The big news
Coal producers in Indonesia have never had it so good, as far as the selling price of their product goes.

For Singapore-listed Geo Energy and Golden Energy & Resources, the price of 4,200 GAR coal -- the grade of coal they produce -- has been on a relentless upsurge since the start of 2021.

That has taken it over the US$100 / tonne level last week.


Coal futuresOct2021Coal futures (Oct, Nov and Dec 2021) have crossed the US$100/ tonne level.
For more, see SGX website and cme.com.


For perspective:

coal pic• Geo Energy's average selling price in 1H2021 was US$40.97 per tonne. In that period, the ICI4 index (a proxy for 4,200 GAR coal) was US$47.78 / tonne.

• Geo Energy reported net profit of US$48.5 million in 1H2021.

Coal producers

Stock price

1HFY21
net profit

Market cap

Geo Energy

25 cents

US$48.5 m
(S$65.6m)

S$350 m

Golden Energy

30.5 cents

US$29.1 m
(S$39.4 m)

S$718 m

* Data as of 24 Sept 2021.

 

Geo Energy is a pure coal play while Golden Energy & Resources is not only into thermal coal but also coking coal and gold.

Its coking coal and gold businesses were loss-making in 1H2021 as they were in phases of expansion and not producing optimally.

Back then, coking coal prices were depressed as well.

Add to that, Golden Energy incurred one-off financing costs of US$10.5 million related to a bond transaction.

• Golden Energy's average selling price for thermal coal in 1H2021 was US$42.56 per tonne. The coal is produced by its 62.5%-owned PT Golden Energy Mines.

• Golden Energy reported net profit of US$29.1 million in 1H2021.


In 2H2021 not only has thermal coal prices risen strongly but also coking coal (for making steel), which will benefit Golden Energy's 60%-subsidiary, Stanmore Resources(See: 
Coking coal price hits record highs as Chinese steel-makers face pain )

METCoking coal is an essential ingredient for making steel.

Stanmore's stock which is listed in Australia has, accordingly, gone up about 31% to 91 cents since 1 July 2021. 

The large impact

The sharply higher prices of thermal coal will also pull up the cash cost of production of Geo Energy and Golden Energy but it will be insignificant relative to the magnified profitability.

How magnified will profits be?

Every 1 million tonnes brings in US$1 million extra revenue for every US$1 rise in selling price.

With selling prices up US$50-60 per tonne over the 1H2021 average, the impact is simply humongous.

Just consider the tonnage that Geo Energy and Golden Energy are targeting to produce: 

Coal producers

1HFY21
(actual tonnes)

2HFY21
(potential tonnes)

2021 production quota*

Geo Energy

5.3 m

6.2 m

11.5 m

Golden Energy

16.6 m

23.0 m

39.6 m

* Quotas approved by Indonesian government



Why the surge in thermal coal price

Thermal coal's upswing has been driven by heavy rains in coal-producing Kalimantan as well as China-Australia geopolitics: 

"A state of emergency has been declared in South Kalimantan's Tanah Bumbu regency until 17 September because of heavy rains and flooding. The rains have also disrupted coal logistics in other parts of Kalimantan. The diversion of cargoes to the domestic Indonesian market after authorities enforced producers' supply obligations is adding to the squeeze.

"The support to current market fundamentals also stems from China's ban on Australian coal imports, which has distorted thermal coal trade flows and created unprecedented price imbalances in the market."

-- Argus Media article (7 Sept 2021) 

Given the above factors supporting the surge in coal price, a reasonable question is of course how sustainable the current prices are.

In addition, it is not known yet if, specifically, the rains and flooding have impacted Geo Energy and Golden Energy.

In a couple of weeks, the 3Q results updates should provide some colour on the situation. 

See: Rain and equipment woes to cap Indonesia coal output

Beyond the near term, there are compelling investor views that coal price could reach even higher over a number of years because:

• financing for coal exploration and projects has dried up in recent years due to climate change concerns, and

• demand for coal as a cheap source of power continues to stay elevated especially in developing countries while renewable energy from solar and wind is still in its infancy.  



See also: 
• GOLDEN ENERGY AND RESOURCES: 64-cent target in KGI initiation report


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