1993-10-05_GENERAL DOCUMENTS - C1981017 (3)

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The Debtor was highly profitable during the 1970 's but experienced business reversals in the 19801s. In particular, the Debtor was adversely affected by increased foreign competition in the steel industry and a consequent decline in U.S. steel production. Due to freight costs, the Debtor was non-competitive in the eastern United States steel production market. The two primary customers for the Debtor's coal production were located in the western United States: the Fontana steel works owned by Kaiser Steel in California and the Geneva steel works owned by USX in Utah. In 1981, Kaiser Steel closed the Fontana works, and in 1986, USX closed the Geneva works. The Debtor then attempted to develop profitable supply relationships with overseas steel producers, particularly Pohang Iron & Steel Company, Ltd. , located in The Republic of Korea. The Debtor entered into a supply contract calling for the delivery of 400,000 tons of coal per year through April 1992 . Coal was shipped via rail to the Port of Los Angeles and loaded onto freighters. The price realized from these sales, net of shipping costs, was less than the Debtor's cost of production. In September 1987, the Geneva works closed by USX were reopened by a new owner, now named Geneva Steel Corporation ( "Geneva" ) . The proximity of the Mine to Geneva produced a significant cost advantage relative to eastern coal suppliers and Geneva became the Debtor's primary customer in the late 19801s. The Debtor entered into a supply contract calling for the delivery of 550,000 tons of coal per year through June 1992. Beginning in 1981, the Debtor undertook a major modernization program designed to reduce costs and increase coal productivity, thereby permitting the Mine to operate profitably in the changing steel market. The Debtor made in excess of $60 million of capital improvements, including raising coal preparation plant capacity to 600 tons per hour; driving twin adits 14 ,665 feet long which are used for transportation, mine drainage, belt haulage, ventilation, and escapeways; installation of belt transportation from working faces to stockpile areas near the preparation plant; and conversion from room and pillar mining to advancing longwall mining on three faces, creating a productive capacity in excess of 1,000,000 tons per year of clean coal. The Mine property, plant, and equipment had a book value of $40.4 million at December 31, 1990; the replacement cost of the equipment is estimated by management to be in excess of $84 million. C:\WP51\JS8\MIDC0N\D18CLOS.STM October 6, 1993 2