Is This Government Wrist Slap a Wake-Up Call for Investors?

Rhino Resource Partners just got slapped on the wrist for substandard work conditions at a mine; is this reason for concern?

Jul 23, 2014 at 4:26PM

As an investor, I'm never happy when a company I own gets into trouble with regulators. But that's just what happened at coal miner Rhino Resource Partners (NYSE:RNO). The question I'm asking now is: "Is this a symptom of bigger problems?"

A dangerous industry
Coal mining is very dangerous. That's why publicly traded miners are always taking about how important miner safety is. For example, Rhino Resource Partners CEO Chris Walton noted in the first quarter, "At our coal operations, we continue to focus on safety while emphasizing controlling costs."

And at the end of the day, that really is the trade off. Running safe mines requires spending more money than you might otherwise want to. So when the Mine Safety and Health Administration (MSHA) decided to use Rhino Resource Partners as a whipping boy I was none too pleased.

According to the MSHA, a surprise inspection of Rhino Resource Partners' Eagle Mine 3 "found 38 violations." Worse, this wasn't the regulator's first visit: "MSHA inspectors revisited Eagle Mine 3 because it experienced an elevated citation rate in the first quarter of 2014 and logged a high number of violations in a May impact inspection."

(Source: ReubenGBrewer, via Wikimedia Commons)

To be fair to Rhino Resource Partners, MSHA frequently highlights companies that have safety violations. So this isn't exactly a unique announcement. But from my read of the release, this mine just whiffed three times in a row on the safety front. Isn't it time that someone struck out?

Taking action
It appears that Rhino Resource Partners isn't sitting still. According to Bloomberg, Rhino has replaced the people running Rhino Eagle Mine 3. According to the company: "Management does not condone action or inaction that violates basic safety standards, and will continue to fully cooperate with MSHA to correct all identified sub-standard practices."

Well, they had to say that, but they didn't have to change the management at the mine.

On one level, it's about time changes were made. On another, I'm glad that change is in the air. At the end of the day, Rhino Resource Partners units will stay in my portfolio, but I'm going to keep a closer eye on safety. However, speaking more broadly, this episode highlights an important issue to watch across the coal space.

For example, Cloud Peak Energy (NYSE:CLD) has been working hard to reduce costs. And it's been very successful, with capital spending in 2011 of $109 million and projected spending this year of between $40 million and $60 million. How is Cloud Peak doing this? One way is by bringing repairs in house and buying used equipment.

This, in and of itself, isn't a bad thing. And the cost benefit can be huge. For example, taking care of wheel motor repairs is roughly a third the cost of hiring someone else to do it. And buying used and refurbishing can save Cloud Peak Energy as much as 60% on equipment purchases. Those are big numbers.

(Source: National Institute for Occupational Safety and Health, via Wikimedia Commons)

The problem, of course, is that if you do everything yourself there's the potential for cutting corners because no one is watching. If Cloud Peak outsourced those tasks or bought new, it would be keen on making sure it got value for its money. This isn't to say that Cloud Peak Energy is doing anything nefarious, far from it.

That said, Cloud Peak Energy's Spring Creek mine experienced a fatality in June. Taking a big picture view of the industry, when the government temporarily shut down, halting MSHA inspections, the coal industry experienced multiple fatalities unusually close together. At the time, United Mine Workers International, a coal workers union, President Cecil E. Roberts noted that "it is extremely troubling that within a week after the federal government shutdown caused the normal system of mine safety inspection and enforcement to come to a halt, three miners are dead."

He's right, of course, and with the coal industry in a deep downturn, it might be more important than ever for investors to keep closer tabs on the balance between cost savings and safety performance. I know I'll be watching Rhino and my other coal investments far more intently than I have in the past.

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Reuben Brewer has a position in Rhino Resource Partners. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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