Alpha Natural Resources’s lawyers have had their hands full with environmental litigation lately, as we detail in a RAN Coal Risk Update released today. During 2012, environmental groups filed multiple lawsuits against Alpha over alleged water contamination from selenium at the company’s mountaintop removal mines.
The company’s 2011 sustainability report advertised that it had a “99.7% water quality compliance rate.” That sounds pretty good, but the Sierra Club and its allies are a savvy bunch of litigators who don’t usually pick fights with coal companies unless they intend to win.
So should investors be concerned about potential selenium-related risks lurking in Alpha’s claimed 0.3% non-compliance rate? The Rainforest Action Network is not in the investment advisory business, but the recent experience of one of Alpha’s industry peers, Patriot Coal, might raise some eyebrows for investors.
In 2007, Patriot’s annual report to investors didn’t include a single mention of selenium as a risk factor for investors. But then the lawsuits started: The Sierra Club, Appalachian Mountain Advocates, Ohio Valley Environmental Coalition, West Virginia Highlands Conservancy and other environmental advocates sued the company over alleged selenium contamination at the company’s surface mines. Five years and multiple settlements later, the company conceded to investors that its estimated selenium cleanup costs had climbed to half a billion dollars and could even rise further.
Selenium is a mineral found in rock and soil at several mountaintop removal mining sites in Appalachia. Although it is an essential micronutrient, it is toxic to humans and wildlife in large doses. And as Patriot Coal learned the hard way, it can be extraordinarily expensive to clean up at mine sites. Patriot’s selenium story ended quite badly for its shareholders, who were wiped out when the company filed for bankruptcy in 2012 due to a combination of pension liabilities, declining demand for coal, and environmental compliance costs.
Of course, Alpha’s courtroom battle over selenium may or may not end like Patriot’s. So to estimate the risks investors face from Alpha’s selenium litigation, we turned to the numbers from the West Virginia Department of Environmental Protection (WVDEP). Mining companies are required to test water at mine outfalls for contaminants such as selenium and report this data to the WVDEP. When these readings exceed permitted limits, the WVDEP can issue violations, and third parties can also sue to force companies to comply.
Using WVDEP data obtained by our allies through Freedom of Information Act requests, we found that between 2005 and 2010, Alpha’s surface mines in West Virginia received penalties about a quarter as frequently as Patriot’s and had selenium readings that exceeded federal guidelines about half as frequently. Although Alpha’s state-wide selenium compliance record is not as bad as Patriot’s, the data suggests that selenium non-compliance at several Alpha surface mines exposes investors to significant risks from lawsuits such as the ones the company currently faces.
As the bankruptcy of Patriot Coal illustrates, managing selenium compliance in the courtroom rather than in the boardroom can expose investors to significant risks. Alpha could reassure investors by, for example, reporting its selenium monitoring data or disclosing the details of its strategy for managing selenium compliance at its mountaintop removal mines. This information would help investors better understand whether the company is wise to roll the dice in the courtroom against plaintiffs who have already won major legal victories against one of its industry peers.