Poses a New Test
For Wilbur Ross
Investor Vows to Continue Push
Into Coal Despite Industry Risk;
The 'Act of God' Component
By PAUL GLADER
Staff Reporter of THE WALL STREET JOURNAL
January 21, 2006; Page B1
Investor Wilbur Ross has had a golden touch, making money in unfashionable smokestack industries -- steel mills, auto parts, coal mining -- that have seen better days.
His strategy has been deceptively simple: Buy up often-struggling businesses on the cheap, assemble them into more-efficient operations, then sell them off at a premium.
Now he faces one of his biggest tests following the fatal mining disaster this month at the Sago mine in West Virginia. The mine is owned by the company Mr. Ross created, International Coal Group Inc. The Jan. 2 underground explosion captured the nation's attention for days, amid uncertainty about the fate of 13 men trapped underground by the blast. Ultimately, 12 miners died and a 13th is hospitalized in a coma.
Wilbur Ross wanted to be a fiction writer. The recent mining disaster was all too real.
"This is the worst day of my life," said Mr. Ross at the time, when he learned of the deaths. He has also said publicly that he identifies with the miners' grieving families, noting that he lost his own father at age 18. "I don't know what is harder -- trying to get to sleep at night with Sago hanging over me or getting up in the morning to face another day of internal sorrow and external criticism," he said on Friday in a statement responding to questions from a reporter.
Mr. Ross has been in the coal business only four years, but already his company, ICG -- which had a stock offering late last year -- is one of the 10 largest coal companies in the U.S. He is aggressively pushing into a gritty, treacherous industry that poses challenges that simply don't exist in other fields. "Coal mining, by its nature, is extremely dangerous," says Wayne Atwell, a metals and mining analyst with Morgan Stanley in New York. Indeed, on Thursday, a separate accident happened at a mine owned by Massey Energy Co. in West Virginia, where two miners are still missing.
The Sago mine accident is putting Mr. Ross under the type of intense scrutiny and criticism he never faced when buying steel mills. For instance, when Mr. Ross announced that ICG was creating a $2 million Sago Mine Fund for the miners' families, inviting others to donate, some observers quickly began questioning whether that was enough and whether he was contributing his own personal funds to the cause. He says he has been calling through his Rolodex to Wall Street banks and billionaire buddies pledging to match additional contributions dollar-for-dollar with his own money.
"My fervent hope is that we will learn something [from the disaster] that will reduce the risk the next time a miner is underground," he said Friday.
Mr. Ross, the son of a lawyer, was raised in suburban New Jersey and wanted to write fiction but says he burned out on writing, especially after a faculty adviser steered him to a summer job on Wall Street while Ross was attending Yale University. He eventually worked his way up to become a bankruptcy specialist at Rothschild Inc. in the 1970s, handling high-profile bankruptcies and restructurings including Texaco, Continental Airlines and TWA, and going head-to-head with people like Carl Icahn and Donald Trump.
After 24 years at Rothschild, including three running a private-equity firm within the firm, Mr. Ross was ready to move on. Rules limited him from investing in deals in which Rothschild was advising, keeping him from being a part of 30% of bankruptcies. So he bought out part of Rothschild and built his own firm to buy and turn around troubled companies.
He eventually hit a home run with this approach in steel, buying bankrupt firms such as Bethlehem, LTV and Weirton, wrapping them into International Steel Group Inc., then selling the lot for $4.5 billion to Mittal Steel Co. in 2004. "He was the early guy, and scooped up a lot of assets at an extremely attractive price," says Mr. Atwell of Morgan Stanley.
He pushed into coal well before the recent boom in demand for energy and commodities. In the past two years he has sped up his acquisitions, snapping up CoalQuest Development LLC, Horizon Natural Resources and Anker Coal Group Inc. "Coal is the right segment to be in," Mr. Ross said last year, when he announced plans to take his coal company public. "We're more intrigued that coal is a particularly domestic resource." The U.S. has more British thermal units -- or BTUs, a measure of heat energy -- he said, "than the whole Arab world has of oil."Some in the investment community are questioning the wisdom of Mr. Ross for getting into an industry that requires so much capital investment to improve bankrupt assets because of myriad government safety and environmental regulations. Anindya Mohinta, a London-based mining analyst with J.P. Morgan, agrees that the human risks of investing in businesses like coal mines have an "act of God" component and it is risky for new companies in the sector to know where and when to spend money for maintenance and prevention.
"If you are trying to turn it around, how much capital expenditure can you spend? The whole point of turning around a bankrupt asset is to do it efficiently," says Mr. Mohinta.
The accident is likely to prove costly to ICG, which had a stock offering on the New York Stock Exchange two months ago. The firm faces the potential of stiff legal liabilities and government fines arising from the accident. Production at the affected mine will be nonexistent during the lengthy investigation into the cause of the explosion. Washington lawmakers from coal-mining states are also demanding investigations to question coal-mining practices. The disaster also provides an opportunity for the United Mineworkers union to make an effort to organize the company's nonunion workers. The company has made disparaging remarks about the efforts by the union, which could increase its labor costs.
ICG's shares began trading on the New York Stock Exchange Nov. 21, hitting an intraday high of $13.10 before closing at $12.45. But they dropped to less than $9 a share after the accident. They have since rebounded to about $10 a share. Mr. Ross's firm, W.L. Ross & Co., owns 13.7% of the company's shares, valued at about $200 million.
Mr. Ross explains that his firm's fundamental approach is unchanged and his company will continue expanding its coal reserves and mining operations. The Ashland, Ky., company, which is building a new headquarters in Teays Valley, W.Va., could be taking a more long-term approach to the coal business than Mr. Ross took in the steel industry. The company, with 100 headquarters staff and nearly 2,000 total employees, is planning to open and develop new mines in West Virginia in addition to the nearly one-billion tons of coal reserves it currently owns.
"We intend to remain in the coal business for a long, long time and have committed $1 billion in the 2005 to 2010 period for upgrading equipment and expansion of mines," says Mr. Ross. "That program is what will make us the low-cost producer."
Write to Paul Glader at email@example.com