Austral Coal has announced the formation of a strategic alliance...

Austral Coal has announced the formation of a strategic alliance with Hong Kong based commodities trading house, Noble Group Limited. A key feature of the alliance is the placement of up to $15 million of new Austral shares to Noble. This will have the effect of alleviating near term financial pressures which we had seen as an increasing risk associated with investing in the Austral Coal Convertible Notes.

"Austral Coal has reduced the financing risks associated with its expansion plans and should enjoy a strong market re-rating when it achieves the forecast higher levels of production."

Austral is a NSW based export coking coal producer that is well advanced in a major expansion of production from its Tahmoor colliery that will drive higher operating margins and stronger earnings. Austral is very attractively priced relative to its medium term earnings potential. However, recent production delays have resulted in reduced levels of earnings and cash flow for Austral, placing the funding for the expansion at risk. The latest equity raising mitigates this risk.

The New Alliance
Last week Austral Coal announced the formation of a strategic alliance with Hong Kong based commodity trading house, Noble Group Limited. Key features of the deal are:

Noble will invest up to $15 million via a placement of Austral shares at 78 cents (a small premium to recent trading levels)
Noble and Austral will enter a seven year coal sales contract covering six million tonnes of coking coal.
Noble becomes the exclusive agent for the sale of 6Mt of coking coal, at prevailing market prices, over the next 7 years. This represents 60% of the incremental production resulting from the expansion of Tahmoor, or around one third of total annual sales. Noble should provide access to new, potentially higher margin markets. Additionally Noble will handle a thermal coal sales for Austral, although these are not significant.

Completion of the capital raising reduces Austral's gearing level, which had been looking somewhat stretched. While it dilutes the existing shareholders slightly, it still leaves the company attractively priced based on prospective earnings ratios - potentially around 5 times earnings. This "discount" to the market should dissipate as execution risks associated with the expansion pass.

The combination of recent coking coal contract price rises of US$10-12/tonne and Austral's favourable currency hedging position provides additional comfort for investors