Investors warm to Centennial's Powercoal deal

INVESTORS continue to lap up Centennial Coal's latest growth play with the company's shares climbing by as much as 5% last week.

Stephen Bell

Sydney-based Centennial unveiled its $331 million Powercoal acquisition in late July, and its shares initially slid 4% to $1.68 when the stock was reinstated on the ASX in early August.

But it has been one-way traffic since then, with the shares up 8 cents this morning at $1.95, just off the day's high of $1.97.

It is a major thumb's up for the Powercoal deal and a boon for shareholders who are able to pick up new stock in the current rights issue at $1.55 per share.

The issue is the second stage of the group's $100 million equity raising for the Powercoal deal.

The first part, an institutional book build, closed over-subscribed a few weeks ago.

Institutions have warmed to the deal, which will nearly treble Centennial's annual coal output to 14 million tonnes, boosting profits by around 60% over the next couple of years.

Centennial also becomes a key energy player in New South Wales, fuelling around 30% of the state's electricity supply.

The market also seems sanguine about the $425 million debt component of the deal, which has caused gearing levels to balloon to 53%.

Centennial managing director Bob Cameron defends the increased borrowings, pointing out the company's revenues are now mostly protected by long-term Australian dollar supply contracts to domestic power stations.

"We think it is a relatively conservative gearing, given the lack of risk factors," he said.

Cameron also insists there is plenty of blue sky left, with a pipeline of development projects (such as the $200 million Mandalong longwall mine near Newcastle) and flexibility to shunt marginal output into the export market.

"Thermal prices in Australian dollar terms aren't so bad at the moment, so there are still quite good returns from the export market," he said.

"But I think our first priority is to honour these new domestic contracts, and put a lot of time into improving our cost competitiveness," he added.

"We would then be in a strong position to increase our presence in the export market, pro rata." -

* See the September issue of Australia's Longwalls for a detailed profile on Centennial and its Powercoal deal.

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