Please refer to our disclaimer at the bottom of the report.
American Resources (“AREC”) reported many quarters of losses until it miraculously scraped together profits of $9m in 4Q22. This was merely an accounting illusion as AREC conveniently fabricated $16m of revaluation gains by selling tech patents to related-party Novusterra Inc, in a non-cash exchange for stock. Surprisingly, AREC’s operating cash flow of $17.9m was also inflated by the same non-cash gain: these are normally subtracted from the operating section of the cash flow statement, but AREC chose to place the entire ($16m) in the investing line. Adjusting for the entire amount would have resulted in losses of ~$7m and operating cash flows of $1.9m for 4Q22.
In 1Q23, AREC reported losses ($3.1m) once again and operating cash outflow of $7.3m. Despite the high price of met coal, production declined at AREC’s key mines in 1Q23 according to Mine Safety and Health Administration (“MSHA”) data.
The second quarter won’t be any better as the price of met coal has dropped since then.
The company continued to engage in related party transactions with $2.5m paid to related parties in 1Q23, as shown below. We underlined cases of self-dealing in our first report.
And now the lithium hype
AREC has jumped on the bandwagon of almost every hype (crypto, battery recycling, rare earth, etc), none of which have generated revenue. Its sights have now turned to lithium. AI is probably harder for a miner but with AREC, one can never be too sure. On 2 June 2023, AREC signed an offtake agreement to buy lithium spodumene from Clay Resources LLC. The plan is to get battery grade lithium-carbonate by refining the ore – supposedly sourced from Democratic Republic of the Congo. There are two ‘peculiarities’ surrounding this deal:
- Clay Resources’ managing director happens to be AREC non-executive director Courtenay Taplin, which means related party transactions could surge.
- Our search for Clay Resources shows the company was incorporated in the State of Florida in July 2021. We were unable to find a related website or a LinkedIn page.
The offtake contract shows different addresses: Coconut Drive (shown below) instead of Coconut Road (see previous screenshot), which is Clay Resources’ principal address. These are different locations in Estero, Florida. You would expect a company to remember its own address. We believe this “quotation” was drafted by American Resources, not Clay Resources.
Potential bond investors should carefully review the viability of the Wyoming County Coal project
Now, AREC wants to reopen its Wyoming County mid-vol coal project, having raised $45m through bonds issued by the West Virginia Economic Development Authority (“EDA”) earlier this month. The bond proceeds were loaned to AREC subsidiary Wyoming County Coal LLC (“WCC”). This arrangement might give the impression of a state guarantee. But the reality is that AREC bears all of the financial risk, with WCC named as the obligor (see diagram below) as per the May 2023 bond prospectus, and American Carbon — which holds all mining operations — the guarantor.
Within the prospectus is a report issued by John T. Boyd Company (Pg 84 of the prospectus) in February 2022. The mining consultant was engaged to review factors likely to affect the Wyoming complex’s operational and financial performance. Some of Boyd’s comments were far from positive:
- The Boyd report’s main conclusion was that the market for met coal was ‘unprecedented’ back in early 2022, when the report was written, and its strength was the main factor supporting the project. However, any material downturns in pricing would impact the project’s financial performance, because of its ‘relatively challenging conditions and high unit operating costs’. Met coal prices have declined by ~48% since then.
- Almost all of the production is expected to come from underground seams where no operations have taken place for 10 years at one seam and at least 5 years for the other one, due to significant fixed costs.
- AREC’s call for annual output levels of ~700,000 tonnes over time is aggressive, according to Boyd, which opined that 400,000 tonnes is more realistic (based on market conditions at the time of the report).
- Included in the prospectus was a report from Darco Energy Management Corporation, a one-man company according to LinkedIn, that was engaged to assess the fair market value of WCC’s coal assets. According to Boyd, the ‘underlying exploration data, assumptions and methodology forming the basis of the Darco tonnage estimates are not provided to a level of detail that is consistent with coal reserve reporting standards, nor the norms for project financing in the coal industry’.
The findings in the Boyd report combined with the falling price of met coal suggest that profitability at the Wyoming Complex is highly unlikely. The economics are poor and there is a risk that the management of AREC may redirect some of the bond’s proceeds to its own pocket via related parties.
We have expressed our concerns in a letter addressed to Senator Joe Manchin who has shown support for this project. In this letter, we have highlighted that the senator may be unaware of the history of AREC and its managers. This letter is copied below.
Conclusion
There is little hope of AREC ever being managed for the benefit of shareholders. We continue to maintain that the company is a fatal combination of low-quality mining assets, with a weak balance sheet, and horrendous corporate governance. Efforts to diversify into other businesses have never come to fruition.
Letter to Senator Joe Manchin
Dear Senator Manchin,
The State of West Virginia recently helped American Resources Corporation to raise money for its Wyoming County Coal project. We applaud your efforts to create jobs and stimulate the West Virginian economy. However, we wonder if the State has partnered with the right people.
We have spent a lot of time looking into American Resources. The company is run by people with checkered histories. We came to this conclusion after reading court filings, documents filed with the SEC, and other publicly available information.
From court filings, we found that American Resources’ CEO Mark Jensen and President Thomas Sauve have been the subject of at least two lawsuits.
- Jensen and Sauve run a firm called T Squared Capital LLC. In 2014, the lead investor for one of its funds sued T Squared for failing to meet a withdrawal request. The complaint filed in the New York Supreme Court shows the fund suffered huge losses because it invested in frauds and charged excessive management fees.
- Another lawsuit hit the pair in 2020. They had guaranteed promissory notes issued by one of their companies – Quest Energy Corporation. This company eventually defaulted on its obligations, and to escape personal liability, Jensen placed all of his assets in a trust. He told investors, “You guys [the Investors] can go after me in court if you want but it will take two years and you’ll get nothing because I’ve put everything into trust”.
Both cases were settled.
From SEC filings, we saw that American Resources has reported losses every year, even when the price of coal was high. As of 31 March 2023, the company had accumulated losses of $170 million on its balance sheet.
We also saw many instances of self-dealing. For example, the company acquired around $2 million of secured loans from related parties between 2017 and 2021. Some of these loans were overdue by four to five years at the time of purchase. All of them were written off eventually.
Now, regarding the Wyoming project, mining consultant John T Boyd Company was engaged by American Resources to review the operational and financial aspects of the complex. The consultant’s main conclusions were:
- The project has ‘relatively challenging conditions and high unit operating costs’ and economic viability requires the price of coal to stay high. The report was drafted in early 2022 and met coal prices have declined by ~48% since then.
- Included in the prospectus was a report from Darco Energy Management Corporation, a one-man company according to LinkedIn, that was engaged to assess the fair market value of WCC’s coal assets. According to Boyd, the ‘underlying exploration data, assumptions and methodology forming the basis of the Darco tonnage estimates are not provided to a level of detail that is consistent with coal reserve reporting standards, nor the norms for project financing in the coal industry’.
Unfortunately, we doubt the project will turn out a success, based on management’s character — clearly shown through their past and recent actions — along with the findings of the Boyd report. For the sake of West Virginia, we urge you to investigate the backgrounds of these executives.
Yours sincerely,
Arnaud Vagner
Director, Iceberg Research
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Very interesting and I appreciate the forensic analysis completed by this firm. So my question is why did Mike Pompei join USA Rare Earth, LLC as a strategic advisor? In Sept , this entity signed a MOU with AREC -Relement affiliate. Also, I believe there is potential funding from the government due to over reliance on China. I dodged a bullet from the old shell game and appreciate your insight with this article . Thank you!