Herky Jerk

Doe Run's owner has done this before -- and that has regulators braced for trouble

Never sat across the bargaining table from him. Never met him, in fact. But union boss Joe Angleton has a high opinion of the man who controls Lodestar Energy Inc., a troubled Kentucky coal company.

"Ira Rennert's a financial genius," says Angleton, president of District 12 of the United Mine Workers of America.

See, Rennert operates at the rarefied level of high finance that can flummox an average Joe, even a union leader who has mastered the arcane language of contracts, cost-of-living escalators and pension multipliers.

In the eye of a storm: Doe Run's Herculaneum smelter
Jennifer Silverberg
In the eye of a storm: Doe Run's Herculaneum smelter

A New York financier who's collected distressed companies at fire-sale prices since the mid-1970s, Rennert snapped up Lodestar five years ago. At the time, the Lexington, Ky.-based company was known as Costain Coal Inc. and owned by a British firm. Rennert's holding company, the Renco Group Inc., paid about $32.5 million -- $22.5 million of it in cash, according to the trade press -- for the company, which Angleton says was teetering on the brink of bankruptcy. A year after the sale, Lodestar borrowed $150 million in high-interest bonds.

Filings with the U.S. Securities and Exchange Commission report that the money was used, in part, to pay cash dividends totaling $27.8 million to shareholders. There was only one shareholder in Lodestar -- Ira Rennert -- and with the dividend payout and the management fees Renco Group charged, he just about made back what he paid for the company.

"Ira Rennert's a financial genius."

Fast-forward to November 2000:

Lodestar, blaming the depressed price of coal, fails to make interest payments on the bonds. The company wants to renegotiate with bondholders and win more favorable terms. But bondholders are angry. They balk. Were it not for the dividends Rennert took, maybe Lodestar wouldn't be in trouble, one investor tells Coal Outlook, an industry publication. In March 2001, bondholders force Lodestar into bankruptcy.

End of story? Hardly.

Lodestar turns the involuntary bankruptcy into a voluntary reorganization -- and, with a federal judge's approval, the company wiggles out of unfavorable contracts with power companies, including the government-owned Tennessee Valley Authority. Angleton, who represents workers at the company's Baker deep mine in western Kentucky, says the move will allow a leaner, meaner Lodestar to emerge from bankruptcy -- its unprofitable operations divested, its money-losing contracts replaced.

And Ira Rennert will be still calling the shots.

"Ira Rennert's a financial genius."

If the Lodestar tale sounds familiar, it may be because two other Ira Rennert-controlled companies last month warned that they also expected to default on bonds.

One is Rennert's Renco Steel Holdings Inc., an Ohio holding company: It said it didn't have enough cash to make debt payments that came due on Feb. 1.

The other Rennert company is his largest -- and one that's dominated local headlines. St. Louis-based Doe Run Resources Corp., in the middle of a multimillion-dollar environmental cleanup in Herculaneum, said on Jan. 30 that it was trying to restructure $305 million in bond debt and was negotiating with bondholders.

In an announcement eerily reminiscent of Lodestar's warning, Doe Run blamed the depressed price of lead, its main product, for its troubles. The company says it's not sure whether it'll be able to make interest payments on the debt that comes due on March 15.

Rennert's Renco Group bought Doe Run from California-based Fluor Corp. in 1994. The Herculaneum smelter was in the midst of a strike, and the company's environmental liabilities -- from discontinued mines throughout the Missouri Lead Belt and from the century-old smelter -- were piling up.

After the sale, the replacement workers at the smelter voted to throw out the Teamsters, a move that ended the labor controversy but left deep resentment in the company town, just south of St. Louis. That resentment would come back to bite the company: Residents grew distrustful, and ex-employees snitched to regulators about company practices [Klose, "Heavy-Metal Racket," Dec. 26, 2001].

But Rennert was undaunted and moved quickly to cinch Doe Run's dominant position in the lead business. Borrowing heavily, Doe Run acquired a major Peruvian lead business and also bought Asarco Inc.'s Missouri lead mines and smelter. The moves left Doe Run groaning with debt just as the price of lead headed south.

Critics say Doe Run moved faster on its expansion plans than on its response to environmental problems in Herculaneum. They also say some changes in company operations actually made things worse. One example: The decision to rely exclusively on trucks to ship in lead concentrate spilled heavy-metal dust on Herky's streets and yards.

And the company has never met federal air-emission standards. As a result, part of this river town of 2,800 is contaminated. Recent blood tests in Herky show nearly that one in four children under the age of 6 has a dangerously high lead level. More than 500 residential yards need to be replaced. And some residents are being offered temporary relocation so lead dust can be removed from their homes.

How much the cleanup will cost is unclear. According to the consent order finalized in May 2001, getting air emissions in compliance by the July 2002 deadline could cost between $8 million and $11 million, says Dave Mosby, the Missouri Department of Natural Resources official assigned to the Herculaneum cleanup. Replacing yards -- at a cost of $10,000 to $15,000 each -- adds a minimum of $5 million. Other costs haven't been identified, including evaluation and stabilization of the hulking slag pile south of the smelter, Mosby says.

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