Spot thermal coal prices have continued to recover of late, recently reaching $US48/t FOB Newcastle. Goldman Sachs said lower Chinese coal supply, Indonesian coal supply concerns, ongoing Australian port issues, lower South African coal sales, European gas supply concerns and the US energy balance were all good pointers for short-term energy shortage.
“Given the moves in thermal coal prices and given that much of the potential bad news in the results is now ‘known’ we have neutralised our negative short-term recommendations,” the analyst said.
The only long-term recommendation changed was for Felix (from hold to sell) as the analyst regarded the producer’s high construction/project risk in the current market would leave the stock prone to negative news flow.
Just yesterday Felix cut its 2006 financial year profit forecast by half as softening PCI and semi-soft coking coal prices hit home. Felix also has a full expansion book, the producer just finishing up the construction of the Minerva project. The Ashton underground mine is now being developed; and the Moolarben opencut and underground mines are currently in pre-development.
“Felix is largely dependent on project execution to drive its earnings growth over the next two to three years and, as we have seen with Excel, this is certainly not without risk,” Goldman Sachs said.
The analyst was a little less harsh on Centennial Coal, but said the New South Wales producer needed to establish a track record. “Centennial, we think, needs to establish a trouble-free period before we revisit the long-term recommendation.”
Centennial had a troublesome 2005 with the loss of about one million tonnes in production following problems at its Newstan longwall and the closure of the Munmorah mine.
On fellow NSW-producer Excel Coal, Goldman Sachs said it was becoming expensive given its commodity price view. Excel Coal is currently in expansion mode, today receiving the mining lease for its $A116 million Wilpinjong Coal project.
Macarthur Coal was the analyst’s lowest project risk (but higher price risk) compared with its peers, but said this could change with the company’s potential project pipeline. Macarthur’s latest development project is the Olive Downs mine, with a mining lease application submitted in November. Mine development is expected to begin in the December 2006 quarter with targeted production set at one million tonnes per annum over the 10-year life of the project.
