Continental Coal Has Improved Its Outlook

Continental Coal may have turned the corner after a difficult period in which a one-fifth decline in the thermal coal price pressured its balance sheet and sent it in search of an equity partner. South African Coal Report has the details.
 
May 20, 2013 - PRLog -- Continental Coal, the Australian-listed coal producer company, is still seeking a strategic investor to help finance its De Wittekrans project in South Africa's Mpumalanga province and deemed by CEO Don Turvey 'a company-maker'.

But having attracted Johannesburg's Village Main Reef into the company, which recently completed the purchase of some 100M shares in Continental, the outlook for the firm is vastly improved. What a difference six months, and some frantic corporate engineering, makes.

Main Reef, which could take up to 19.9% in Continental, will have been heartened by its March quarter performance in which there was record run-of-mine (ROM) production of 0.632mt, a one third increase over the previous quarter.

Turvey said the investment by Village Main Reef would strengthen the company's growth strategy and operating credentials in South Africa.

"Funds raised under the transaction will be used by the company towards debt reduction, working capital and overall strengthening of the company's balance sheet," he said.

Analysts were impressed with the turnout for the quarter.

"Certainly not a bad quarter in this challenging coal price environment with record ROM coal production and all three operations generating positive operating cash flow," Investec Securities said in a note to clients.

Continental's operations include the ageing Vlakvarkfontein and Ferreira mines as well as Pemunbra, a project nearing completion and therefore likely to take further stress off the company's balance sheet.

Investec said Vlakvarkfontein, which produces only domestic coal, generated a respectable $6m profit, and attention was now turning to overall positive cash generation at the company.

"The key measure will be when the company actually generates overall cash flow net of all capital requirements, and with Penumbra now 95% complete, Continental Coal should be nearing this point," it said.

Total thermal coal sales were 0.464mt with export sales of 0.114mt. This left cash of $6.2M against $1.2M at the end of the second quarter. Even Penumbra generated positive cash flow in its first full quarter of production.

UK-based brokerage Whitman Howard said the quarterly update for the South African thermal coal producer was encouraging.

But "falls in thermal coal prices and currency movements meant that revenues fell 4.1% on the previous quarter," it said, adding that it thought Continental was running to stand still owing to the market pressures.

The muted forecast regarding thermal coal prices is therefore a driver in financing De Wittekrans, believed to be the best quality resource under Continental's portfolio.

The company said it was talking with potential strategic partners, including Indian power companies and "major global commodity trading groups", with a view to a potential long-term offtake agreement, strategic partnership and funding of, or a joint venture in, the De Wittekrans project.

"As at the end of the quarter, these discussions and negotiations are continuing with the greater focus being on finalisation of a transaction on the De Wittekrans coal project," it said in its third quarter production results announcement.

The aim is to first fund an initial seven-year open cast mine which would then generate enough cash to support the development of a subsequent 30-year underground mine with 3.6mtpa in output.

In the meantime, Continental said it continued to wait for a new order mining right from the South African Government as well as an integrated water use licence at De Wittekrans.

Continental also has three exploration properties that it is prospecting in Botswana. One is north of the Morupule Coal Mine, Botswana's only fully-fledged coal producer and two are near the Mmamabula coal fields in which Jindal Steel and Power has a presence after buying Toronto's CIC Energy last year. Anglo American also recently won the right to develop in the eastern part of the Mmamabula coal field.

"The company anticipates finalisation of one of the joint venture agreements in Botswana coal projects to be completed in the current quarter," Continental said in its results presentation.

For more news and analysis on the coal industry of southern Africa, subscribe to Energy Publishing’s South African Coal Report.  South African Coal Report provides the most comprehensive analysis along with price, trade and tender information on this important coal producing region.  Contact us at epi.coalinfo@ihs.com or visit http://www.coalportal.com for a free copy.
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Tags:Continental Coal, Asx, South Africa, Coal Price, Mining
Industry:Investment, Energy
Location:Mpumalanga - South Africa
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