second takeover bid rejected, page-8

re: letter from kilmister...cheerful LZ,

I think CPB tried the heavy handed approach, but were very surprised by the level of strong shareholdings in CHL. Although the shareprice has grown rapidly from mid 20's to mid 30's there has really been very little volume for them to accumulate on the market. They realize their goal of a takeover is just not going to happen in the sort of price range they seek.

If you cant get shares on the market, or off the market via a takeover bid the next option is to see if the company would make a share placement. You may have noticed the loose reference to CPB being "willing to gain a greater shareholding by whatever means is available." I believe this was a subtle hint CPB would be willing to provide capital for CCI's growth for a share placement.
The response from the CCI board was to explain to CPB CCI has sufficient cashflow to meet it's bank finance obligations, fund its growth and capex requirements, and pay dividends. Bad luck CPB. CCI doesn't need your money!!!

As far as commenting on CCI's growth, the comments from Mr Kilmister were quite a way off the mark. You need to consider results free from one off abnormals and there were 3 events involved here, all in the second half:

1. The litigation settlement (loss)
2. The closure of the Indonesian engineering fabrication business (loss)
3. The sale of the remaining 50% of the Pluton coal investment in the Ukraine (gain)

The net effect of all three combined was a pre-tax loss of 1.19M. Excluding the effect of this loss the company would have earned 5.23M pre tax, and NPAT of 3.66M.
This represents underlying earnings of 2.75cps.

This can easily then be apportioned as 1.1c in H1 (from the half year report which was free ob abnormal amounts), and 1.65c in H2.

They are the real numbers. Mr kilmister can quote all sorts of numbers but when you boil it down the company is growing profits strongly as indicated by the 74% growth in EBIT.

The much awaited forecast for 06/07 earnings will dispell any suggestion CCI's profits have reached a plateau. In fact the opposite would surely be true as margins and profits will now accelerate on the back of steeply higher coal volumes over the next 18 months.

The risks associated with CHL are very low. the company does not have onerous levels of capital expenditure. CCI is basically a specialist labour supplier. Sure they have to purchase equipment for the technicians to be able to carry out their work, and their laboratories are periodically upgrading the equipment involved in the analytical and sampling processes, but this is a small amount when compared to the costof the labour. CCI spent 34m on employees expenses last FY. Their bill for new plant and equipment was less than 2.5M, so this is not an issue at all.

On the issue of contracts CCI has a very solid reputation built on 15 years of excellence in providing high quality testing services. They basically never lose certification work once they get a contract. Production testing and exploration bore core work is won more on the demand for this work by the mining company's. At present CCI is getting a lot of additions and incremental work associated with contracts already set up. The sector is booming. anyone with a coal mine is trying to get more coal out to benefit from the boom. CCI is brilliantly positioned to benefit from this extra need for technical services.

One threat to CCI is in the area of being able to secure enough skilled labour to provide services to meet the growing demand. Their work in automating more of their processes is helping in this regard. But really this is a pretty good sort of "problem" to have!

the main threat to CCI though is always a major slow down in the coal sector or in the mining sector in general. the global demand for steel looks to be showing signs of being stronger for longer, and CCI's exposure to other industry outside of coal does also lessen it's cyclical nature somewhat.

this investment only really needs time to pass before it will be worth a whole lot more. So just sit back and enjoy the ride mate :)

Regards,

Cheerful.l