Coal's comeback

By John Lippert and Mario Parker
Bloomberg News
Sunday, October 31, 2010; G5

With maps of 675 square miles of his Illinois mines before him, Chris Cline recalls the moment he knew the coal in those mines would be worth billions of dollars.

It was 2002, and he and a competitor were on the phone lamenting how hard it was to find big deposits in central Appalachia. Cline, a miner's grandson, knew where to look instead. The next day, he decided to spend $300 million for mining rights, land and equipment in Illinois, betting on coal his rivals were abandoning. Cheap, plentiful and energy-rich, Illinois coal had a major drawback: It contained too much acid-rain-producing sulfur to be burned in most power plants.

Cline foresaw that the dwindling Appalachian supply, coupled with what he expected would be rules to force all power plants to add scrubbers to remove pollutants, would make Illinois coal attractive. If plants had to clean the coal anyway, Cline reasoned, why not use inexpensive Illinois stock?

He was right. Three years later, the U.S. Environmental Protection Agency required power plants to add scrubbers to cut emissions. As a result of that and other market forces, the value of Illinois deposits quintupled during the next five years, helping Cline raise $1.2 billion to build the mines that he's now parlaying into a fortune.

In an age obsessed with global warming and green energy, coal - a combustible rock that has generated heat for humanity for 5,000 years and still conjures up images of black lung disease and the England of Charles Dickens - is staging a defiant comeback.

Condemned by environmentalists who say that digging it mars the land and that cleaning it is impossible, and blasted by the World Health Organization for contributing to premature deaths, coal supplied 29.4 percent of the planet's man-made energy last year - the highest level since 1970.

Apologist for coal

If you've never heard of Cline, it may be because he's making his fortune far from Wall Street on the Illinois prairies - by digging up a rock humans have used for fuel since the Bronze Age.

Cline doesn't hang out in Hollywood or Silicon Valley. He's the principal owner of a private company, Foresight Energy, and until now has never spoken to the media.

Cline maintains his roots in West Virginia. He spends two months a year off the beaten track in Beckley, a town of 16,832 near where his grandfather mined coal with a pickax a century ago.

Chances are good that if you live in the eastern third of the United States - or even in parts of Europe - your home is lighted by electricity from his coal. Cline ships 11 million tons a year and may reach 80 million tons by 2018, giving him 7 percent of projected U.S. output.

Cline says he abandoned his policy of avoiding reporters - and his long-held belief that there's no such thing as good publicity in the coal business - because he wants to improve coal's public image on all fronts.

"We in the industry probably do the worst job in the world getting out the story of the good lives we're helping people live," Cline says. "Changing that is certainly a big interest of mine."

At his Pond Creek mine outside Marion, Ill., Cline, who at 52 has the rugged looks of actor Harrison Ford, turns effusive as he dons blue coveralls and a white hard hat. He ushers his visitors into a pickup that heads down a paved slope toward the coal.

This is ideal territory for long-wall mining, so called because it uses a machine with a 5.5-foot shearer to cut slices 3.5 feet thick from a coal seam that's 1,400 feet wide. Each day, Cline's long-wall machine extracts 35,000 tons, enough to power 2,800 U.S. homes for a year.

It's dangerous work that can rile up landowners when it causes property on the surface to drop by six feet. But compared with Appalachia, with its four-foot-thick coal seams and mines filled with water and mud, it's more like coal farming, Cline says.

Five hundred feet underground, the pickup emerges into a labyrinth of corridors alongside a conveyor that hauls coal to the surface. Cline beams as fist-size chunks rattle past.

"I like that," he says. "It's like the sound of coins when they're jingling."

Soaring consumption

Responsible for a third of U.S. emissions of carbon dioxide, coal is the main greenhouse gas producing climate change, the Government Accountability Office found in June.

CO2 in the atmosphere rose in July to 390.09 parts per million from 387.84 ppm a year earlier. The International Energy Agency, which advises 28 governments including the United States, advocates a limit of 450 parts per million to avoid catastrophic climate change.

"Coal is one of the most damaging materials in the environment, but it's not going away," says John Thompson, an analyst at Boston-based Clean Air Task Force. "By 2015, China will have three times more coal-fired plants than the U.S. They'll produce CO2 that will stay in the atmosphere thousands of years."

China opens a coal-fired plant each week; last year, seven workers on average died each day in Chinese mines trying to supply those plants, according to the nation's environmental ministry.

Global coal consumption may soar 58 percent from 2010 through 2035, the U.S. Energy Department says, making it a growth industry for the 21st century. Eighty-five percent of the increase will come in China and India.

Cline says he has read everything he can find on global warming and describes it as a real but exaggerated threat. He says he supports technologies that make the burning of coal cleaner. He says humankind will benefit more from cheap and abundant energy than from overreacting to what he calls minimal increases so far in atmospheric CO2 and the level of the world's oceans.

Cline was so annoyed when his children's teachers in Palm Beach, Fla., aired Al Gore's film "An Inconvenient Truth" that he asked them to distribute literature that showed that climate change may be caused by clusters of sunspots or the Earth wobbling on its axis, not just carbon. When they refused, he complained to school fundraisers.

"As far as the social acceptability of coal, I like to think I'm part of supplying the cheapest energy in America," he says.

Taking the plunge

Investors are applauding coal's comeback. After tumbling 84 percent in five months from June to November 2008 as the financial crisis gutted growth, the Stowe Global Coal Index of stock prices rebounded. The index rose 295 percent from its low on Nov. 20, 2008, through Oct. 11 of this year - more than five times the rise of the Standard & Poor's 500-stock index in that period.

Cline says mining rights to his 4 billion tons of Illinois coal are worth at least $3 billion. Dennis Kostic, president of Weir International, a Downers Grove, Ill.-based consulting firm, puts the value at $4 billion.

Illinois was still a big bet when Cline went "all in" in 2002. An EPA crackdown to limit acid rain, starting with the Clean Air Act of 1990, had cut the state's coal output to its lowest level since the Great Depression. Exxon Mobil, which mined coal in addition to drilling oil, was closing mines from West Virginia to the Rocky Mountains and joining Chevron and others in abandoning Illinois.

"Chris was willing to take more risk than we were," says Robb Turner, co-founder of Boston hedge fund ArcLight Capital Partners. Turner purchased West Virginia mines from Cline but declined to invest in Illinois because he expected meager profits.

Cline is buying locomotives, building a port on the Ohio River and designing his own oceangoing ships to serve his coal empire. He already exports 40 percent of his haul, mainly to Europe. As China and India gobble up half of world production, he is in talks to ship to them, too.

Cline is exploiting coal's big advantage: It's a bargain compared with most forms of green energy.

"Coal is the backbone of reliable, low-cost power," says Bartow Jones, managing director of Riverstone Holdings, a New York-based Carlyle Group affiliate that invested $600 million in Cline's operations in 2007.

Power-plant coal such as Cline's sold for $47.25 a ton on Oct. 11, about two-thirds cheaper than wind power and three-quarters the cost of solar. In the second quarter, the cost of electricity per megawatt hour from coal was $59.51, including capital and operating expenses, compared with $176.37 for power from offshore wind and $240.55 for electricity from thin-film photovoltaic cells.

At a cost of $19 a ton to mine coal last year at Pond Creek, Cline spends even less than competitors. Coal from central Appalachia averages $57 a ton to mine, Schwartz says.

Impact on people, land

Miners still bear coal's most immediate and deadly risks.

Methane and coal dust may have sparked the blast that killed 29 workers at Massey Energy's Upper Big Branch mine in Montcoal, W.Va., on April 5 - the worst U.S. mining accident in 40 years. Massey's much-criticized chief executive, Don Blankenship, who unlike Cline has had no qualms about grabbing the spotlight, said in July that excessive regulations can imperil miners.

Cline describes Blankenship as one of the coal industry's most talented leaders.

"Don thinks his convictions are morally correct and follows them," Cline says. "In some ways, people should admire it. They should also think, 'Maybe there's a way to not be a bull in a china shop.' "

On a July day, while flying in his helicopter, Cline points to West Virginia mountaintops that Arch Coal, Massey and others have sliced off to remove coal. He says he's amazed that gutting mountains can be profitable.

"We have less environmental impact," he says of his underground Illinois mines.

Looking to the future

Foresight Energy's newest mines are taking shape in Illinois. On a June day, Cline parks his pickup at the bottom of the slope for his Sugar Camp mine, 12 miles northeast of Pond Creek. He points upward in a room as big as a cathedral. He describes how workers suspended 19-ton rollers for the coal conveyor from the ceiling and lowered them into place.

Sugar Camp may have four long-wall machines mining 30 million tons annually. The first one will arrive in the fourth quarter of next year. Cline's Hillsboro mine, 100 miles northwest, may deliver 25 tons per man-hour when finished in 2011, says Dwayne Francisco, the operation's president.

Even with his yacht, plane and 34,400-square-foot Palm Beach mansion, Cline says he remains a miner at heart. He goes underground to inspect his operations twice a month. While flying over his Macoupin County, Ill., site in June, he told Foresight chief executive Michael Beyer to remove trash and to ship off a pile of coal that was hot enough to release steam in the bright sunshine.

Cline says he may reach top speed in eight years, when his sons Christopher, 16, and Alex, 15, will be old enough to join the firm. He says he has no plans to sell, especially if Foresight becomes a public company that trains his boys.

"There's a good possibility they'll be the fourth generation," Cline says. "I'm hoping they will."

Cline says he introduces his children to miners and shows them videos of when he started out. He also wants them to learn what it may take in the future to overcome forces aligned against a black rock that - despite outrage over its environmental, health and safety history - has proved its staying power as the world struggles to go green.

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