BUMI's operations, Indonesia.

BUMI's operations, Indonesia.

Rothschild Resigns from Bumi Debacle

Issue 17, October 2012

Headlines of ‘Nat King Coal’ in late 2010 welcomed Nathaniel Rothschild’s entry into the coal mining sector, when his cash shell paid $3bn for two of Indonesia’s largest coal mining groups, Bumi Resources and Berau Coal.

The mood has since worsened, with the Financial Times describing the new venture, Bumi plc., as the “most ill-fated listing on the London Stock Exchange in recent years.”

Nathaniel Rothschild first entered the agreement with unusual daring-do, meeting the Bakrie family, Bumi’s original owners and his co-investors in Bumi plc., just twice before signing the deal. “Coal mines all look the same,” he was quoted as saying, “they’re just bigger or smaller.”

Shares in the new venture have since fallen from a peak of £14.00 to their current £2.54, amid boardroom tussles, missed production targets and investigations of financial impropriety. The Bakrie’s bid to repurchase the company’s assets for $1.2bn, plus their shares in the London listing, was therefore leapt at by the market, with shares rising 40 per cent on the news.

Bumi plc.’s board or shareholders could block the transaction, but may welcome the opportunity to return to a cash shell, concreting over a paper loss to close an unwelcome ordeal.

Providing the Bakries can raise the necessary financing, they in turn will have completed a remarkable piece of financial engineering, gaining control over Berau Coal whilst regaining their original stake in Bumi Resources, but with less debt and at lower interest. Combined annual tonnage currently shy of 100m is expected to rise to 140m by 2014.

Alternatively, the Bakries may be trying to borrow time by supporting the price of assets they are heavily geared against. The train of complex deals has served to conceal Bumi’s underlying flaw that the profitability of its low margin, high sulphur coal is especially vulnerable to rising costs and a weakening economic backdrop.

Rothschild’s resignation from the board, announced on Monday evening, does little to soften the blow to his dealmaking nous; as Joshua Bates of Barings observed in 1830, following a failed bid to corner the Russian market in tallow: “It should be a warning never to embark in any operation of magnitude to attract universal attention.”

“Coal mines all look the same. They’re just bigger or smaller.”
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