National Coal--a Ponzi Scheme

southeast us | economic and social justice | news report Wednesday February 20, 2008 12:13 by Chris Irwin - United Mountain Defense

National Coal Corporation is a strip mining corporation in Tennessee

Definitions of Ponzi Scheme on the Web:

* Named after Charles Ponzi, a man with a remarkable criminal career in the early 20th century, the term has been used to describe pyramid arrangements whereby an enterprise makes payments to investors from the proceeds of a later investment rather than from profits of the underlying business venture, as the investors expected, and gives investors the impression that a legitimate profit-making business or investment opportunity exists, where in fact it is a mere fiction.
www.cftc.gov/opa/glossary/opaglossary_p.htm

This article is an attempt at an economic profile of the National Coal Corporation (NCC) by a non-economist. It is informative to use NCC as a case study because they are engaged in strip mining in Tennessee .

During the last burst of strip mining in Tennessee , and the Appalachians in general in the 70’s there emerged a trend in the boom and bust coal industry. Companies sprung up when coal was high, then declared bankruptcy when the prices went down. And often the “bonds” the strippers posted were insufficient to pay for later damage.

Like criminals strip mine companies are required to post bonds when they start ripping a mountain apart. This bond is supposed to be returned when the site is “reclaimed”. The bond money otherwise is to be used to do remediation if the company fails to be the abysmally low standards for reclamation.

Generally those bonds are to low and do no reflect the true cost of restoring the landscape to anything resembling its pre strip health. Many argue that a reason for this is it is incredibly expensive to even attempt to restore a strip mine site to any even closely resembling pre-mine health and functionality.

Bankruptcy and corporate dissolution means that if the bond is insufficient, the company the state would sue to recoup any cost no longer exist—there is no pocket to dig in.

One example of this is the massive landslide on High Point Mountain . There the entire mountainside that was stripped blew out and is currently breaking apart 10 feet at a time. The bond for this mining disaster was returned as the site was “reclaimed” and as such there is no money to repair this strip mining disaster. Additionally the mining company went bankrupt and no longer exist. The Office of Surface Mining (OSM AKA Office of Stealing Mountains) has said that since the bond was returned it’s no longer their deal and if any repair of the mountainside is to be done the state has to pay for it.

National Coal is one of the big three companies strip mining Tennessee for coal right now (the other two are Mountainside Coal and Apollo Fuels). National Coal is a corporation incorporated in Florida . Here is information directly from NCC’s Securities and Exchange Commission (SEC) filing.

National Coal Corp. mines, processes and sells bituminous steam coal from mines located in east Tennessee and southeastern Kentucky . The Company owns the coal mineral rights to approximately 74,600 acres of land and leases the rights to approximately 40,900 additional acres. As of December 31, 2006 the Company's mining complexes included two underground mines, two surface mines and two high wall mines. In addition, it has four preparation plants, two active and two inactive, and four unit train loading facilities, two active and two inactive, served by the Chessie Seaboard Multiplier (CSX) and Norfolk Southern (NS) railroads. The Company holds permits that allow it to open or re-open five new mines close to its operations. As of December 31, 2006 , the Company controlled approximately 36.2 million estimated recoverable tons of coal reserves.

National Coal has never turned a profit in its entire existence. This is from another NCC SEC filing.

As of September 30, 2004 , we had $257,500 in cash
deposited with the Department of the Interior for post-mining reclamation
pursuant to one mining permit for our surface mine #2, and we have $1.034
million of cash invested in certificates of deposit, against which letters of
credit are written in favor of the U.S. Department of the Interior, Office of
Surface Mining, or OSM, for the reclamation bonds related to our mine #9
operations, and mines and mining assets acquired from U.S. Coal, Inc. Subsequentto September 30, 2004, we deposited $3.19 million in cash and posted a $700,000 letter of credit secured by our executive office building to secure a $3.89 million bond for "mine #7" acquired from Robert Clear Coal Corporation. Reclamation bonds are typically renewable on a yearly basis, if they are not posted with cash. Our failure to maintain, or inability to acquire, bonds that are required by state and federal law would have a material adverse effect on us. That failure could result from a variety of factors including the following:

NCC has never turned a profit. In fact NCC has reported to the SEC over 31.7 million dollars is loses.

Sept 30th 2003 2.5
million

2004 10.4 million[1]

2005 6.8 million[2]

2006 7.7 million[3]

2007 The operating loss for period ended March 31, 2007
$4.3 million[4]

A total loss of 31.7 million dollars since National Coal has existed.

Where does a company that has never turned a profit, and in fact has lost over 30 million dollars in its existence keep getting money? Its simple, they borrow it.

At March 31, 2007 , we had cash and cash equivalents of approximately $9.7 million, working capital of approximately $3.1 million, and cash flows used in operations of approximately $5.4 million for the three months then ended. In order to fund general operating and working capital needs, we entered into a Term Loan Credit Facility in October 2006 that provided borrowings of $10.0 million with Guggenheim Corporate Funding, LLC. We borrowed $8.0 million in 2006 and the remaining $2.0 million in March 20.[5]

So how can a company that has never turned a profit make anyone rich? The people who work in the administration of National Coal are the ones getting rich, but nothing as straight forward as profits from the mountains they are strip mining. Certain employees of National Coal get stock options for thousands of shares of stock, at well below market value. They then sell that stock and quadruple their money.

On November 30, 2004 , Jenco Capital Corporation exercised an option,
assigned from Jon Nix on the same date, to purchase 5,000,000 shares of the
Company's Common Stock from Farad and Arlene Beloit at an exercise price of $0.20 per share ("First Option"), and a second option, assigned from Jon Nix on the same date, to purchase 1,800,000 shares of the Company's Common Stock from Farad and Arlene Beloit at an exercise price of $0.55 per share and 144,555 shares of the Company's Common Stock at an exercise price of $0.65 per share ("Second Option"), using funds borrowed from Crestview Capital Master Fund, LLC pursuant to a short-term loan. The loan matured on December 10, 2004 and had an interest rate of 1%.[6]

What this translates to is that the President of National Coal, Jon Nix was given an option to purchase 5,000,000 shares of common stock at 20 cents a share. He acquired a right to this stock from the Beloits, and then sold it to Junco Capital. Junco also bought 1,800,000 shares of common stock for 55 cents a share. As of July 29th 2007 1 share of NCC stock was valued at $4.76. Officers of National Coal are commonly give large stock options which they can trade and sale like any other commodity. These options are to buy stock at a low low rate. These options are also used to secure loans.

Here are some of the employees of the National Coal Corporation.

Board of Directors and how many shares they got at current market value.

Jon E. Nix
Chairman of the Board
On 9/14/06 Mr. Nix sold some of his national coal stock and made over proceeds of $1,550,000.00 from the sale. As of 4/17/07 Mr. Nix reported he owned over 6,103,638 shares of stock in National Coal at an estimated value of $26,611,861.68.[7] Most of this is stock options he got when he was hired onto the company. National Coal, a company that has never turned a profit in its existence, has made Mr. Nix a millionaire.

Daniel A. Roling
President and Chief Executive Officer

As of 3/02/07 Mr. Roling reported that he controlled over 300,000 shares of National Coal stock at a value of as of: 07/27/2007 of $1,308,000.00. National Coal a corporation which has lost over 30 million dollars in its existence has made Mr. Roling a millionaire.[8]

“We did not grant options to purchase common stock during 2003. In March
2004, we granted options to purchase common stock to our executive officers. All
of these options vest in four equal annual installments commencing January 1,
2005, have a term of 10 years from the date of grant, and have an exercise price
of $0.55 per share. Specifically, we granted Mr. Nix, Mr. Chemiel, and Ms. Bowen Nix an option to purchase 2,500,000, 1,500,000, and 500,000 shares of our common stock, respectively. Additionally, we granted Mr. Kite an option to purchase 100,000 shares of our common stock while he was serving as a director of ours and before becoming our General Counsel.”[9]

Here is how it works. This is a hypothetical. Pretend you’re Mr. Nix and on March 2005 you get the option to purchase 2,500,000 shares of National Coal stock at 55 cents a share. Well guess what? As of July 29th, 2007 that one share is now worth $4.36 cents. So Mr. Nix exercises his right and buys 2,500,000 shares of stock. It cost him $1,250,000 dollars. He in turns flips his stock and sells it on the open stock market on July 29th, 2007 at $4.36 cents for a total of $10,900,000 dollars, or a tidy profit of $9,650,000, this is how you become a millionaire from a company that has lost 31.7 million dollars in its existence, and has never turned a profit. It’s a good job when you can get it.

Why do seemingly sane financial institutions like Crestview and Jenco keep loaning money to a corporation that appears doomed for bankruptcy? The same reason—they get stock options to secure there capital loans. There loans are secured against stock at a set low price which they have a right to purchase. Sometimes their loans are disguised as massive stock buys, but it amounts to the same thing.

So everyone gets rich, the administration of National Coal, the lenders—and when the party ends and it all crashes their personal assets are protected by the corporate veil, and bankruptcy court. The company will be broken up and sold—and everyone walks away rich, except the coal miners, the community and its mountains which are destroyed.

The problem with this ponzi like scheme is that National Coal Corporation is not in the business of making widgets, they make strip mines. Strip mines that lay on the land for all eternity. Just at one mine, the Zeb Mountain mine which National Coal owns—over 40 sediment dams are being constructed which are going to be there for all eternity—a distinction National Coal lacks. National Coal will get their bond back, and then if any one of those sediment dams blow out their will be no bond money to repair it. And if (god forbid) National Coal goes bankrupt like so many other strip miners in the 70’s did there is no one to pick up the tab of cleaning up their waste except the tax payer. And that’s one of the reasons strip mining is so cheap, it puts the bill on the very future.

Strip mine Millionaires are being created from schemes like this, but at the expense of the destruction of East Tennessee watersheds, forest and mountains. And when it comes time to pay the bill for the ecological destruction, to often out of state corporations like National Coal are nowhere to be found.

[1] NATIONAL COAL CORP. REPORTS FOURTH QUARTER AND
FULL YEAR 2005 FINANCIAL RESULTS

[2] id.
[3] http://www.nationalcoal.com/documents/Q1%202006%20Final.pdf.
[4] NATIONAL COAL CORP. REPORTS FIRST QUARTER 2007 RESULTS
[5]

Form 10-Q for NATIONAL COAL CORP15-May-2007 Quarterly Report

[6] SCHEDULE 13D

UNDER THE SECURITIES EXCHANGE ACT OF 1934

[7] http://www.marketwatch.com/tools/quotes/person.asp?pid=...58921
[8] http://www.marketwatch.com/tools/quotes/person.asp?site...09060
[9]NATIONAL COAL CORP
Form:SB-2 Filing Date:11/1/2004