the real story - upside long term, page-3

re: the real story - continued During a visit to the Tahmoor mine last week managers tried to be diplomatic about the skills of the Austral team. But it was clear that since Centennial took over and replaced the top managers, there has been a renewed focus on occupational safety and on commissioning the equipment necessary to maximise production.

The shift schedule has changed from the outdated seven-hour, four shift a day system popularised by the union movement in the 1970s to a standard working day of three eight-hour shifts. This has saved 20 per cent in labour costs due to the lack of overlap.

And now the mine has the benefit of being part of a larger group, allowing managers like Taylor to consult the managers of Centennial's other mines to discuss common problems. "We put a lot of focus on the expertise we have throughout the group with respect to mining engineering, geology and engineering generally," Cameron says.

And Taylor is well-aware that Tahmoor is particularly important to the company's financial situation.

"The reality is that if we sneeze, then Centennial's got a cold," Taylor says.

After completing three planned longwall moves this year - each of which costs a month of production - Tahmoor's run of mine output should increase to 2.7 million tonnes next year from 2 million tonnes this year.

Coking coal prices could fall slightly after contract negotiations are completed but are expected to remain strong when they are settled with Asian steel mills early next year.

Because Tahmoor will have delivered on all of its commitments from the Austral days, the mine will finally be able to earn the full contracted price for its coal and be a major contributor to Centennial's profits.

Export thermal coal prices are expected to fall from this year's $US54 a tonne to as low as the $US40 a tonne spot price next year, although most observers expect prices to settle at about $US44-48 a tonne.

But news on Friday that Xstrata had settled for $US40 a tonne with Taiwan Power was not encouraging, although some have questioned the quality of that particular coal.

As for Centennial, most of its coal is sold domestically under long-term contracts to NSW power stations at an undisclosed price below the $US40 a tonne spot price.

Cameron admits there has been an opportunity cost to his company due to those contracts but says when coal prices fall, Centennial's more defensive posture could be an advantage.

"With the export market coming off the boil a bit - more so, of course, in thermal coal - I imagine some investors will say we should look again at Centennial because it's less leveraged to the export prices and does have a very strong underpinning Australian dollar cashflow from these very secure long-term contracts," he says.