Excerpts from KGI Securities report

Analyst: Joel Ng

Well-positioned to power Asia’s growth

Event
Recovery and growth. Geo Energy Resources Limited (GEO) is a coal mining company with operations mainly in Indonesia.

Geo Energy

Share price:
25 c

Target: 
36 c

GEO’s total reserves increased to 95m tonnes after the recent acquisition of PT Tanah Bumbu Resources (TBR), a mining concession next to its existing PT Sungai Danau Jaya (SDJ) coalmine in South Kalimantan.

In line with the recovery of the coal industry in late 2016, 
GEO’s 1H17 net profit increased to US$24.6m from US$35k in 1H16 on the back of increased coal production at its SDJ mine. The group sold 3.6m tonnes in 1H17 compared to 1.3m tonnes in 1H16.

tungkh3.17Tung Kum Hon, CEO of Geo Energy: Negotiating offtake agreement for TBR mine. Management expects to announce deal in 4Q17, says KGI Securities. 
NextInsight file photo.


Impact
Transforming to a low-cost coal producer. On the production side, GEO has partnered with an experienced mining contractor in Indonesia, PT Bukit Makmur Mandiri Utama (BUMA), which helps to mitigate operational risks.

JoelNg10.16Valuation & Action: We have a DCF-derived (13.5% WACC; 7-year operations; 0 LTG) fair value of S$0.36 and recommend a BUY on GEO.

"Our fair value is an implied FY17/18F 
6.4/5.0x PE, a 25-40% discount to its larger-sized peers. We believe the discount is fair given its smaller coal reserves relative to other Indonesian coal miners (4-10x smaller). The announcement of a new offtake agreement may provide a short-term upside catalyst.


Joel Ng (photo),
Head of Research,
KGI Securities

The group’s demand side is mostly covered by an offtake agreement with Engelhart Commodities Trading Partners (ECTP) for the delivery of a minimum of 7m tonnes in FY17 (70% of GEO’s FY17 target production). For FY18, it is currently exploring offtake arrangements for its TBR mine, which management expects to announce in 4Q17.

Seven years of coal supply. Its current coal reserves is able to support a production schedule for the next 7 years based on our assumptions of 9m tonnes in FY17 and 13m tonnes per year from FY18 to FY23. Our assumptions would yield a total of 87m tonnes of coal mined until FY23, a conservative estimate that is well below GEO’s current 95m tonnes of coal reserves.

Risks
Decline in thermal coal prices due to weaker demand/increased production from China. Regulatory risks in Indonesia.


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