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Goldman Sachs in Talks to Sell Its Coal Mines

Goldman Sachs Group Inc. got a disconcerting update a year after buying its second coal mine in Colombia: “Certain operational issues have arisen,” commodities executives reported.

That was putting it mildly. Local women and children had formed a human blockade to protest labor issues, shutting down production. Coal prices had dropped 20% in three years, and another 6% decline could permanently impair the value of Goldman’s investment, the executives told directors in late 2013.

After that, the bad news kept coming. Coal prices tumbled by more than 40%. An environmental law shut down production for most of last year.

It now appears that Goldman has had enough. The firm is in talks to sell the coal mines at a loss, according to people familiar with the negotiations. Any deal, coming after Goldman’s prior sales of power plants and an aluminum-storage business, would mark the end of the firm’s rocky sideline as a producer of raw materials.

The sale talks come as the Federal Reserve weighs new restrictions on the ways commercial banks can produce, store and sell raw materials. A Senate panel concluded last fall that such operations are rife with potential conflicts of interest and systemic risks to banks. It expressed concern that banks involved in producing commodities, as opposed to merely trading them, might gain an unfair advantage in the market and possibly manipulate prices.

At a hearing in November about Wall Street’s involvement in commodities, conducted by the Senate Permanent Subcommittee on Investigations, Republican Sen. John McCain said physical-commodity operations carried “dangers of toxic spills, deadly explosions, and other disasters. These are not the risks we normally associate with banks, whose primary role should be focused on more traditional banking activities.”

Goldman says commodities remain an important business for the firm, and that it plans to continue trading raw materials and related financial instruments and making a market in the commodities for its clients, including temporarily storing them. Its commodities operations represented about $1.5 billion in revenues in 2013, down from about $3.4 billion in 2009.

Goldman executives testified at the Senate hearing that their physical-commodities operations don’t pose catastrophic risks because the ownership structure shielded the bank from liability. They also said their stake in the overall commodities markets are so small that price manipulation would be difficult. The Colombian coal mine, for example, has the capacity to produce only about 5% of that nation’s total output.

But amid controversy and falling commodities prices, banks are bailing out. In December, Goldman sold its metal-warehousing unit to Reuben Brothers, an investment firm based in Switzerland. That business was criticized in a recent Senate report for allegedly pushing up aluminum prices by making it hard to get aluminum out of Detroit warehouses—assertions that were denied by Goldman executives.

J.P. Morgan Chase & Co. last year sold its physical-commodity assets, including a metals-warehousing business. Morgan Stanley has sold its oil-shipping and pipeline business and is looking for a buyer of its oil-trading and storage business.

Goldman bought its first Colombian coal mine, called La Francia, in 2010 from Coalcorp Mining Inc. of Canada for about $151 million, plus $50 million in additional financial considerations. Goldman had planned to resell it quickly. But a logical buyer, Vale SA of Brazil, decided to sell its mine next door. So in 2012, Goldman bought that one, and a stake in a railroad, for about $407 million. The two mines were rolled into a Goldman unit called Colombia Natural Resources.

Gregory Agran, Goldman’s co-head of commodities trading, told the Senate subcommittee that Goldman did extensive due diligence and beefed up the mines’ environmental and safety standards.

In 2010, Goldman’s Colombian coal unit recorded $66 million of revenue. The following year, revenue tripled to $200 million.

But environmental problems were cropping up. The Colombian government ordered the firm and some competitors to relocate three entire villages where residents allegedly were being sickened by the dust.

In January 2013, a subcontractor running the La Francia mine abruptly ended its contract, according to Goldman internal records subpoenaed by the Senate subcommittee. “The mine’s activities were suspended,” the records said, “and all the machinery…was abandoned on the field.”

A few months later, in mid-April, women and children—relatives of the employees—blocked access to the neighboring mine. Goldman unsuccessfully sought help from the police and the military. The mine remained closed for nine months.

That September, Goldman paid $10,000 to each of about 120 current and former employees—a total of more than $1 million, according to Goldman records. It entered into arbitration with the operator. The matter is pending.

Revenue sank to about $70 million in 2013. Demand softened as consumption of natural gas rose, and competition picked up. Drummond Co. Inc., a U.S. operator with a mine in Colombia, was shifting sales to Europe, Goldman’s prime market, to compensate for a slump in the U.S.

Then shipping problems cropped up. Coal operators had been using small barges to carry coal to bigger ships. The Colombian government was phasing out the practice with a new law, then banned the system altogether after an environmental mishap.

Setting up a different loading system, Goldman told Senate investigators, would have cost the firm as much as $220 million. It couldn’t justify the cost. Its efforts to get help from competitors loading its coal went nowhere. Goldman again stopped production of coal.

Last week, Goldman outlined a plan for development of a scaled-back loading mechanism.

Goldman’s losses were offset by financial transactions it began making in 2012 that produced profits when coal prices declined. Those wagers generated a gain of $246 million in two years, according to Goldman records. Nevertheless, the firm had losses of more than $200 million on the Colombian coal venture, according to people with knowledge of the matter.

The Federal Reserve has said that big banks with physical-commodity operations haven’t allocated sufficient capital or insurance to cover potential losses stemming from disasters such as mine collapses or oil spills.

Goldman says it isn’t in danger of losing more than it invested because liability is limited to the unit running the mine. The mines in Colombia are open-pit, not underground, so there is no danger of collapse.

source: http://www.wsj.com