SDJ1.16aCoal mining operations started in Dec 2015 at the SDJ mine in South Kalimantan. Photo: Company
Excerpts from NRA Capital's report

Analyst: Liu Jinshu

Enters into coal purchase agreement with adjacent mine. Geo Energy announced on 31 October entry into an exclusive agreement to acquire the output from 259.5 hectares of an adjacent 773.1 hectares coal mine (AJE Mine), with an estimated 5m tonnes of coal reserves to be mined out in 2017.

Secondly, Geo Energy will also provide mining project management services to the AJE Mine, thus earning project management fees from its neighbour. The AJE mine is located beside Geo Energy’s SDJ coal mine, running on the same coal seam with similar calorific value of 4,000 to 4,200 GAR.

These agreements and the Coal Offtake Agreement for the SDJ Mine entered into in July this year for 6m tonnes of coal in 2017 means that Geo Energy may sell up to 11m tonnes of coal next year, versus 0.85m tonnes in 2Q FY16 for profit after tax of US$4.24m.


TungKumHon2tb 1.2016Tung Kum Hon was appointed Geo Energy's CEO on 1 Nov 2015 and joined its board in Dec 2015. NextInsight file photo

3Q was a strong quarter for Geo Energy. Based on the company’s slides at the end of September, we can expect Geo Energy to sell 1.6m tonnes of coal in 3Q16, of which 0.9m tonnes was achieved in the month of September alone on average selling prices (ASP) of US$31.92/tonne in August and US$35.35/tonne in September, or approximately about 2.5% below the Indonesian Coal Index reference price for coal of 4200 GAR.

Geo Energy
Share price: 
21.5 c
Target: 
31 c

Based on the data provided, the estimated average selling price in 3Q16 is about US$33.50/tonne. Given costs of US$24/tonne, we can expect cash profit of about US$29.5m for whole of 3Q. After deducting for depreciation and operating costs, we expect 3Q PATMI of about US$5.4m.

§ Revising forecasts higher on sustained higher coal prices. The price of FOB Kalimantan 4,200 kcal/kg GAR coal has since risen to US$46/tonne today. In our revised forecasts, we expect ASP of US$35/tonne in 4Q or at a steep discount of about 24% from current prices to incorporate some safety buffer against coal price risk. Cash cost is assumed to increase by about 5% to US$25.2/tonne.

Consequently, we expect 4Q FY16 PATMI to be about US$10.5m, bringing estimated 2H FY16 PATMI to US$15.9m, up by more than 100% from our previous estimate of US$7.86m. For FY17, ASP of about US$35.3/tonne, cumulating in PATMI of US$29.55m! 

 

Recommendation. We are mindful that Geo Energy’s share price has almost doubled since our initiation of coverage. However, sustained coal price growth suggests that Geo Energy will continue to outperform in 3Q and 4Q 2016. In addition, risks are now substantially lower as the company’s improving profitability has substantially the refinancing risks associated with its borrowings. However, we caution that its share price may now be subject to higher volatility given higher share trading volume recently."

-- Liu Jinshu,
NRA Capital analyst

§ Maintain Overweight (High return / high-average risk). The updated forecasts have pushed our free cash flow valuation of Geo Energy to S$0.310, valuing the company at US$3.5 per tonne of coal reserves at SDJ and TBR. This valuation is based on a conservative estimate of 7m tonnes of output in FY17, 8m tonnes in FY18 and 10m tonnes per year from FY19 to FY24.

Hence, we have only factored in partial contribution from TBR and AJE. In this update, we reposition Geo Energy from high risk to high-average risk while maintaining the high return view. While its share price has almost doubled since our coverage, the turnaround in 2Q and high volume growth in 3Q has substantially reduced risks associated with its borrowings.

Full report here

 

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