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Speculations on 49 percent stock deal

January 21st, 2014 at Tue, 21st, 2014 at 3:43 pm by stevewehrly

11. Waiting for the other shoe to drop department: the three way sale of 49 percent of the stock in the holding company that owns SSA Marine suggests that the Cherry Point coal port project is undergoing re-evaluation by investors and by SSA.

SSA Marine, the world-wide operator of more than 200 installations at ports in Asia, Africa and North and South America, now has an active partner for its project to move millions of tons of coal from the Powder River Basin in Wyoming and Montana to China. That coal does not need to go through Cherry Point.

The new 49 percent partner, Fernando Chico Pardo, operates nine airports in Mexico through an extensive and successful conglomeration of companies and investments. Although Chico Pardo almost certainly shares SSA’s enthusiasm for the Cherry Point project as a sound investment, his connection to Mexico would be an invaluable asset if the Carrix company and its SSA subsidiary decides to pursue an alternative location for the bulk terminal or if SSA determines that approval of the bulk terminal at Cherry Point will not be possible.

The holding company executive I talked with at SSA/Carrix denied that the stock sale by a Goldman Sachs-managed infrastructure fund had anything to do with the coal port project. He clearly stated that SSA would continue to pursue the Cherry Point project and that Chico Prado would be an integral and supportive team member and partner.

Nevertheless, investment banks and private equity funds like Goldman do not invest, or divest, without careful consideration of all investment factors.

SSA and many other companies and government officials believe that the bulk commodities terminal at Cherry Point is a great investment that will make a lot of money for themselves, their partners, the State of Washington and the Bellingham community, where the Smith family that founded and still controls SSA has deep roots.

As SSA moves towards refinancing its capital structure, as reported in the Seattle Times, it must recalibrate its commitment to Cherry Point as only one of several major port expansion projects the company is pursuing in the US, Mexico, Chile, Colombia and Vietnam. At some point, the game isn’t worth the candle.

To be clear, I have no inside information on anything. In about 1989, I worked one legislative session for Tom Stewart, during the time that the Stewart family and the Smith family were breaking up the predecessor conglomerate founded by the Smith and Stewart families and still controlled by the Smith and Hemingway families. About all I learned about the company was that they knew what they were doing and were aggressive dealmakers and managers.

Further disclosure: from 1987 to 1990, I worked at Gordon, Thomas, Honeywell law firm. I have not talked with anybody from that law firm about their involvement in this project.

A few points in favor of my thesis that the project won’t work out for SSA, at least in its present form:

First, the rail transportation problems in Washington State seem insurmountable. But transporting the coal to Mexico would be only marginally longer and possibly less expensive.

Second, the EIS alone is costing SSA millions of dollars and the almost certain lawsuits that will be generated will take ten years and millions of dollars more to resolve.

Third, if tribal opposition to the project doesn’t kill the project outright (and tribes probably don’t have quite that much power – yet), the mitigation costs for the tribes would probably run into eight or nine figures (with no decimal points). (I also represented the Muckelshoot Tribe for about ten years.)

The pre-project estimates for tribal mitigation were probably in the $50-70 million neighborhood (about the cost of the Puyallup Tribe/Port of Tacoma settlement, which I worked on for Jim Waldo at Gordon, Thomas), but the concerted opposition from every tribe within a hundred miles of either the port or the railroad tracks has probably run that estimate to $100 million or more. And, of course, the Boldt fishing litigation is a good example of the havoc the tribes could cause if they take this project to court.

Fourth, SSA is a very successful world-wide company for a reason. That reason is they have very good people at the strategic, tactical and operational levels who think ahead. They would not have sold 49% of their company to Goldman Sachs without carefully planning what SSA and Goldman would get out of the capital investment and what would happen if Goldman tired of the marriage.

Fifth, in this new three-way trade (some three-way trades work), Goldman get all or most of its investment back, SSA replaces the Goldman Sachs investment on its balance sheet with an investor who can actually contribute more than money to any project, especially in Mexico, and Fernando Chico Pardo’s multi-faceted holding company joins a successful, growing enterprise that already has a connection to Mexico and might want to build upon that connection.

Sixth, the new investor provides SSA with an extremely attractive project alternative in Mexico, where both SSA and Chico Pardo are already major players.

Almost every direct and indirect cost (transportation, land, permitting, construction, workers, fuel and millions of dollars in other costs that I don’t know about or understand) will be a fraction of the U.S. costs.

Plus, the government of Mexico might be convinced to finance some part of the rail costs and possibly some of the land and construction costs. And, from Chico Pardo’s 49 percent perspective, a lot of his money will stay in Mexico.

Seventh, Goldman Sachs had no comment on the sale of its investment back to the controlling Smith and Hemingway families. I’m not sure what that means, but it means something.

Another fact that I don’t know the meaning of: Goldman Sachs rated Peabody Coal “hold” in September and “buy” in November.

Eighth, the consortium of banks, investment banks and private equity funds that financed Chico Pardo’s stock purchase, and the investors that will refinance SSA’s existing debt, would not put their money in unless they had a good idea what Chico Pardo and SSA were going to do with the money.

Ninth, the price of coal has been volatile and looks like it will continue to be volatile. China’s reliance on coal is also subject to change in both the short term and long term. In fact, the investment research literature on extractive industries in general and coal in particular is moving from bullish to bearish. Even Goldman Sachs research reached mixed conclusions about extractive industries.

I’m sure many readers will be skeptical of what I’ve written above; some of those skeptics have much more information that I do.

I do not know whether the Cherry Point project is a good thing or not. It’s good for a lot of working people, businesses and governments, but at least an equal number of people and many tribal and local governments think it will result in ecological and economic damage greater than the Exxon Valdez disaster.

If I were a lobbyist for either side (I lobbied on both sides of similar issues for thirty years), my advice now would be: figure out the end-game. I would also be alert to a change in SSA’s approach: they might take a page from the Boeing playbook and start telling all involved that they have an alternative to Cherry Point if the county, the state and the tribes don’t moderate their approaches.

There are people in favor of and opposed to this project who risk both credibility and cash if the project dies — or doesn’t.

My surmise is that SSA will succeed no matter what path it takes. But it might calculate that pulling the plug on a project that faces a long, hard road to approval (and possibly even a negative conclusion) should be done by itself sooner rather than by a court or Whatcom County later.

I look forward to, and will put on this blog, any cogent contrary analysis. Send comments to swehrly@sanjuanjournal.com.

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