting on the board of directors. A year later, the board threw out the old management and installed a “corporate workout” specialist. Anker then entered into Chapter 11 bankruptcy. When it emerged in October 2003, many creditors were wiped out, and Ross was de-facto boss. His right-hand lieutenant, Wendy L. Teramoto, was named chairman of Anker Coal. She also became CEO of CoalQuest Development, an Anker subsidiary that is now attempting to license a new mine in Taylor County near Grafton, W.Va. Sago Mine was reopened – with an ambitious production ramp-up – by Anker in early 2004.

Why is Ross so keen on Anker? Because Anker owns or controls 707 million tons of bituminous coal and holds long-term contracts with several major Eastern utilities. This potentially gives Ross a monopoly on utility-grade steam coal, if only he can increase production. The price of high-Btu Appalachian coal at the mine mouth has risen to $25-30 a ton and, including transport, now sells at $60-65 a ton to electric utilities in the East. Today’s price is 69 percent higher than in January 2004. But just as likely, Ross is aiming to stir up the waters in Big Coal, then sell off Anker-ICG at a premium to a major player, say to Consol Energy or to one of the oil conglomerates.

Gallagher: Ross’ public comments have been that he never cuts corners on safety. Appearing on the Neil Cavuto program on Fox News on January 5, Ross said: “We have never declined one penny’s worth of requests from management for either P&L expenditure for safety expense or for capital expenditure for safety purposes. And, in fact, International Coal Group, on the 19th of September 2005, was awarded the ‘Sentinels of Safety Award’ by the Mine Safety Health Administration of the Department of Labor. That’s the most important award for safety in the entire mining industry.” How do these statements by Ross square with the safety record of the mines owned by Anker and ICG?

Reutter: The Charleston Gazette has been looking into the safety question in detail. Its findings were summarized on January 14: “All of International Coal Group Inc.’s underground mines in West Virginia have accident rates that are worse than the national average.” The paper reported that the worst safety records were in Anker’s underground mines, with the Stoney River Mine reporting a nonfatal injury rate 4.3 times the national average, as compared to Sago Mine’s injury rate of nearly three times the national average. Safety at the Sago Mine actually deteriorated after June 2005, when ICG took over managerial control of the property.

A key question for investigators to answer is whether ICG-Anker, under pressure from its owner, ratcheted up production too quickly at the Sago Mine in 2005. It should be noted that Ben Hatfield, president of ICG, and other executives were offered stock and cash bonuses in 2005 for achieving production and profit margins prescribed by the company’s owner, Wilbur Ross. At the same time, Ross, Teramoto, and other WL Ross principals shared $2 million last year by providing “management and advisory” services to ICG.

Given the pressure to produce more coal in a rising market (ICG wanted to double output at Sago in 2005), is the corporate culture at ICG conducive to safety in any way other than lip service?

Gallagher: What characterizes the operation of the mines Wilbur Ross has bought into?

Reutter: All of Ross’ mines are non-union, for one thing. Anker has even experimented with the controversial practice of “contract miners” for its deep mines. Under this system, a contractor uses his own employees and supplies to mine the coal, earning a fee for each ton of clean coal mined. (Contract laborers were used at the Sago Mine until the contractor quit; the idea was proposed as a cost-cutting measure by the New York investment bank Gordian Group.)

Additionally, because Ross’ companies have undergone bankruptcy, previously guaranteed health benefits to retired miners and their families were eliminated. In its 2005 prospectus to stockholders, ICG practically brags about its low labor costs. “We believe that compared to other publicly traded U.S. coal producers we have the lowest post-retirement employee obligations,” the November 2005 prospectus stated, and a “union-free” environment keeps costs to the minimum.

What’s more, Ross’ mines work off of old coal reserves in a district with a long history of mine explosions and rapacious absentee owners, including the notorious corporate raider Victor Posner, who was a forerunner to Ross and his cohorts.

While Sago is a “new” (1999) mine, it is part of a field once owned by Pittston Coal that includes many worked-out areas. Cave-ins and roof collapses are a constant hazard. Sago also is a “gassy” mine with large quantities of potentially explosive methane. And, finally, remember that the miners are not only several hundred feet below the surface, but they have to go long distances underground to reach the coal face.

The explosion that trapped the 12 men on January 2 came from a worked-out section that had been sealed, perhaps improperly, in December 2005. The seal was blown out by the explosion, trapping the men in a passageway 10,500 feet from the mine portal (meaning fresh air). As we know, all but one of them died in that dark subterranean tomb from carbon monoxide poisoning.

Gallagher: What’s the background of WL Ross & Co., the investment company through which Ross bought into Anker?

Reutter: It started as the Rothschild Recovery Fund in 1997 to invest in distressed securities. In April 2000, Ross purchased the fund from the Rothschild family, recruited the senior officers of his former employer, and established WL Ross & Co. as a “boutique” private equity investor looking for value among distressed companies. He launched the Absolute Recovery Hedge Fund to purchase distressed bonds and to “short” the stock in companies that were in trouble. Typically, these were companies either on the verge of collapse or in Chapter 11 bankruptcy proceedings.

Starting with bankrupt LTV Steel in 2002, Ross arranged to buy companies after a bankruptcy judge ruled that the companies did not have to honor contracts that guaranteed health benefits to retirees (company pensions were taken over by the quasi-public Pension Benefit Guaranty Corp.). All this is perfectly legal under the U.S. Bankruptcy Code, but this approach had never been followed with such blunt determination before.

Ross is a lone hunter seeking out big game – namely, companies with huge cash flow, but also with high labor costs that global investors want lowered. Taking out such a target could prove too visible for the Rothschild family. Or for a Fortune 500 corporation. (Think Enron, whose financial manipulations were widely exposed at the time.)

Until recently, Ross was unknown outside of banking circles, except for his brief marriage to Betsy McCaughey while she was lieutenant governor of New York State under Governor George Pataki. Ross is soft-spoken, articulate, witty. And he has impeccable credentials. Let’s see: B.A. from Yale (where he majored in English literature for awhile), M.B.A. from Harvard, seats on prestigious boards, such as the Yale School of Management. Just the kind of person who could announce to a gullible media that he was “rescuing” a troubled company from liquidation and “saving” American jobs, while his associates are in the back room, knifing retiree benefits and slicing and dicing factory jobs.

Gallagher: Are there parallels between Wilbur Ross’ operations in the steel industry and in coal?

Reutter: Yes. Pension stripping is the most obvious. In purchasing LTV, Beth Steel, Weirton, and several smaller companies out of the bankruptcy – Ross walked away from these companies’ previous obligations. In all, more than 150,000 retired steelworkers lost health-care benefits that they earned in retirement as part of their deferred paychecks. Ross, meanwhile, was in and out of the steel business in less than three years, pocketing $267 million in personal profits through his sell-off to Mittal Steel.

Ross used the same technique when he purchased bankrupt Horizon Natural Resources, once a United Mine Workers (UMW) operator. The federal bankruptcy judge in Kentucky ruled that Horizon did not have to pay health benefits for retired miners that it had negotiated with the UMW. Thanks to that decision, International Coal Group, which took over Horizon’s assets, escaped from paying the “post-retirement employee obligations” to 4,000 retired and in many cases sick miners.

ICG also closed down UMW-represented mines when corporate ownership passed from Horizon to the Ross entity in 2004. Dirty business in the coal fields.

Gallagher: What’s Wilbur Ross’ involvement with Steve Miller, the man who took over Delphi Automotive Corp. in July and took it into bankruptcy three months later? Is Ross moving into the U.S. auto sector?

Reutter: Robert “Steve” Miller was the restructuring expert who placed Bethlehem Steel into bankruptcy in October 2001. That set off a chain of events that led to the sale of the company to Ross’ International Steel Group (ISG) in May 2003. As CEO of the Bethlehem estate, Miller petitioned the bankruptcy judge for permission to end health benefits to retirees in a prearranged court filing with Ross. In was a two-step legal dance: First Bethlehem, as debtor-in-possession, was freed of its retiree obligations. Then Bethlehem’s assets were sold to ISG, while the company itself was dissolved.

Last year, Miller returned from retirement to become chairman and CEO of Delphi, the nation’s largest auto-parts maker. In October, he placed Delphi into Chapter 11 bankruptcy. A month before the filing, Ross announced that he had formed an investment fund to buy and “globally consolidate” auto-parts makers. Ross expressed interest in buying Delphi if the company succeeded in lowering its labor costs.

In the spirit of “if once you succeed…,” Ross and Miller are repeating their playbook from Beth Steel. Once again, they are cloaking their activities with pronouncements about the pressures of globalization on U.S. companies. And once again, they are banking on working families to sacrifice their future incomes and benefits in order to “rescue” another American industry from purported ruin. Much of their p.r. is consequently aimed at the media, spinning this story about the waste and inefficiency of union contracts.

Let’s hope that the shock from the Sago mine disaster – including Ross’ effort to downplay his ownership of the mine and Ben Hatfield’s inept rescue attempt -– results in a closer look at both Ross and his bank and hedge-fund enablers.