[May 13, 2014] By Richard Valdmanis, Fergus Jensen
and Sonali Paul
BOSTON/JAKARTA/MELBOURNE (Reuters)
— Billionaire Tom Steyer has rapidly become one of America's
most visible environmental advocates, vowing to punish lawmakers who
don't oppose climate change and pledging to spend up to $100 million
to put the issue center stage in the November 4 elections.
His in-your-face tactics have made him fierce enemies on the right
who accuse him of hypocrisy and claim that he made much of his
fortune through investments in fossil fuel energy at Farallon
Capital Management, the San Francisco-based hedge fund he founded in
1986.
Steyer, 56, stepped down as co-managing partner of Farallon in 2012
to devote himself to full-time activism because, as he later wrote,
he "no longer felt comfortable being at a firm that was invested in
every single sector of the global economy, including tar sands and
oil."
But he has provided few details of the extent of those fossil fuel
investments or how he profited from them. He said in July 2013 that
when he had left Farallon, which manages much of his estimated $1.6
billion wealth, he had instructed the fund to divest his holdings in
fossil fuels. Neither he nor Farallon has said whether that process
has been completed. Farallon declined to comment.
A spokesman for Steyer declined to comment for this article.
Until now, most of the conservative ire against Steyer has focused
on Farallon's energy investment record in the United States. Little
attention has been paid to foreign investments such as its forays
into Asian coal.
During Steyer's tenure, Farallon helped finance coal project
acquisitions in Indonesia and Australia valued at more than $2
billion and covering some of the region's biggest mines, some of
which swiftly ramped up production afterward, according to a close
examination by Reuters of company disclosures and interviews with
people involved in the deals.
While Farallon has not made public its shares in these deals,
sources familiar with the fund's dealings say they amounted to at
least several hundred million dollars.
The Asian coal investments were mostly conducted through Noonday - a
unit of Farallon set up by Steyer's deputy, Andrew Spokes, in 2004.
Spokes co-led Farallon from 2007 and succeeded Steyer after his
departure. In Steyer's final note to investors in 2012, he said
Spokes "embodies values in which I believe and which distinguish our
firm."
People familiar with Steyer's management of Farallon said that while
his main focus was on the United States, he would have signed off on
those foreign deals and, as co-managing partner, would have shared
in their profits.
"The discretion to make or break any investment rested with him,"
said a Farallon investor, who asked not to be named.
The ramped-up production at the Indonesia mines contributed to
Asia's coal boom as demand for fuel surged in China and India and
prices soared, according to industry analysts.
Farallon's investments in Indonesia and Australia included projects
that raised concern among local environmental groups over air and
water pollution and coal's role in global carbon emissions, which
contribute to global warming.
Under Steyer's stewardship, Farallon grew to become one of the
world's largest hedge funds. Farallon's regulatory filings show
energy currently makes up nearly 9 percent of its overall $19
billion portfolio.
"He made us a lot of money and his attitude has always been
'whatever it will take to make money,'" said one former investor
with his fund, who asked not be named because of his ongoing
relationship with Steyer.
REWARDED WELL
As Steyer has become a bigger voice in U.S. politics, the Republican
party and other conservative groups have sharply escalated their
attacks on the big Democratic donor, raising questions about how he
made his money.
Conservative attacks on Steyer's record have mainly focused on his
fund's involvement in U.S. energy companies like Kinder Morgan,
which has plans to expand an oil sands pipeline to Canada's West
Coast. Just before Steyer left Farallon in 2012, the fund held $125
million worth of Kinder Morgan securities, along with $220 million
in shares of Nexen, a Canadian oil sands producer, according to U.S.
filings.
Farallon's investments contrast with Steyer's aggressive campaign
against fossil fuels in North America, in which he has targeted
politicians who support TransCanada's proposed Keystone XL pipeline
from Canada to the United States and has urged universities to sell
off their coal stocks, saying "a coal free portfolio is a good
investment strategy."
While little noticed, in Indonesia, Farallon helped finance the
leveraged buyout of three coal companies, including the country's
No. 2 coal miner Adaro Energy in 2005. Indonesia is the world's
biggest coal exporter, according to the U.S. Department of Energy.
Farallon's involvement in the Adaro deal laid the foundation for a
60 percent expansion in production at the firm that was lucrative
for all involved, said Edwin Soeryadjaya, chairman of Saratoga
Capital, which owns a major stake in Adaro. The Adaro buyout was
valued at about $1 billion, according to Adaro's website.
A source involved in the deal said Farallon's share included $110
million in loans, and a direct purchase for $5.5 million of an 11
percent stake in the company that later surged in value.
"They were bullish on making money ... If they didn't like it they
wouldn't go with it, but for that they were rewarded very well,"
Soeryadjaya told Reuters.
Farallon's Noonday unit approached Adaro when Asian coal prices were
$50 a metric ton (1.1023 tons). When Adaro went public in 2008, coal
prices were $170 a metric ton, yielding a solid return for
investors. Adaro's coal output during that period soared 60 percent
to 38.5 million metric ton.
Farallon made other inroads into Indonesian coal too, including
helping to finance an Indonesian-led consortium's purchase of Berau
Coal, Indonesia's fifth largest producer, in 2004 and Indonesian
mining company Bumi Resources' $500 million acquisition of Kaltim
Prima Coal from BP and Rio Tinto in 2003. Production jumped at those
mines, too. The amount of money that Farallon contributed in these
deals remains unclear.
David Price, senior coal analyst at consultants IHS, said the
leveraged buyouts funded by Farallon were important for raising
Indonesia's coal production, which quadrupled between 2002 and 2012
and triggered worries among environmentalists about pollution and
carbon emissions.
"There was an enormous amount of Chinese demand for imported coal.
So there was incentive to increase production," Price said. "At the
same time the leveraged buyouts were instrumental. Everyone knew at
the time that the first thing the buyers would do was ramp up
production in order to regain their capital expenditure as quickly
as possible."
A source familiar with Farallon disputed any link between the hedge
fund's investments and the surge in coal production, saying the
investments did not give the fund any say on the Indonesian
companies' operations. "The biggest friend to rising production is
prices, and Farallon can't take credit for that," the source said.
The Adaro mining site in Tanjung, South Kalimantan, produces some of
the world's cleanest coal - with low sulfur content and low ash,
industry experts said. But there is still air pollution from coal
dust and pollution of the Balangan River that Adaro uses to channel
coal out on barges, said Arif Fiyanto, an activist at Greenpeace
Indonesia, whose team monitors the area.
Saratoga Capital's Soeryadjaya said Adaro worked hard to minimize
impact on local communities.
CLIMATE CONCERNS
Farallon's investments in Australia, meanwhile, laid the groundwork
for the fund to become the biggest shareholder of Whitehaven Coal,
which is developing one of the country's biggest remaining coal
reserves, Maules Creek. The mine has become a lightning rod for
environmentalists worried it will deplete water supplies and destroy
a forest, while producing coal that will add to carbon pollution.
Farallon provided a loan of $335 million for entrepreneur Nathan
Tinkler's acquisition of the mine in 2009, according to a source
familiar with the deal. Tinkler's company, Aston Resources, went
public in 2010 and then was taken over by miner Whitehaven Coal in
2012.
Farallon loaned Tinkler more money to buy other mines, but when that
loan came due in the midst of slumping world coal prices,
cash-strapped Tinkler had to repay Farallon in the form of half of
his stake in Whitehaven. Farallon became Whitehaven's top
shareholder by the end of 2013, after Steyer's departure, according
to public filings. Whitehaven's share price had nosedived more than
60 percent over the preceding two years.
"Early investors made a lot of money. Farallon were part of that,"
said a person familiar with the Maules Creek loan. But he noted
investments made later, including those by Farallon, were showing
losses. "It's been a rollercoaster," the source said.
The Maules Creek mine is due to start producing in 2015. Green
groups, farmers, local Aboriginals and the community in the
surrounding area worry it will destroy the Leard State Forest, hurt
farms, spread coal dust on nearby towns, and damage sacred
indigenous sites.
Whitehaven says it went through a rigorous environmental approval
process and all of the issues have been addressed. The Maules Creek
mine won state and federal environmental approvals following a
three-year process, which included a court challenge by
environmentalists.
"It (Maules Creek) has become the focus point for a lot of people
who are concerned about inaction on climate change," said Georgina
Woods, New South Wales coordinator for the Lock the Gate Alliance, a
coalition of environmental groups.
When Farallon won its initial stake in Whitehaven in 2012, Steyer,
too, was worrying about climate change.
He quit in October 2012 after what he later described as a "Road to
Damascus" awakening about the importance of tackling the issue,
which he calls "the challenge of our generation." He has since
devoted time and millions of dollars to philanthropic causes, most
centering around climate change.
(Additional reporting by Svea Herbst-Bayliss and Rory Carroll,
editing by Ross Colvin)
