FYI | Apr 26 2007
My memory is a bit blurry this week, but if my calculations are correct I received the first indications that things weren’t exactly flash at Centennial Coal (CEY) a little over eighteen months ago.
Someone with excellent contacts inside the industry alerted me to it.
Ever since that day I have often wondered how it is that so few research reports by securities analysts at stockbrokers have mentioned the specific risks and challenges of Centennial’s coal mines, let alone highlight the risks of owning shares in the company.
The fact that I haven’t written more about the company myself in the past two years is a small miracle, especially considering that I thought I was sitting on top of a scoop on several occasions.
So what happened?
As is sometimes the case: life took a few unexpected turns, and so did things at Centennial. My would-be stories got squeezed in the middle of conflicting events.
In the course of 2006 it seemed like a nice story was developing though. Bankers at Macquarie Bank (MBL) who as head of an international consortium on a blue Monday had helped the company secure additional funding, was pushing management to sell some assets to reduce the large company debt.
This could have been my first story, but it seemed at the time I would receive more information about which assets would be sold and when and so the story remained on my desk, in anticipation of more news.
I must have been close to publishing at least four times during the past two years. I remember on some Fridays I would receive an indication from one of my sources that a deal looked very close, maybe as close as a few days only.
On other times I was told about Macquarie organising an auction for Centennial assets. I know of two auctions, but it may have been three (sorry, my memory is not in optima forma this week).
Again, at some point I would hear about Chinese interest for the assets. That story changed into Chinese interest through an Australian company that would formally bid for the assets. And yes, they did participate in Macquarie’s auction.
But every time the end result was silence.
It is easy, in hindsight, to conclude I should have published at least on one occasion, but as every journalist knows once you allow the story to run so close to its moment of truth and it turns out a non-event the story instantly loses its essence.
Assuming I have been the only journalist who has been following Centennial Coal as closely as I did over the past two years, each of the above mentioned developments could have seen me revealing the news before it would have become public knowledge. Because of forces outside of my power I never did.
I’ll probably never find out why.
Fact is that –finally- it has started to dawn on most securities analysts that Centennial Coal is a high risk proposition, and not just because of the company’s large debt burden (which will be an ongoing risk in the years ahead).
But then again, the only reason why Centennial shares are still trading around $3 a piece is because Xstrata launched a bid for Gloucester Coal (GCL) and part of the market is hoping someone might thus put a similar bid on the table for Centennial.
Nothing is impossible these days, I know, but I wouldn’t count on such a scenario – for the simple reason that the risks attached to the company are too high. As shown in this week’s March quarter production report, volume projections are pretty weak (they can change as the wind changes direction) and it’ll be another year still before four of the non-sellable mines will be put on care and maintenance (effectively closed down for production).
It will probably come as a great relief to everyone, staff included, when the four mines will end production so that personnel and equipment can be relocated to other assets. One would hope this will also end the sad era of ongoing operational disappointments at Centennial.
It’s double sad because coal is enjoying its biggest revival ever, putting other producers in the Australian share market on relatively high earnings multiples, while Centennial’s share price has gone south since peaking above $5 in mid-2005. The share price would have halved by now, if it wasn’t for the small chance that somebody might bid for the company – or for its main assets.
At some point in the past two years, resources analysts at ABN Amro stated it all could have been much worse if it weren’t for the highly experienced and highly skilled staff at some of Centennial’s mines.
While that may be true, management is nevertheless likely forced to sell some of Centennial’s future potential in order to continue moving forward. A large part of Centennial’s future upside is closely linked to the company’s Anvil Hill project.
The freshly re-elected NSW government is expected to give approval to the project anytime soon now. However, the question is can Centennial finance the project on its own?
It is widely expected the company will sell a big stake in the Anvil Hill project to a partner in order to financially secure it. However, this will not mean that all the negative news is soon to be replaced by positive announcements.
Already the first indications are appearing in analyst reports that the start up of Anvil Hill is likely to be delayed.
And worse scenarios are still possible.
Till next week!
Your cautious as ever editor,
Rudi Filapek-Vandyck
(as always supported by the Fab Three: Greg, Chris and Terry)