Stock of the Week Centennial Coal (CEY)

Centennial Coal (CEY) is a coal mining and marketing company that supplies thermal and coking coal to domestic and export markets. CEY is the largest independent coal company in Australia in terms of production, has twelve domestically operated coal mines and can be considered as one the shares to buy.

Centennial Coal is a major fuel supplier to the NSW energy industry, fuelling around 47% of the state’s coal-fired electricity. CEY is primarily a producer of domestic thermal coal, but also produces around a third of its coal for the export markets.  International customers include power stations and steel mills in Japan, Korea, India, Europe and South America.

A rough year

CEY struggled with a number of operational problems over the last 18 months, affecting production, sales and profits.

The problems included failure of production equipment at the Charbon site, partially spurred by bad weather, restrictions in production at its Clarence site, ventilation issues at Tahmoor and roof instability at its Newstan operation.

At the time, the company was down but not out, predicting brighter times ahead. CEY reaffirmed its FY07 guidance of $30-$40 million and predicted that lower costs, and strong coal prices, would drive earnings in the future.

Followed by a turnaround

This poor period was followed by considerable damage control for CEY.

The company acted quickly to unlock some cash to inject into its stock. Late last year, CEY completed the sale of its shares in Austral Coal Limited (and its Tahmoor mine) and Anvil Hill for more than $1.1 billion.

Though some say CEY sold off their two best assets, the sale has unlocked significant value for shareholders, and the proceeds from the sale will be used to reduce debt by about $400 million. CEY is clearly aiming for a fresh start, realising the value on its best assets to help pay down the company’s huge debt of around $730 million.

The sale gave the company enough cash to give its shareholders a capital return. After getting approval from the ATO in late December, CEY returned a $1.88 capital return to shareholders on Tuesday.

A brighter future

CEY released its latest quarterly results yesterday, for the second quarter of 2007/08.

CEY’s coal production totalled 3.3 million tonnes for the last three months of 2007, and totalled 8.4 million tonnes for the second half of 2007. The poor quarterly results were attributed to longwall changeovers at key mines.

The recent floods in Queensland will affect production at many of CEY’s key peers and this may push up local coal prices. CEY is highly leveraged to the coal price and a minor price increase will provide a major boost to CEY’s bottom line.

There was more positive news last week, with CEY declaring “full steam ahead” for Newcastle’s third coal terminal following completion of finance arrangements and a signing of a 35-year lease for the site from the NSW government. The lengthy lease span indicated that CEY’s domination of the NSW energy industry would be intact for decades to come and reinforcing the company’s status as one of the market shares to buy.