Geo Energy Resources Limited - NRA Capital 060816_.pdf · Geo Energy Resources Limited Initiating...

Geo Energy Resources Limited

Initiating coverage 8 August 2016

Overweight

Current Price S$0.103

Fair Value S$0.225 Up / (downside) 118%

Stock Statistics

Market cap S$124.9m

52-low S$0.090

52-high S$0.205

Avg daily vol 9,717,258

No of share 1,212.3m

Free float 36.25%

Key Indicators

ROE 17F 11.48%

ROA 17F 4.71%

P/BV 1.0

Net gearing 80.8%

Major Shareholders

Dhamma Surya 46.8%

Charles Antonny Melati

7.88%

Historical Chart

Source: Bloomberg

Recovery of Coal Price Brings Geo Energy Back to Focus

High return / high risk. We expect Geo Energy Resources Limited (Geo Energy) to report PATMI of US$1.4m for 2Q FY16 and US$6.7m for FY16 following a net loss of US$2.6m in 1Q16. The turnaround is supported by a ramp up in production volume to 1.0m tonnes in 2Q16 and 5.5m tonnes in FY16, and higher coal prices since 2Q 2016, as major coal mining countries cut back on production thus resulting in a supply shortfall. We value Geo Energy at around 2.2x P/BV or S$0.225 per share, representing upside of 118%. Key risks arise from Geo Energy’s leverage at 80.8% as of 31 March 2016 and potential placement on the Watch List due to the minimum trading price criteria. On balance, we rate Geo Energy Overweight with a high return/high risk classification.

Coal prices rebounded amidst sharp production cuts. Global production coal has fallen thus far in 2016. China, in particular, plans to reduce coal capacity by 750m tonnes by 2020 and will be sending inspection teams to local governments to enforce these capacity reductions. The decline in domestic production has led to higher coal imports to China and higher prices. As larger miners cut back production at peripheral mines, we hold the view that coal prices may have stabilized after five years of decline.

Geo Energy’s low sulphur, moderate ash coal attracted US$1.2 billion offtake agreement. Geo Energy’s coal is relatively low in calorific value, but has extremely low levels of sulphur and ash. China has banned the import of high sulphur and high ash coal, in spite of their calorific value. Geo Energy’s coal is useful as blend stock to meet these regulatory requirements. Geo Energy has shipped about 1.5m tonnes of coal in 1H 2016 and has recently obtained a US$1.2 billion offtake agreement over the life of its SDJ mine, pointing to robust demand for Geo Energy’s products.

New TBR acquisition to provide additional upside. Geo Energy is currently in the midst of completing the acquisition of an adjacent concession holding another 41.6m tonnes of coal reserves. This acquisition allows us to project total group coal output of 79.48m tonnes from FY16 to FY24, thus justifying the upside presented.

Prospective turnaround makes for reasonable investment case. During 1Q16, Geo Energy’s ASP was about US$24.52/metric tonne. Benchmark prices of similar coal products reached US$29.58/metric tonne as of 25 July 2016. Should the supply shortfall continue, we may see coal prices rising further. However, we remain conservative and assume an ASP of US$26.00/metric tonne for 2Q16. Based on an ASP of US$30/metric tonne, we further project that Geo Energy may make US$13.86m in FY17F, translating to a forward P/E of 7.4x. Given the upside potential, we initiate coverage on Geo Energy.

Liu Jinshu

(+65) 6236-6887 [email protected] www.nracapital.com

Key Financial Data

(US$ m, FYE Dec) 2015 2016F 2017F 2018F 2019F

Sales 22.34 150.81 180.00 240.00 330.00

Gross Profit 0.40 18.10 30.30 36.81 71.43

Net Profit -16.31 6.69 13.82 17.31 43.14

EPS (cents) -1.39 0.50 1.04 1.30 3.25

EPS growth (%) nm nm 106.4 25.3 149.2

PER (x) nm 15.3 7.4 5.9 2.4

NAV/share (cents) 7.90 8.53 9.57 10.88 14.12

DPS (cents) NA NA NA NA NA

Div Yield (%) NA NA NA NA NA

Source: NRA Capital forecasts

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http://www.nracapital.com/


Company Background

Geo Energy is primarily a coal producer. It owns two mining concessions via its wholly owned subsidiaries PT Bumi Enggang Khatulistiwa (BEK) and PT Sungai Danau Jaya (SDJ) in Kalimantan, Indonesia. Geo Energy’s current focus is on the extraction of coal from SDJ, which has higher calorific value. In December 2015, it commenced mining at SDJ, earning revenue of about US$11.9m from the extraction of 484,836m tonnes of coal during 1Q 2016.

The company has also announced in July the proposed acquisition of a new coal concession held via PT Tanah Bumbu Resources (TBR) for a total consideration of about US$90m. This acquisition is expected to be completed before 18 July 2017, based on the long-stop period of 12 months from the date of the agreement.

Figure 1: View of SDJ and TBR Concessions

Source: Company, NRA Capital


Coal Market Shows Signs of Stability

Production fell in 2015 following five years over lower prices. Over the last five years, coal prices have taken a beating, with the Indonesian Coal Reference Price (HBA Marker 6,322 kcal) falling by 60% from US$127.05 per tonne in February 2011 to a low of US$50.92 per tonne in February 2016. In turn, coal production growth has slowed to 0.1% in 2014 and fell by 4.0% in 2015 to 3.8 billion tons of oil equivalent. On the other hand, consumption fell by only 1.8% in 2015.1

Figure 2: Indonesia Coal Reference Price HBA Marker 6,322 kcal

Source: Bloomberg, NRA Capital

Figure 3: Global Coal Production


Lower production at just five countries USA, Indonesia, China and Australia accounted for close to 90% of the lower production in 2015. Production in Indonesia fell the most in percentage terms, or 14.4% to 241.1m tons of oil equivalent. Coal production fell by 10.4% in the United States, followed by 4% in Australia and 2% in China. Together, these countries accounted for 73% of global production in 2015, with China alone accounting for 47.7% market share.

1 http://www.bloomberg.com/quicktake/confronting-coal

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Figure 4: Change in Coal Production in 2015, Selected Countries


Decline in production accelerated to 9.7% in 1H16 in China. The decline in production in China appears to have accelerated in 1H 2016, dropping by 9% or 161.4m metric tonnes year-on-year to 1,628m metric tonnes by volume. The decline in production accelerated in 2Q 2016 when output fell by 14.8% and 15.1% year-on-year in May and June respectively. In turn, consumption has dropped by a slower rate of 5.1% in 1H 2016.2 For the full year, China’s National Development and Reform Commission (NDRC) plans to reduce coal production capacity by 280m metric tonnes or by about 7% to 8% over 2015.3

Mine closures have helped to reduce production. The decline in production in China comes amidst the government’s plan to reduce overcapacity in the coal and steel sectors. According to the China National Coal Association, China had around 11,000 coal mines in operation by the end of 2015, with a total capacity of 5.7 billion tonnes.4 The NDRC in turn plans to close 4,300 mines over the next three years and cut annual production capacity by 750m tonnes by 2020.5

Efforts being put in place to ensure capacity cuts. On 5 August, Chinese media Xinhua reported that the authorities are not satisfied by the progress of overcapacity reduction, citing that a temporary price recovery has impeded efforts to shut down production. Apparently, some regions have not begun the process of retiring excess capacity. 6 In turn, inspection teams will be sent to local governments to oversee capacity cuts starting from mid-August.

Domestic cuts have in turn raised imports. Amidst the reduction in domestic production, China imports of coal has increased by 8.2% in 1H 2016 to 108.0m tonnes. The increase was the sharpest in May and June when imports grew by 33.5% and 31.0% year-on-year respectively, most likely due to inventory restocking. Therefore, we can deduce that the production cuts in China has been steeper than the reduction in consumption, thus leading to a short term supply shortfall even as the government cuts back on structural excess capacity.

Production fell in USA too. Amidst lower coal prices, coal consumption in the US fell by 20.5% year-on-year while coal production fell at a faster rate of 30.4% during the first four months of 2016. While coal production has risen by 23.9% from 46.0m short tonnes in April 2016 to 57.0m short tonnes in June 2016, we reckon that the increase has been seasonal as production remains 14.2% lower year-on-year in June 2016.

2 http://news.xinhuanet.com/english/2016-08/05/c_135567331.htm

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Figure 5: China Coal Imports, Change Y-o-Y

Source: http://www.customs.gov.cn/, NRA Capital

Figure 6: USA Coal Production and Consumption

Source: http://www.eia.gov/totalenergy/data/monthly/pdf/sec6.pdf, NRA Capital

Signs of more stable coat prices. The reduction in coal output in 2015 and thus far in 2016 has cumulated in more stable coal prices. The benchmark thermal coal price (Indonesian Coal Reference Price HBA Marker 6,322 kcal) has risen in five out of the past six months. The last time coal prices exhibited a similar trend was in 4Q 2013 to 1Q 2014 when coal prices rose in four out of five months. Back then, coal prices were in the range of US$76 to US$82 per tonne. We are of the view that sustained production discipline with the shutdown of inefficient mines will help to halt the slide in coal prices.

Low cost coal miners to benefit longer term. A number of US based coal mining companies have declared bankruptcy since April 2015 back when the Indonesian reference price was US$64.48 per tonne. We are mindful of these developments, but maintain the view that stable coal prices provide conditions for low cost coal miners to sustain and grow while large miners continue to cut back on production at peripheral mines and reduce excess capacity.

3 http://www.bloomberg.com/news/articles/2016-07-15/china-s-oil-coal-output-slides-in-sign-of-more-imports-to-come 4 http://uk.reuters.com/article/china-coal-closures-idUKL3N1551R4 5 http://www.platts.com/latest-news/coal/hunan-china/china-coal-mining-capacity-to-be-cut-by-280-mil-26479203 6 http://www.scmp.com/news/china/economy/article/1999598/beijing-struggles-local-governments-industrial-overcapacity

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Geo Energy Nearing Turnaround

1Q16 results provide visibility about cost structure. During 1Q16, Geo Energy generated revenue of U$11.89m from coal mining of 484,836 metric tonnes and US$0.92m from the provision of mining services. The mining services business generated a gross loss of US$0.43m while coal mining (from SDJ) generated a positive gross profit of US$0.28m, leading to an overall gross loss of US$0.15m.

Based on the preceding information, we can infer that Geo Energy’s average selling price was about US$24.52 per metric tonne. Cash operating cost was about US$21.44 per metric tonne (US$10.4m in 1Q16), leading to an operating margin of US$3.08 per metric tonne (US$1.49m in 1Q16). This represents a reasonable cash margin of 12.6% over revenue.

The low gross profit of US$0.28m (gross margin of 2.3%) was mainly due to non-cash depreciation and amortisation of U$1.2m charged to coal mining. Another US$0.79m of depreciation and amortisation expense was charged to the mining services segment that was sold off at the end of 2Q16.

Higher prices and tonnage to improve margins in 2Q. The 0.5m tonnes of coal sold in 1Q16 were due to the 1.5m metric tonnes offtake agreement with BTG Pactual Commodities (Singapore) Pte Ltd that was entered into in July 2015. The remaining 1m tonnes of coal has since been shipped by June 2016.

Assuming ASP of US$26 per tonne, we can expect Geo Energy to make revenue of about US$26.00m in 2Q16 and gross profit of US$2.05m from coal mining alone. In addition, Geo Energy has disposed its mining services business for US$10m at the end of 2Q16, which is expected to generate a gain of about US$2.8m. Consequently, we estimate that Geo Energy will likely make a net profit of US$1.42m for 2Q16 (See Figure 8).

Figure 7: Argus/Coalindo Indonesian Coal Index (4,200 GAR / 3,800 NAR)

Source: Geo Energy Presentation Slides dated 29 July 2016, NRA Capital


New Offtake Agreement Secures Long Term Cash Flows

New offtake agreement to provide upside from 3Q onwards. Another good news is that Geo Energy has secured an offtake agreement with Engelhart Commodities Trading Partners (Singapore) Pte. Ltd. (formerly known as BTG Pactual Commodities (Singapore) Pte. Ltd.). Under the offtake agreement, Geo Energy will sell at least 4.0m tonnes of coal to Engelhart during the second half of 2016 and 6.0m tonnes of coal in 2017. Thereafter, Engelhart will offtake a minimum of 4m tonnes of coal per year over the remainder of the life of mine.

Background of counterparty. BTG Pactual is actually a leading financial institution in Brazil with a common equity and tier 1 capital ratio of 13.4%. In comparison, our local banks have a common equity and tier 1 ratio of 13% to 15%. The BTG Pactual Group listed in Brazil has a market capitalisation of about US$5.2 billion. Earlier in April this year, BTG Pactual renamed its commodities trading business as Engelhart under its plan to spin off the latter. The size of BTG Pactual gives us comfort in relation to the counterparty risk undertaken by Geo Energy.

Assuming slightly higher average selling price of US$28.00 and US$30.00 per tonne in 2H FY16 and FY17 respectively, we expect Geo Energy to make net profit of US$7.86m and US$13.82m in 2H FY16 and FY17. We have factored in slightly higher cash cost in FY17 to take into account higher strip ratio over time. Our forecasts are relatively conservative as Geo Energy expects the TBR mine to commence contribution in 2017 and boost production to 10m tonnes, as opposed to our forecast of 6.0m tonnes.

Figure 8: Review of 1Q16 Results and Forecasts

Coal Mining Mining

Services Total

1Q FY16 2Q FY16F 2H FY16F FY16F FY17F Volume (metric tonne) 484,836 484,836 1,000,000 4,000,000 5,484,836 6,000,000 Revenue (US$ m) 11.89 0.92 12.81 26.00 112.00 150.81 180.00

Average selling price per tonne (US$/t) 24.52 NA NA 26.00 28.00 NA 30.00 Cash cost of sales -10.40 -0.56 -10.95 -21.44 -85.76 -118.15 -134.64

Cash cost per tonne (US$/t) -21.44 -21.44 -21.44 NA -22.44 Depreciation and amortisation -1.22 -0.79 -2.01 -2.51 -10.04 -14.56 -15.06 Gross profit 0.276 -0.429 -0.15 2.05 16.20 18.10 30.30 Other income 0.50 2.80 0.00 3.30 0.00 Interest income 0.55 0.55 1.09 2.19 2.19 General and admin expenses -1.46 -1.46 -2.93 -5.86 -6.15 Other expenses -0.24 -0.09 -0.19 -0.53 -0.53 Finance costs -1.85 -1.85 -3.69 -7.39 -7.39 Profit before tax -2.66 1.99 10.48 9.81 18.42 Income tax 0.06 -0.50 -2.62 -3.06 -4.61 MI 0.01 -0.07 0.00 -0.06 0.00 PATMI -2.59 1.42 7.86 6.69 13.82 Gross margin -1.2% 7.9% 14.5% 12.0% 16.8%


Assume modest increases in ASP – in line with currently higher prices of close to US$30/tonne

Based on unit of production method. Each tonne of coal = US$2.51 of depreciation.

Assume 5% increase in administrative expenses in 2017. Most other costs are expected to remain constant. Other expenses are expected to be lower from 2Q FY16 onwards. 1Q’s net profit was dragged lower by US$1.9m of net foreign exchange loss. Following depreciation of 10.3% in 2015, the IDR appreciated by about 5.6% against the USD in 1Q16. During 2Q16, the IDR depreciated by 0.5%.

Disposed for US$10m (gain of US$2.8m in other income) as of end 2Q16


Overview of SDJ Mine

The SDJ concession covers a total area of 235.5 hectares, or about 368 football fields. The tenure is held under an IUP Operasi Produksi permit granted on 17 June 2014 for eight years until 29 May 2022. The northern area of the mine requires a “Borrow to Use” permit (IPPKH permit). Such a permit covering 69.90 hectares has been issued with an extension until 29 May 2022. The Directorate General of Mineral and Coal has issued a “clean & clear” certificate (No. 467/Bb/03/2014) on 31 December 2014. Indonesia has cracked down on illegal mining earlier in 2016, revoking some 478 coal-mining permits across 12 provinces.7 This “clean & clear” certificate shows that the SDJ mine is compliant with basic laws.

Access is by a two hour flight from Jakarta to Banjarmasin followed by a three hour car ride to Tanah Bumbu on tarred regional roads, and a final 30-minute stretch (partly on palm plantation hual road) to the Project Area.8

Exploration. Exploration commenced in 2010 with limited coal outcrop mapping and shallow drilling. As of June 2014, data from 103 boreholes to a maximum depth of 125 metres has been used in resource estimation. Another 27 boreholes have been excluded from a total of 130 boreholes as they fall outside of the concession area.

Figure 9: Location Map of SDJ Project

Source: Qualified Person’s Report 2015, NRA Capital

7 http://www.banktrack.org/manage/ems_files/download/20160222_indonesian_coal_market_update_pdf/20160222_ indonesian_coal_market_update.pdf 8 Extracted from Qualified Person’s Report 2015.

15 km to Anchorage and 17km to Jetty for export purpose.

2-hour flight from Jakarta


Coal Seams. A total of 13 seams of coal have been identified, of which reserve and resource estimates have been compiled for four seams, split into upper and lower members. The thickness of these seams range from 0.4 metres or 40 cm to 9.4 metres or 940 cm on average, based on a minimum thickness cut-off of 0.3 metres. It is considered unlikely that any seam thinner than 0.3 metres will be extracted. According to the Qualified Person’s report, the parent seams can be seen as relatively deep, at 5 to 10 metres, with relatively thick interburden of more than 10 metres. However, the dip of these seams are relatively shallow at 5 degrees, thus facilitating simple coal mining practices.

A total of 42.4m tonnes of marketable coal reserves has been estimated across the four main seams A5A, A5B, A5C and A5D. (see Figure 10). A5D and A5C appears to being mined based on cross section data as of February 2016. These two seams hold a total of 12.7m tonnes of reserves. Mining will likely extend to A5B within 2016 or 2017.

Strip ratio appears relatively low at the early stage. Based on Slide 16 of Geo Energy’s 1Q16 results presentation slides, the first seam A5D has been extracted to about 5 metres deep, followed by 8 metres for the second seam A5C, with a strip ratio 1:2.8. Strip ratio in turn is expected to rise to more 1:4x at the later stage of the mine life, based on production schedules in the Qualified Person’s report.

Figure 10: Reserve Estimates as of 31 December 2015 (Estimated Seam Thickness)

Marketable Reserves as of 31 Dec 2015 Thickness

Seams Splits Proved

Coal (Mt) Probable Coal (Mt)

Proved + Probable Coal (Mt)

Min (metres)

Max (metres)

Mean (metres)

A5D A5D2 8.4 0.2 8.6 0.5 5.1 2.3

A5D1 1.4 0.6 2 0.8 7 3.5

A5C A5C2 0.9 1.1 2 0.3 4.2 1.8

A5C1 0 0.1 0.1 0.1 1.8 0.7

A5B A5B2 18.2 3.5 21.7 0.4 5.7 3

A5B1 4.6 1.6 6.1 4.6 16.4 9.4

A5A A5A2 0 1.7 1.7 0.3 2.7 0.8

A5A1 0 0.2 0.2 0.2 1.5 0.4

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A2 0.3 0.7 0.5

A1 0.2 0.8 0.5

A0 0.7 1 0.9

A 5.9 6.4 6.1

Total 33.4 9.0 42.4

Source: Qualified Person’s Report, NRA Capital

Figure 11: Cross Section Progress as of 12 February 2016

Source: Slide 16 1Q16 Results Presentation Slides


Import Regulations Demand for Low Ash Low Sulphur Coal

Low sulphur, High Volatile Moderate Ash Coal. As for coal quality, the Qualified Person reported little variation and classified the SDJ coal as Low sulphur, High Volatile Moderate Ash coal with Low Gross as Received Energy (GAR). There are generally three major grades of coal – lignite, bituminous, including sub-bituminous coal, and anthracite coal. Lignite to bituminous coal are generally used for electric power generation.

Typical sulphur content of bituminous coal ranges from 0.7% to 4.0% while that of ash ranges from 3.3% to 11.7%.9 Low ash and low sulphur coal is generally less polluting. SDJ’s reserves have average sulphur content of about 0.19% and ash of about 5.6%, thus explaining for the low sulphur, moderate ash classification. The key downside of SDJ coal is its relatively high moisture content that averages at about 36.3% and its relatively low calorific value of 4,036 kcal/kg on an as received basis. However, the offtake agreements with BTG Pactual with minimum annual volume over the life of mine suggest robust demand for SDJ coal. Of the 0.48m tonnes of coal sold during 1Q16, 0.43m tonnes were shipped to North Asia, implying steady overseas demand.

China bans high ash/high sulphur coal imports. Demand for SDJ coal can be partly explained by China’s ban on the production, sale and import of coal with ash of more than 40% and sulphur of more than 3% from 2015.10 In certain parts of China, requirements are even more stringent, banning coal with ash of more than 16% and sulphur of more than 1%. Hence, even coal of high CV of 5,500 kcal/kg cannot be imported into parts of China if they have high sulphur and ash content, e.g. Australian and South African coal of 23% to 25% ash and 0.8% to 1.0% sulphur.11

In addition, coal transported more than 600km from the production site or port cannot have a CV (NAR basis) of less than 3,941 kcal/kg for lignite and 4,300 kcal/kg for other coals. On surface, this requirement may seem negative for SDJ coal. However, the high ash and sulphur content of some Australian coal for instance will require blending with SDJ coal to meet the sulphur requirements.12

Figure 12: Types of Coal

Source: Geo Energy Presentation Slides 1Q16 Results

9 http://www.engineeringtoolbox.com/classification-coal-d_164.html 10 http://www.sdpc.gov.cn/gzdt/201409/W020140915620478165053.pdf 11 http://af.reuters.com/article/energyOilNews/idAFL3N0RH37620140916 12 http://www.crugroup.com/about-cru/cruinsight/chinese-coal-import-regulations


TBR Mine to Provide Further Production Upside

The key upside from the TBR mine is that it is located right next to the SDJ mine and can be exploited alongside SDJ. Both mines appear to have similar characteristics and Geo Energy can manage near term stripping costs by expanding its mine across to TBR, rather than to mine deeper into SDJ. Secondly, the location of TBR is beneficial to Geo Energy which will save on capex costs. The transportation of coal from TBR can in turn leverage on the same road and shipping infrastructure of SDJ.

Based on the announcement dated 18 July, TBR has proved and probable coal reserves of 41.6m tonnes. As with SDJ coal, the TBR reserves contain low sulphur (0.24%) and moderate ash (5.1%). The GAR value is higher at 4,219 kcal/kg, suggesting that higher selling prices can be fetched for TBR coal. Geo Energy plans to exploit this concession commencing from 2017.

The cost of the acquisition is about US$90m, of which US$13m will be funded by the issuance of 117m new shares at S$0.150 each. The remaining US$77m will be funded via US$10m of proceeds from the sale of the mining services business, US$28.5m of offtake prepayment from Engelhart and future operating cash flows.

Figure 13: Comparison between SDJ and TBR

Total Waste

(Mbcm)

Total Coal (Mt) Strip Ratio

Proved Coal (Mt)

Probable Coal (Mt)

Proved + Probable Coal (Mt)

SDJ 158.6 43.2 3.67 33.4 9.0 42.4

TBR 165.9 45.6 3.64 38.2 3.4 41.6

Total 324.5 88.8 3.65 71.6 12.4 84.0

Ash adb

(%) VM adb (%) TM arb (%) RD adb (t/m3) TS adb (%)

GAR (Kcal/Kg) (arb)

SDJ 5.6 41.7 36.3 1.25 0.19 4,000 - 4,200

TBR 5.1 39.4 34.4 1.28 0.24 4,219

*adb =air dried basis, vm=volatile matter, tm=total moisture, arb = as received basis, RD= relative density, TS=total sulphur, GAR=gross as received.



Forecasts and Valuation

Expect ASP to increase to US$30/tonne in FY17 and FY18. In our forecasts, we assume that average selling price will be US$26/tonne in 2Q FY16 and US$28/tonne in 2H FY16, followed by US$30/tonne in FY17 and FY18. According to the Indonesian Coal Index 4 (Indonesian 4,200 GAR / 3,800 NAR) compiled by Argus/Coalindo, coal prices have rebounded US$26.43 in February 2016 to US$29.58 per metric tonne as of 25 July 2016. Hence, we assume that average selling prices will have likely increased during 2Q FY16 through the end of the year. However, we assume flat selling prices in FY17 and FY18 to take into account potential price corrections in the early stage of the coal market recovery. Thereafter, selling prices are assumed to increase by 10% per annum over FY19 and FY20 and by 5% per annum until FY24.

As for mining costs, we assume that they will stay flat in FY16 as Geo Energy takes advantage of the low stripping ratio at the early stage of the SDJ and TBR mines. However, costs are assumed to grow by US$1/tonne in FY17, and by 2% per annum thereafter.

We have also moderated production assumptions, expecting the company to produce 6m tonnes of coal in FY16, 8m tonnes in FY17 and 10m tonnes in FY18. This production profile implies that the company will produce 79.48m tonnes of coal from FY16 and FY24, which is in line with the estimated reserves of both SDJ and TBR. Other key assumptions are provided in Figure 14 and 15.

Figure 14: Key Forecasting Assumptions and Projections

US$m FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23F FY24F

Volume (million metric tonnes) 5.48 6.00 8.00 10.00 10.00 10.00 10.00 10.00 10.00

ASP (US$/tonne) 27.3 30.0 30.0 33.0 36.3 38.1 40.0 42.0 44.1

Coal mining revenue 149.9 180.0 240.0 330.0 363.0 381.2 400.2 420.2 441.2

Cash cost per tonne (US$/t) -21.44 -22.44 -22.89 -23.35 -23.81 -24.29 -24.78 -25.27 -25.78

Cash cost of sales -117.60 -134.64 -183.11 -233.47 -238.14 -242.90 -247.76 -252.71 -257.77

Cash profit 32.29 45.36 56.89 96.53 124.86 138.25 152.45 167.50 183.46

Depreciation and amortisation -13.77 -15.06 -20.08 -25.10 -25.10 -25.10 -25.10 -25.10 -25.10

Gross profit 18.52 30.30 36.81 71.43 99.76 113.15 127.35 142.40 158.36

Other income 5.06 2.19 0.00 0.00 0.00 0.00 0.00 0.00 0.00

General and admin expenses -5.86 -6.15 -6.33 -6.52 -6.72 -6.92 -7.13 -7.34 -7.56

Other expenses -0.53 -0.53 0 0 0 0 0 0 0

Finance costs -7.39 -7.39 -7.39 -7.39 -7.39 -7.39 -7.39 -7.39 -7.39

Profit before tax 9.81 18.42 23.08 57.52 85.65 98.84 112.83 127.67 143.41

Income tax -3.06 -4.61 -5.77 -14.38 -21.41 -24.71 -28.21 -31.92 -35.85

PATMI 6.69 13.82 17.31 43.14 64.24 74.13 84.62 95.75 107.56

Source: NRA Capital

Valuation. Based on the above revenue and profit assumptions, we estimate that Geo Energy to be worth about S$0.227 (rounded to S$0.225) per share based on an equity value of US$225.3m and 1,329m shares outstanding, including 117m new shares to be issued for the acquisition of TBR. The equity value of US$225.3m is derived based on a cost of equity of 15% per annum and a cost of debt of 8% per annum. Currently, Geo Energy’s cost of debt is about 7%. We added 1% point as a margin of safety, lest financing costs increase subsequently. Geo Energy’s shares closed at S$0.103 on 5 August 2016. As of 31 March 2016, Geo Energy’s NAV per share is about US$0.0763 or S$0.102. Hence, the current share price of Geo Energy is not excessively stretched.


Figure 15: Free Cash Flow Valuation

US$m FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23F FY24F Group EBIT 17.20 25.81 30.47 64.91 93.04 106.23 120.22 135.06 150.80 EBIT x (1- 25% tax) 12.90 19.36 22.86 48.68 69.78 79.67 90.17 101.30 113.10 Depreciation and amortisation 13.77 15.06 20.08 25.10 25.10 25.10 25.10 25.10 25.10 Net Capex -64.2 -10 -5 -5 -5 -5 -5 -5 -5 Change in non-cash working capital 46.32 -16.48 -20.70 -39.88 -6.99 -3.30 -3.50 -3.71 -3.93 Non-cash working capital -35.92 -19.43 1.26 41.14 48.13 51.43 54.93 58.64 62.57 Free cash flow to firm 8.79 7.94 17.24 28.91 82.90 96.47 106.77 117.69 129.27 Total debt / Com. Equity 83.9% 70.0% 70.0% 65.0% 60.0% 55.0% 50.0% 45.0% 40.0% WACC 10.9% 11.3% 11.3% 11.5% 11.6% 11.8% 12.0% 12.2% 12.4% Discount factor 1.11 1.23 1.37 1.53 1.71 1.91 2.14 2.40 2.70 PV of FCFF 7.93 6.43 12.55 18.88 48.51 50.49 49.89 49.01 47.88 Residual value 291.58 Less net debt -66.24 Value of free cash flow to equity (US$m) 225.34 S$m 301.96 Number of shares 1,329 Value per share (S$) 0.227 Current share price (S$) 0.103 Upside 121%

Source: NRA Capital

Key Risks

Global production may creep up with higher selling prices and lead to swings in coal price. While the upside for Geo Energy may seem high based on our valuation, we also caution that the upside is highly conditional upon realized selling prices. If we assume coal prices of US$30/tonne across our forecast horizon from FY20 to FY24, we would have arrived at a lower valuation of S$0.058 per share. We have tempered expectations by assuming US$30/tonne ASP over FY17 and FY18. However, our valuation may be impaired if the full market recovery takes longer than expected.

Costs may rise faster than expected. We noted that the Qualified Person’s report 2015 estimates life of mine operating costs to be about US$29.05 per tonne of coal as opposed to the realized cost of US$21.44 per tonne in 1Q FY16. The difference is likely due to higher stripping ratios in the later stage of mine life. Our forecast horizon assumes cost of US$24.01 per tonne from FY16 to FY24, which is around the midpoint for both estimated and realized costs.

Maturity of Medium Term Note in January 2018. As of end 2015, Geo Energy has US$80.59m of medium term notes payable, carrying a fixed interest of 7% per annum. These notes are due in January 2018. Hence, refinancing risk is a key concern, albeit mitigated by improving profitability and cash flows as anticipated by us in light of higher selling prices.

Minimum Trading Price. Geo Energy is listed on the Mainboard of the SGX and may be placed on Watch-list on review on 1 September 2016 as its share price is currently lower than S$0.200. While the operating fundamentals of the company remain unchanged, placement on Watch-List may strain the company’s ability to raise new debt or equity funding until remedial actions such as a share consolidation are undertaken.


Profit & Loss (US$ m, FYE Dec) 2015 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F

Revenue 22.34 150.81 180.00 240.00 330.00 363.00 381.15 400.21 420.22 441.23

Operating expenses -28.09 -119.84 -139.13 -189.45 -239.99 -244.86 -249.82 -254.89 -260.06 -265.33

EBITDA -5.76 30.97 40.87 50.55 90.01 118.14 131.33 145.32 160.16 175.90

Depreciation & amortisation -4.54 -13.77 -15.06 -20.08 -25.10 -25.10 -25.10 -25.10 -25.10 -25.10

EBIT -10.30 17.20 25.81 30.47 64.91 93.04 106.23 120.22 135.06 150.80

Net interest & invt income -7.93 -7.39 -7.39 -7.39 -7.39 -7.39 -7.39 -7.39 -7.39 -7.39

Associates' contribution 0 0 0 0 0 0 0 0 0 0

Exceptional items 0 0 0 0 0 0 0 0 0 0

Pretax profit -18.23 9.81 18.42 23.08 57.52 85.65 98.84 112.83 127.67 143.41

Tax 1.64 -3.06 -4.61 -5.77 -14.38 -21.41 -24.71 -28.21 -31.92 -35.85

Minority interests 0.28 -0.06 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Net profit -16.31 6.69 13.82 17.31 43.14 64.24 74.13 84.62 95.75 107.56

Shares at year-end (m) 1,185 1,329 1,329 1,329 1,329 1,329 1,329 1,329 1,329 1,329

Balance Sheet (US$ m, as at Dec) 2015 2016 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F

PPE 131.87 200.90 195.84 180.76 160.66 140.56 120.46 100.36 80.25 60.15

Investment properties 3.34 3.34 3.34 3.34 3.34 3.34 3.34 3.34 3.34 3.34

Other long-term assets 10.90 10.90 10.90 10.90 10.90 10.90 10.90 10.90 10.90 10.90

Total non-current assets 146.10 215.13 210.07 194.99 174.89 154.79 134.69 114.59 94.49 74.39

Cash and equivalents 12.42 10.21 22.27 38.86 80.88 184.19 299.58 422.58 552.49 688.54

Trade debtors 32.71 36.96 44.38 59.18 81.37 89.51 93.98 98.68 103.62 108.80

Other current assets 23.92 23.92 23.92 23.92 23.92 23.92 23.92 23.92 23.92 23.92

Total current assets 69.05 71.09 90.58 121.96 186.18 297.62 417.49 545.19 680.03 821.26

Trade creditors 39.64 90.21 81.15 75.25 57.57 58.72 59.89 61.09 62.31 63.56

Short-term borrowings 6.56 6.56 6.56 6.56 6.56 6.56 6.56 6.56 6.56 6.56

Other current liabilities 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03

Total current liabilities 46.23 96.80 87.74 81.84 64.15 65.31 66.48 67.68 68.90 70.15

Long-term borrowings 69.25 69.99 79.66 84.56 103.21 129.16 153.63 175.40 193.17 205.49

Other long-term liabilities 5.70 5.70 5.70 5.70 5.70 5.70 5.70 5.70 5.70 5.70

Total long-term liabilities 74.95 75.70 85.37 90.26 108.92 134.86 159.33 181.11 198.88 211.20

Shareholders' funds 93.73 113.43 127.25 144.56 187.70 251.94 326.07 410.69 506.44 614.00

Minority interests 0.24 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30

NAV/share (US$) 0.079 0.085 0.096 0.109 0.141 0.190 0.245 0.309 0.381 0.462

Total Assets 215.15 286.22 300.65 316.96 361.07 452.41 552.18 659.78 774.52 895.64

Total Liabilities + S’holders' funds 215.15 286.22 300.65 316.96 361.07 452.41 552.18 659.78 774.52 895.64

Cash Flow (US$ m, FYE Dec) 2015 2016 2017F 2018F 2019F 2020F 2021F 2021F 2021F 2021F

Pretax profit -18.23 9.81 18.42 23.08 57.52 85.65 98.84 112.83 127.67 143.41

Dep & non-cash adjustments 4.54 13.77 15.06 20.08 25.10 25.10 25.10 25.10 25.10 25.10

Working capital changes 36.22 40.47 -21.09 -26.47 -54.26 -28.40 -28.01 -31.71 -35.63 -39.79

Cash flow from operations 22.53 64.05 12.40 16.70 28.36 82.36 95.93 106.22 117.14 128.72

Capex -20.04 -77 -10 -5 -5 -5 -5 -5 -5 -5

Net investments & sale of FA 0 10 0 0 0 0 0 0 0 0

Others 3.02 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Cash flow from investing -17.02 -67.00 -10.00 -5.00 -5.00 -5.00 -5.00 -5.00 -5.00 -5.00

Debt raised/(repaid) -11.83 0.74 9.67 4.89 18.66 25.95 24.47 21.78 17.77 12.32

Equity raised/(repaid) 3.74 0 0 0 0 0 0 0 0 0

Dividends paid 0 0 0 0 0 0 0 0 0 0

Others 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Cash flow from financing -8.09 0.74 9.67 4.89 18.66 25.95 24.47 21.78 17.77 12.32

Change in cash -2.58 -2.21 12.07 16.59 42.02 103.30 115.40 123.00 129.91 136.05

Change in net cash/(debt) NA -2.95 2.40 11.70 23.36 77.36 90.93 101.22 112.14 123.72

Ending net cash/(debt) -66.24 -69.19 -66.80 -55.10 -31.74 45.62 136.55 237.77 349.92 473.64

KEY RATIOS (FYE Dec) 2015 2016 2017F 2018F 2019F 2020F 2021F 2021F 2021F 2021F

Revenue growth (%) -57.94 575.18 19.36 33.33 37.50 10.00 5.00 5.00 5.00 5.00

EBITDA growth (%) NM NM 31.98 23.69 78.04 31.26 11.16 10.65 10.21 9.83

Pretax margins (%) NM 6.51 10.23 9.62 17.43 23.60 25.93 28.19 30.38 32.50

Net profit margins (%) NM 4.44 7.68 7.21 13.07 17.70 19.45 21.14 22.79 24.38

Effective tax rates (%) NM -31.14 -25.00 -25.00 -25.00 -25.00 -25.00 -25.00 -25.00 -25.00

Net dividend payout (%) NA NA NA NA NA NA NA NA NA NA

ROE (%) NM 6.46 11.48 12.74 25.97 29.22 25.65 22.97 20.88 19.20

Free cash flow yield (%) NM 2.48 2.30 11.23 22.43 74.27 87.30 97.18 107.67 118.78

Source: NRA Capital forecasts


NRA Capital Pte. Ltd (“NRA Capital”) has received compensation for this valuation report. This publication is confidential and general in nature. It was prepared from data which NRA Capital believes to be reliable, and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. No representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information or opinions in this publication. Accordingly, neither we nor any of our affiliates nor persons related to us accept any liability whatsoever for any direct, indirect, special or consequential damages or economic loss that may arise from the use of information or opinions in this publication. Opinions expressed are subject to change without notice. NRA Capital and its related companies, their associates, directors, connected parties and/or employees may own or have positions in any securities mentioned herein or any securities related thereto and may from time to time add or dispose of or may be materially interested in any such securities. NRA Capital and its related companies may from time to time perform advisory, investment or other services for, or solicit such advisory, investment or other services from any entity mentioned in this report. The research professionals who were involved in the preparing of this material may participate in the solicitation of such business. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additional information is, subject to the duties of confidentiality, available on request. You acknowledge that the price of securities traded on the Singapore Exchange Securities Trading Limited ("SGX-ST") are subject to investment risks, can and does fluctuate, and any individual security may experience upwards or downwards movements, and may even become valueless. There is an inherent risk that losses may be incurred rather than profit made as a result of buying and selling securities traded on the SGX-ST. You are aware of the risk of exchange rate fluctuations which can cause a loss of the principal invested. You also acknowledge that these are risks that you are prepared to accept. You understand that you should make the decision to invest only after due and careful consideration. You agree that you will not make any orders in reliance on any representation/advice, view, opinion or other statement made by NRA Capital, and you will not hold NRA Capital either directly or indirectly liable for any loss suffered by you in the event you do so rely on them. You understand that you should seek independent professional advice if you are uncertain of or have not understood any aspect of this risk disclosure statement or the nature and risks involved in trading of securities on the SGX-ST.

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