Excerpts from RHB Research report

Sizable ramping up in coal production ahead. Golden Energy and Resources (GEAR) has a track record of increasing its thermal coal production by a CAGR of 32% 2010-2016 to 9.5m tonnes in FY16. The company plans to ramp up Borneo Indobara’s (BIB) coal production to 13m tonnes in 2018, 22m tonnes in 2020 and 40m tonnes from 2023 onwards.

bigmachine4.17@ Golden Energy's mine: Overburden removal is carried out in order to reach the coal seams. NextInsight file photo. To ensure it meets its coal 
production targets, GEAR appointed two coal industry veterans Mr Bonifasius and Mr Utoro as the president director and director of its 66.9%-owned subsidiary, Golden Energy Mines (GEMS IJ, NR) effective 1 Jan 2017. Mr Utoro was formerly Kaltim Prima Coal’s (KPC) chief operating officer and instrumental in increasing that company’s coal production to >60m tonnes pa (mtpa) from 2 mtpa.

Large coal reserve supports its plan to ramp up production. GEAR is one of the largest thermal coal reserve owners in Indonesia, with 2bn tonnes of thermal coal resources and 780m tonnes of thermal coal reserves as at 31 Dec 2016. Most of its coal production, coal reserves and earnings come from BIB, with its coal mine sites located in South Kalimantan.

Target price: 71 c
Initiate coverage with a BUY call and DCF-derived TP of SGD0.71, which implies 14.7x FY17F and 12.4x FY18F P/Es respectively. A key main catalyst is the substantial earnings growth going forward due to a sizable increase in coal production. Key risks to our call include execution risks in ramping up coal production, weaker-than-expected coal demand and price, as well as regulatory risks.

Low cost thermal coal mining producer. GEAR has a low stripping ratio with the average life of a mine stripping ratio at BIB’s concession areas ranging from 3-6x. According to the independent qualified person’s report and valuation issued by Salva Resources Pty Ltd (Salva Resources), a global exploration, mining and commodities consultant, the average total operating cost over BIB’s life of mine is USD17.31 per tonne of coal (excluding royalty).

Golden Energy: 44 c

KGI target: 
76 c

RHB target: 
71 c

Strong support from stakeholders. GEAR through its subsidiary Golden Energy Mines, has a 25-year offtake agreement to sell up to approximately 217.5m tonnes of coal to GMR Coal Resources Pte Ltd (GMR), a leading infrastructure group in India. On top of that, GEAR as part of the Sinar Mas conglomerate, should benefit from its synergy with the other companies under this group.

Jetty4.17This is the 800-m jetty of GEAR on which runs conveyor belts transporting its coal from stockpile to barges. NextInsight file photo.Excerpts from KGI Securities report

Joel Ng (photo)

Valuation & Action

Seriously undervalued – GEAR’s current price assumes long-term coal price of US$35/tonne and a US$22/tonne cash cost. This price would mean a 20% discount to the 8-year 4200kcal Indonesian coal price average and a US$22/tonne cash cost (it achieved US$21 in 1Q17 and US$20 in FY16) to arrive at GEAR’s current share price (see Figure 3 for the DCF calculation).

We believe these assumptions seriously undervalue GEAR’s long-term potential given its free cash flow generating capabilities and track record in consistently increasing its coal production every year over the past five years. We maintain our BUY recommendation with a DCF-derived TP of S$0.78. 

Decline in coal prices due to weaker demand/increased production from China and India. Regulatory risks in Indonesia, which we believe is offset by GEAR’s strong Indonesian parentage. 

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