In April 2016, Peabody Energy, the largest coal producer in the US, declared itself bankrupt.
This event marked the nadir of the 2015-2016 crash of the American mining sector, in which Arch Coal, the country’s second-biggest coal producer, was also declared insolvent. So severe was the crisis that bankruptcy-hit companies accounted for around half of US coal production at the time.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataAside from their shared financial woes, what linked the likes of Peabody and Arch Coal was the practice of self-bonding, whereby US coal companies can guarantee they have the cash to pay for remediation works in the event of closure, based solely on a healthy fiscal appearance.
In essence, the practice allows miners to make concrete promises of mine reclamation without stumping up any collateral whatsoever. And in the event that a company runs into financial dire straits, clean-up costs are transferred to the taxpayer.
Around the time of the crash, it emerged that somewhere in the region of $3.86bn across the coal mining industry was contained in self-bonds, with more than $2.5bn held by bankrupt entities.
Nonetheless, many of the companies that went bust, including Peabody, have since bounced back and retained their permits for mining activities. According to official figures, some 44% of the coal in the US is produced by companies impacted by bankruptcy at some point since 2014.
That these companies – clearly struggling to stay afloat – were allowed to issue self-bonds in the first place by state authorities is difficult to accept. Indeed, in the wake of the crisis, the Office of Surface Mining Reclamation and Enforcement (OSMRE) issued a warning against the use of self-bonding.
Initially, the caution appeared to be well-understood. When saved from bankruptcy, Peabody switched from self-bonds to sureties backed by insurance firms.
But old habits die hard. Speaking last year, Peabody CEO Glenn Kellow claimed his company “continues to qualify for self-bonding and will consider adding self-bonding to its capital structure to support its coal mine reclamation requirements in the future, should circumstances warrant.”
Self-bonding condemned but is Washington listening?
Much of Peabody’s reluctance to denounce self-bonding is inevitably tied to prevailing attitudes in Washington. When OSMRE issued its warning of the harm of self-bonding, it was in operation under the Obama Administration.
However, President Trump, who canvassed on the idea of restoring prosperity to the domestic coal mining sector, is keen to dismantle sanctions on self-bonds, which he previously described as “a significant burden on America’s coal industry”.
Trump’s refusal to come down hard on self-bonding has dismayed environmental bodies. A recent report by the US Government Accountability Office (GAO) – a federal agency that answers to Congress – also called for an end to self-bonds, claiming the practice places too much risk on the shoulders of taxpayers, who are required to foot the bill when companies can’t pay their own reclamation costs.
According to the GAO report, around 12% of the $10.2bn’s worth of reclamation guarantees held in the US in 2017 were self-bonds. Collateral accounted for 12% of bonds, with the rest of mining companies taking out insurance policies. The GAO’s statistics were supported by global climate news website Climate Home News, which through its own analysis, estimated there to be around $1bn of self-bonds still remaining – a drop from $3.86bn in mid-2016.
With self-bonding seemingly not as popular as it once was, some believe the time is right to eradicate the practice once and for all.
“Self-bonding is risky to taxpayers and unnecessary to coal mining companies,” said Western Organization of Resource Councils (WORC) spokesperson Bob LeResch, in response to GAO’s findings.
“Self-bonding could be ended tomorrow and no one would blink. The immediate threat posed by self-bonding has receded for the time being. Congress and individual states should seize this perfect opportunity to end self-bonding before it again becomes a danger to taxpayers.
“We urge decision-makers at the state and federal level to end the public’s exposure to self-bonds once and for all.”
A local decision: the power of state regulators
Based in Billings, Montana, WORC represents landowners and environmentalist organisations across its home state, as well as in South Dakota, North Dakota and Wyoming, where Arch Coal was given clearance to self-bond by state authorities in September 2015 before being declared bankrupt four months later.
And while the federal government stance appears to be in favour of self-bonding, it is ultimately the state’s call. For instance, regulators in Wyoming are reported to be drafting up new rules to restrict self-bonding, supported by local NGO Powder River Basin Resource Council.
“The coal market has changed dramatically in the last 30 years. What worked then for self-bonding does not work with the new market,” said council member Stacy Page.
“We have reached a point of energy transformation in our country, with coal usage on the decline and increasing usage of natural gas and renewable energy. The state has a responsibility to ensure reclamation happens and not at the expense of adjacent landowners or taxpayers.”
Mining industry disputes claims
The GAO report, though, has not gone down well with coal mining industry representatives, who argue that its findings are unfounded and overpromote sureties as an alternative.
“The report provides no evidence of any self-bonded company that defaulted on its obligation to provide financial assurance for reclamation,” says National Mining Association (NMA) spokesperson Ashely Burke.
“Self-bonded companies tend to be the largest with strong records of on-going operation and therefore have a self-interest in meeting their obligations. In fact, not only does GAO’s recommendation appear unfounded, it may be harmful by shifting a greater risk burden on the surety industry.”
The NMA’s stance is hardly surprising, as there are many reasons for coal companies to stick with self-bonding, for instance, by simply avoiding the cost of sureties they can free up cash or collateral for other activities.
Should self-bonding be allowed to continue?
The question now is whether self-bonding equates to a fair exploitation of a loophole or downright misrepresentation.
By law – the 1977 Surface Mining Control and Reclamation Act – coal miners are obliged to clean-up operations after they have closed, returning sites to liveable and useable conditions. Any wilful disregard of this through empty reclamation promises would make self-bonding nothing short of a scam.
There is also the danger that struggling coal companies are able to self-bond through their subsidiaries – which may appear to be financially healthy on the surface, but share the same solvency difficulties as their parent companies.
These are dubious practices, but not against the law. In some instances, self-bonding miners have been met with little resistance from state authorities. This was highlighted in the GAO report, which claimed that regulators were loath to push companies to replace their self-bonds with sureties during the 2015-2016 crisis, for fear it would only exacerbate their financial positions.
Fortunately, the biggest companies that declared bankruptcy two years ago are back on their feet, with their mines still operational: no bonds were forfeited and taxpayers didn’t get shafted.
But as warned by Page: “We might not be so lucky again”.
