Executive Summary

Division of Natural Resources - Public Land Corportation

Issue 1: The Cabwaylingo Coal Lease with Vantage Mining Corporation has Several    Irregularities Indicating thatthe Lease Should be Reevaluated or Possibly Voided.

On January 14, 1999 the Public Land Corporation (PLC) approved the execution of a coal lease with Vantage Mining Corporation. This lease was for over 8,000 acres of coal beneath the Cabwaylingo forest on the "Alma Seam". As part of the lease provisions, Vantage agreed to pay the PLC one million dollars up front and $100,000 each year as a minimum royalty payment. The Legislative Auditor's review of this transaction reveals several irregularities which raises concerns in the transactions procedures of the PLC, and raises the question that the contract should at least be reevaluated and possibly voided. The Legislative Auditor's Office found the following problems regarding this transaction:

This lease was reviewed by the Governor's Office which also found problems with many of the lease provisions. The Legislative Auditor requested a review of the royalty calculation by a representative of the Property Tax Division within the State Tax Department. This review indicates that the Vantage lease contains deductions that are unusual for unaffiliated parties, and would provided no chance of the State receiving royalty payments on a tonnage basis. The Tax Department's analysis is intended to be a statement of fact and not an opinion from the Department of whether the lease provides market value to the state.

The Cabwaylingo coal lease with Vantage Mining Corporation was approved by members with incorrect and inadequate information. The lease was not prepared by staff experienced in such leases, nor does the PLC have staff knowledgeable to conduct a thorough economic analysis to ensure that the state receives fair market value for its resources as required by law. Though not specifically required by the code, a public hearing was held in 1998 for the leasing of 45 acres of coal in Braxton county according to the DNR annual report, while the Cabwaylingo lease is for over 8,000 acres of coal yet no public hearing was held. The deduction of operating costs and taxes denies the state 6% royalties on tonnage of coal which could be significantly greater than the $4 million in minimum payments that the state is locked into receiving. Several of the deductions are not typical for coal leases involving unaffiliated parties. Furthermore, the PLC meeting which executed the lease violated the open meetings statute, which may be sufficient to invalidate the Vantage lease agreement. The Legislative Auditor recommends the following:

Recommendation 1:

The Vantage Coal lease agreement executed by the PLC should be renegotiated or possibly voided.

Recommendation 2:

The Legislature should consider amending the PLC statute to ensure that the requirements for leasing gas, oil and mineral rights are just as stringent as those required for land sales, transfers or exchanges.

Recommendation 3:

The PLC should be required to have leases prepared and reviewed by individuals knowledgeable in coal leases, analysis of coal appraisals and all other aspects of leasing mineral rights.

Recommendation 4:

The PLC should comply with West Virginia Code 20-1A-4(f) by promulgating rules regarding procedures for conducting public land sales by competitive bidding, modified competitive bidding and direct sales.