Chairman's report
Coal & Allied reported a record financial result in 2008. This was attributable to record coal prices and changing our sales mix to maximise revenue.
Results
Coal & Allied's net profit after tax was $804 million compared with $110 million in 2007.
We finished the year with net cash of $523 million compared with net debt of $312 million at the end of 2007. The strength of our balance sheet enabled us to increase the final 2008 dividend to 550 cents per ordinary share. Together with the interim dividend of 160 cents per share the dividend for the full year was 710 cents per share, compared with the full year dividend of 25 cents per share in 2007. All dividends were fully franked at the rate of 30 per cent.
The Coal & Allied share price at the date of preparing this report was $83.00 which is higher than the 2007 closing price of $75.25. The share price fluctuated between $71.00 and $120.00 throughout the course of 2008, although trading was on very thin volumes.
Strategy
Coal & Allied seeks to be the leading Australian export thermal and semi-soft coal producer in terms of operational, financial and ethical performance. Coal & Allied's existing three coal mines and its undeveloped projects are based on a world class resource base.
In 2008 significant progress was made against agreed strategic targets. During 2009 there will be increased focus on reducing costs, resolving infrastructure issues and advancing growth projects towards a state of development readiness.
Markets
Global demand for thermal and semi-soft coal increased dramatically in 2008, which resulted in Japanese benchmark prices rising to US$125/t for thermal coal and US$240/t for semi-soft, increases of 120 per cent and 270 per cent respectively from the previous contract year.
During 2008 we increased our production of semi-soft coal by 37 per cent to take advantage of the significant premium that existed in this market. However, we saw global growth stall in the fourth quarter of 2008 and this will have an impact on demand for our products in 2009. Currently, thermal coal demand remains relatively strong, however global steel demand has weakened considerably and as a consequence the price premium for semi soft coking coal over thermal coal is likely to narrow in 2009. Accordingly, our production profile in 2009 will likely have a lower proportion of semi-soft coking coal.
Infrastructure
Coal & Allied remains constrained by the infrastructure issues that have plagued the industry in the Hunter Valley for the past several years. Late in 2008 the New South Wales Government announced a proposed long term solution, which it anticipates having in place by mid 2009. This solution includes the ability for producers to sign long term contracts, and a proposal for the construction of a fourth coal terminal at the port of Newcastle. The Australian Consumer and Competition Commission (ACCC) has authorised the extension of the existing Capacity Balancing System at Port Waratah Coal Services (PWCS) until the end of March 2009, on condition that the ACCC is satisfied that work on a long term solution is progressing.
Meanwhile, the Australian Federal Government has announced $1 billion in funding to the Australian Rail Track Corporation to increase rail track capacity in the Hunter Valley. Additionally, the expansion by PWCS to 113 Mtpa is continuing, with its completion in September 2009 facilitating increased capacity. Studies have also commenced for a further expansion of PWCS to 145 Mtpa.
Although, the infrastructure issues are not yet fully resolved we support the New South Wales Government's proposed long term solution. We look forward to these measures which should ensure that there will be sufficient capacity and infrastructure throughout the entire coal chain to accommodate current and future production for all producers.
Projects
At last year's Annual General Meeting I spoke of Coal & Allied's plans to potentially double production by 2015. Much work was carried out during the second half of the year into assessing potential greenfield and brownfield projects. Given some current uncertainties in global markets, our priorities are now focussed on maximising cash flow and managing our costs until such time as there is greater confidence in the market outlook and rail/port infrastructure capacity to support the further development of our extensive reserves and resource.
In 2008, Coal & Allied continued work on an engineering feasibility study on the Mount Pleasant thermal coal project located adjacent to the Bengalla coal mine near Muswellbrook in the Hunter Valley. The study determined that the mine was economically attractive but greater certainty regarding coal chain infrastructure in the Hunter Valley is required before committing to the development of this project.
In a Memorandum of Understanding with the New South Wales Government, we have proposed to transfer 80 per cent (4,180 hectares) of surplus land in the Lower Hunter into permanent conservation, on the basis that Coal & Allied develops the remaining land. Coal & Allied's proposed residential development for the southern estate area in the Lower Hunter has been submitted for government review and approval. The concept plans for the northern estates went on public exhibition in February 2009, and will be followed by a submission seeking government approval.
Changes to the board
In January 2008, Doug Ritchie returned to the Board in a non-executive capacity having served as managing director from 2006 to 2007. Mr Ritchie replaced Charles Lenegan, who resigned in January 2008.
In October 2008 we also farewelled Toru Nambu, following which Kaoru Yamanaka was appointed as a non-executive director.
Effective 1 January 2009, Bill Champion was appointed as a director of Coal & Allied and managing director of Rio Tinto Coal Australia ("RTCA") following the resignation of Hubie van Dalsen.
Chris Renwick
Chairman
