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24-05-2017, 06:44 PM
Why do you say that it is very undervalued? I actually have a different opinion.
In the event of a liquidation, there will not be much value on the balance sheet. Current assets is only slightly higher than current liabilities. Deposits, prepayment, and some receivables may not be recoverable. But lets assume CA is sufficient to pay for CL. For non-current assets, deferred tax assets and stripping costs cannot be cashed, deposits and prepayments may not be recovereable. Most of the non-current assets are the mining equipment (US$99m worth of PPE). In a liquidation, perhaps the PPE can be sold for a third of its book value, or about US$33m. So US$33m, or S$46m, is a conservative liquidation value. Currently GER's market price is S$310m. So there isn't very much safety on the book value side.
Of course, the key value of GER isn't on its books, but its ability to mine and sell coal for profits. Its costs are more or less fixed, so profitability is dependent on the market price of coal, and the latter moves in cycles. The demand and supply of any commodity is dynamic and difficult to predict. The long lead time taken to explore/develop (and grow, for agri) resource assets creates a surplus situation if forecast demand does not materialise.
This may be unlikely to happen at this point, but what is GER going to do if coal price falls below its break-even cost and remain low? It has purchase agreements but these do not last more than a year or so. If low prices persist for longer than its purchase agreements, it may have to stop production, while its huge PPE depreciates.
Looking at historical graphs of coal price, GER profitability, and GER share price, there is much correlation between them. Selling at spot or on short-term contracts may generate huge gains but is risky. Even longer term shipping charter contracts did not save the ship owners during the prolonged downturn. Given the its current business model, if I were interested in GER, I will buy when coal prices are near historical lows. It is difficult to use p/e as a valuation tool for GER since there is little long-term certainty in its selling price.
In the event of a liquidation, there will not be much value on the balance sheet. Current assets is only slightly higher than current liabilities. Deposits, prepayment, and some receivables may not be recoverable. But lets assume CA is sufficient to pay for CL. For non-current assets, deferred tax assets and stripping costs cannot be cashed, deposits and prepayments may not be recovereable. Most of the non-current assets are the mining equipment (US$99m worth of PPE). In a liquidation, perhaps the PPE can be sold for a third of its book value, or about US$33m. So US$33m, or S$46m, is a conservative liquidation value. Currently GER's market price is S$310m. So there isn't very much safety on the book value side.
Of course, the key value of GER isn't on its books, but its ability to mine and sell coal for profits. Its costs are more or less fixed, so profitability is dependent on the market price of coal, and the latter moves in cycles. The demand and supply of any commodity is dynamic and difficult to predict. The long lead time taken to explore/develop (and grow, for agri) resource assets creates a surplus situation if forecast demand does not materialise.
This may be unlikely to happen at this point, but what is GER going to do if coal price falls below its break-even cost and remain low? It has purchase agreements but these do not last more than a year or so. If low prices persist for longer than its purchase agreements, it may have to stop production, while its huge PPE depreciates.
Looking at historical graphs of coal price, GER profitability, and GER share price, there is much correlation between them. Selling at spot or on short-term contracts may generate huge gains but is risky. Even longer term shipping charter contracts did not save the ship owners during the prolonged downturn. Given the its current business model, if I were interested in GER, I will buy when coal prices are near historical lows. It is difficult to use p/e as a valuation tool for GER since there is little long-term certainty in its selling price.