Continental Coal: Against The Wind

Having reported un-audited revenue of AUD 82m and gross profit of AUD 15m, Continental Coal (CCC.AX) enjoyed strong FY12 financial performance, driven by a 94% y-o-y increase in coal sales, robust export pricing and cost cutting. In the meantime, it continues to advance the Penumbra mine – slated for first production in late 2012 – adding c 0.5Mt in high quality export thermal coal. With AUD 15m in cash and AUD 30m in available debt financing, the company is well funded to deliver on its short-term growth plans.

On track to launch Penumbra
Penumbra is the company’s most advanced development project, to be launched in late 2012, gradually replacing the depleted Ferreira mine. The project is 38% complete and is expected to be commissioned on time and on budget. Penumbra is forecast to produce 750ktpa of ROM coal with 500kt of high-quality saleable product destined for the seaborne market and the remainder sold domestically.

Strong FY12, but challenging year ahead
Continental Coal achieved strong financial and operating performances in FY12, driven by growing sales volumes, robust export pricing and cost cutting. Having seen a 94% y-o-y increase in overall coal sales, it reported FY12 un-audited revenue of AUD 82m and gross profit of AUD 15m. While the full-year numbers look solid, the Q412 performance was dented by the deteriorating export coal pricing environment. We expect this weakness to persist through FY13, pointing to a challenging year ahead.

Botswana: A long-term opportunity
The company has recently produced its maiden resource estimate for the Botswana coal projects with JORC-compliant inferred tonnage of 2.2bn tonnes and a combined exploration target of 8.9bn tonnes. Continental Coal’s tests suggest the coal is suitable for both domestic South African and Asian export markets. While the project might be hard to swallow in the current market environment, we expect the company to partner to advance it to the development and production stages.

Valuation: 13p SOTP/share offers healthy upside
Our SOTP yields 13p/share value, a 198% upside from the current share price. Having fallen 62% YTD, the stock performed broadly in line with global resource and coal producers’ equities, which were under pressure on the back of falling commodity prices. We see the near-term key catalysts as financial/operating performance, the Penumbra launch and the De Wittekrans execution decision.

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