“Audley Capital believes that Walter Energy has high quality metallurgical coal assets in established mining jurisdictions with scope for significant growth, with a market position that should enable it to generate substantial free cash flow going forward,” the firm said on Tuesday .

“However, following the acquisition of Western Coal in November 2010, Walter Energy has consistently failed to deliver shareholder value as a result of questionable financial decisions and poor management.

“As a result, Audley Capital believes that shareholders have lost confidence in the ability of the existing board of directors to deliver profitable growth going forward.”

Audley cited Walter Energy’s share price which had dropped 73% since peaking in April 2011.

Walter also underperformed major mining indices such as the MSCI World Metals and Mining Index, which declined only 33% in the same period.

Audley said other areas of immediate concern included Walter’s non-existent quarterly earnings guidance over the last two years.

“Walter has missed consensus earnings expectations for six out of the last eight quarters,” Audley said.

“In particular, the failure to deliver production growth and cost reductions in Canada has disappointed expectations.”

Audley pointed to a “serious lack of consistent leadership” at Walter, noting that four chief executive officers had held the same seat in five years, only three of its 10 board members had significant mining experience and 60% of its “stale and out-of-depth board” exceeded 65 years of age.

It also said Walter made questionable financial decisions – the operator had $2.3 billion of debt, according to its data, that was primarily accumulated in 2010 during the acquisition of Western Coal.

“[T]he acquisition could easily have been funded by issuing more equity above a price of $US100 per share at the time of the transaction and at a time of record coal prices,” the firm said.

“Instead, shareholders are left with a net debt to book value of equity ratio of 200% for a mining company with a high level of operational and commodity price risk.”

Finally, Audley said the producer’s insufficient cost controls made it eligible for a thorough and disciplined review of selling, general and administrative expenses.

“Based on Audley Capital’s analysis, SG&A costs at the company are higher than Walter Energy’s US peer group and savings of at least $10 million per quarter ($40 million per year) should be feasible,” it said.

“Such cost reductions could equate to $200 million of incremental value at a 5.0x multiple, the ultimate goal being a reduction of SG&A costs of $40 million per annum.”

The investment firm said it had compiled initiatives to improve the governance, financial performance and asset value of Walter over the coming year, though no details were released on Tuesday.

It said the efforts would be communicated over the next weeks.

As for Walter’s board, it is seeking the company’s assistance to replace current directors Howard Clark, Jerry Kolb, Joseph Leonard, Bernard Rethore and Mike Tokarz.

In their place, Audley is proposing “highly qualified mining industry experts” including former BHP employee and CIC Energy executive Eddie Scholtz, former Glencore worldwide coal division co-head Mark Lochtenberg and Canadian coal veteran Robert Stan who has held senior management positions with Fording Coal, Westar Mining, Teck, Smoky River Coal and, most recently, Grande Cache Coal.

It also suggests the addition of Lawrence Clark Jr, who recently became president and CEO of JW Resources, as well as experienced mining activist Julian Treger.

Within hours, Walter Energy officials responded to the report and to Audley’s plans to replace board members at its next annual meeting.

“Audley has not communicated with the company about its proposed slate of directors outside of its notice of intent prior to today's public announcement,” Walter said.

“The company said that its board and management team remain fully committed to creating value for all shareholders through the successful execution of the company's strategy.”

Walter confirmed that no date had yet been announced for its 2013 annual meeting.

In a late afternoon statement, the producer announced one change to its board, the retirement of Howard Clark effective February 18 and the addition of Mary “Nina” Henderson effective February 19.

No impetus for the transition was provided.

Walter said as a result of Clark's retirement and Henderson's election, its board would continue to consist of nine independent directors plus the company's CEO.