Geo Energy Resources

[karlmarx]

Nothing new that hasn't already been said or discussed.

This is a gamble. Everything rests on coal selling price.

[holymage]

While commodity producers' profitability is dependent on the commodity price, I wouldn't go so far to say that it is a gamble. If one were to perform adequate research, I believe he/she is still able to anticipate the selling price of the commodity. However to be able to do so might be more challenging and there aren't many successful investors compared to equity investors. At worst, I would say it is a smart speculation, but definitely not a gamble if the investor does sufficient due diligence.

[zz...]

many business rely on the selling prices of their products to be profitable, esp business with cyclical nature. The more important question is how much they can make when price is in their favor and if they can survive when the selling price is low, so the cost control of their production will play an important part too for survival as not all miners are created equal. Having said that, if a person invests at a point with higher selling price, the risk is obvious higher compared to a person enters at lower selling price but long term economical demand is still there. My concern is if renewable and clean energy will replace coal completely and that would be a catastrophic even for all miners.

[weijian]

Nothing new that hasn't already been said or discussed.

This is a gamble. Everything rests on coal selling price.

At least we have some updates of the "1mil of e-commerce" investment...Nice way to put it - CSR project requested by Indon Gov..haha
https://www.valuebuddies.com/thread-2462...#pid142342

[TTTI]

Nothing new that hasn't already been said or discussed.

This is a gamble. Everything rests on coal selling price.

At least we have some updates of the "1mil of e-commerce" investment...Nice way to put it - CSR project requested by Indon Gov..haha
https://www.valuebuddies.com/thread-2462...#pid142342

haha indeed
Geo's mines are also held under IUP business licenses, as opposed to the concession contracts that some of their peers have.
Those with concession contracts were recently forced to renegotiate with the gov and end up paying substantially higher mining taxes.
IUP holders were not affected.

This "CSR project" is well worth the money..... LOL
That's how to do business in Indo.

[karlmarx]

As mentioned before, GER does not fix the selling price of their coal with its customer. Mining costs are largely fixed. This leaves GER exposed mainly to market price risk.

Most businesses do not purchase large amounts of inventories that is to be sold over a few years, especially where the selling price of these inventories is unstable. Exposure to market price risk is reduced by purchasing only enough inventories one thinks can be sold within a time period where market prices will not move much. Or hedging the selling price. In the business of selling coal, where GER has a large inventory, the fact that they do not have any form of hedging done means they predict coal prices to remain at least at the current level, for as long as the life of their mines. Is this a prudent strategy?

Adaro -- the top coal producer in Indonesia -- is entering the power generation business, so that some of its coal will not be dependent on global prices. Yet, whether a fall in coal price can be effectively hedged by the power generation business depends on whether the regulators of the electricity market require electricity prices to track coal prices.

http://www.adaro.com/files/news/berkas_e...0Final.pdf

Indika Energy -- another top coal producer in Indonesia -- stated that it "has not entered into coal pricing agreements to hedge its exposure to fluctuations in the coal price, but may do so in the future. However, in order to minimize the risk, coal prices are negotiated and agreed every year with the customer."

http://www.indikaenergy.co.id/wp-content...glish1.pdf


Clearly, GER's competitors see a need for some form of hedge against market price. Does GER intend to have some form of hedge? GER has the option of hedging its market price risk by selling coal futures, or making long-term contracts with its customer. It could also have chosen to be a mining contractor (like BUMA) by keeping its mining PPE and sold its mines, thereby eliminating any exposure to coal prices. But I guess the margins of a contractor is too low, so it did the opposite. Since there is no hedge, is the management of GER placing all their faith on the market price of coal for the company's prosperity? The two possible outcome for this is win big or lose big.

But that's not enough for GER.

To increase its bet on rising coal prices, GER purchased more mines to be able to sell more coal. This resulted in them taking on massive debts with very high interests on them, exposing themselves to the credit market. A fall in coal prices to below their production cost, for a prolonged period of time, will cause massive losses. And GER does not have the option of not selling when prices are low since it has an offtake agreement.

The two possible outcome for this is now 'win very big or lose everything.'

[TTTI]

As mentioned before, GER does not fix the selling price of their coal with its customer. Mining costs are largely fixed. This leaves GER exposed mainly to market price risk.

Most businesses do not purchase large amounts of inventories that is to be sold over a few years, especially where the selling price of these inventories is unstable. Exposure to market price risk is reduced by purchasing only enough inventories one thinks can be sold within a time period where market prices will not move much. Or hedging the selling price. In the business of selling coal, where GER has a large inventory, the fact that they do not have any form of hedging done means they predict coal prices to remain at least at the current level, for as long as the life of their mines. Is this a prudent strategy?

Adaro -- the top coal producer in Indonesia -- is entering the power generation business, so that some of its coal will not be dependent on global prices. Yet, whether a fall in coal price can be effectively hedged by the power generation business depends on whether the regulators of the electricity market require electricity prices to track coal prices.

http://www.adaro.com/files/news/berkas_e...0Final.pdf

Indika Energy -- another top coal producer in Indonesia -- stated that it "has not entered into coal pricing agreements to hedge its exposure to fluctuations in the coal price, but may do so in the future. However, in order to minimize the risk, coal prices are negotiated and agreed every year with the customer."

http://www.indikaenergy.co.id/wp-content...glish1.pdf


Clearly, GER's competitors see a need for some form of hedge against market price. Does GER intend to have some form of hedge? GER has the option of hedging its market price risk by selling coal futures, or making long-term contracts with its customer. It could also have chosen to be a mining contractor (like BUMA) by keeping its mining PPE and sold its mines, thereby eliminating any exposure to coal prices. But I guess the margins of a contractor is too low, so it did the opposite. Since there is no hedge, is the management of GER placing all their faith on the market price of coal for the company's prosperity? The two possible outcome for this is win big or lose big.

But that's not enough for GER.

To increase its bet on rising coal prices, GER purchased more mines to be able to sell more coal. This resulted in them taking on massive debts with very high interests on them, exposing themselves to the credit market. A fall in coal prices to below their production cost, for a prolonged period of time, will cause massive losses. And GER does not have the option of not selling when prices are low since it has an offtake agreement.

The two possible outcome for this is now 'win very big or lose everything.'

OK..... I'm guessing you're just typing all this off the top of your head.
I'll be as brief and succinct as I can.

"Most businesses do not purchase large amounts of inventories that is to be sold over a few years, especially where the selling price of these inventories is unstable. Exposure to market price risk is reduced by purchasing only enough inventories one thinks can be sold within a time period where market prices will not move much. Or hedging the selling price. In the business of selling coal, where GER has a large inventory, the fact that they do not have any form of hedging done means they predict coal prices to remain at least at the current level, for as long as the life of their mines. Is this a prudent strategy?"

Large amounts of inventory?
This model that you are describing, is true of ALL miners ALL OVER THE WORLD. Not just coal. Diamonds, lithium, even oil. Pretty much anything that involves mining.
On top of that, on the exact contrary to what you said, GER has 1 of the LOWEST (not large!) inventory amongst all the miners. In fact, the argument that they have the lowest inventory (only about 90mil tonnes across all their mines), is cited in many reports as 1 of their risks. 
In contrast, the next SGX listed coal peer, GEAR, has almost 3 BILLION tonnes in reserves, more than 30 times that of GER.
http://www.gear.com.sg/keycoal
Many have argued that their lower coal tonnage deserves a lower valuation assigned.

You'd have been better off making the exact opposite argument that GER deserves a lower valuation cos of their lower reserves, as many analyst reports have already pointed out. Not sure where you get the idea that GER has a large inventory.
Which is why Geo has set aside $200mil USD to look at more acquisitions.

"Adaro -- the top coal producer in Indonesia -- is entering the power generation business, so that some of its coal will not be dependent on global prices. Yet, whether a fall in coal price can be effectively hedged by the power generation business depends on whether the regulators of the electricity market require electricity prices to track coal prices. "

Hedging? Really... Sure, Adaro energy has an energy generation business. But you have any idea how much of their revenue is contributed by coal and how much from energy generation?
In 2016, their revenue is 2.52 billion USD, of which 2.35 billion USD is generated from the sales of coal, both export and domestically.
So I can assure you there's no hedging that, they sure as hell are exposed to coal prices too.

http://www.adaro.com/files/news/berkas/1...FY2016.pdf


"To increase its bet on rising coal prices, GER purchased more mines to be able to sell more coal. This resulted in them taking on massive debts with very high interests on them, exposing themselves to the credit market. A fall in coal prices to below their production cost, for a prolonged period of time, will cause massive losses. And GER does not have the option of not selling when prices are low since it has an offtake agreement. "

You know what's GER's cost of debt for the MTN? 8%
Adaro just sold MTN earlier in 2017 at 9% btw, and they are much larger.
The cost of debt for miners are much higher, but they can finance at these rates cos they ROI at current coal prices are well in the mid teens.
And since we're on this topic: Alliance mineral, the lithium miner on SGX, did a loan at 11%. Just for comparison.

Perhaps in your entire long paragraph, the only 1 statement that I can agree with is that GER is exposed to coal prices.
But then again, every Tom Dick Harry in the market knows that too.
And that's true of every other miner.

Of course, GER does have several risks. But none of which are what you mentioned.

[karlmarx]

1) The issue is not about the size of GER's inventory relative to peers. GER has about 80 million tonnes of coal. At the rate it is currently producing -- about 8 million a year -- it will take 10 years for them to sell this inventory. Fewer years if they're faster of course. But the exposure to spot market prices is undoubtedly in years. This is the risk. Very few business will allow themselves to be exposed to spot market prices for this long. Not to mention the highly volatile commodities market. The fact that there are peers in the industry that is similarly exposed to the spot market does not pardon GER. Some simple calculation will illustrate this risk.

From its latest quarterly, GER has revenue of US$75m and PBT of US$11.7m. Assuming that its production volume and expenses remain the same, a 30% rise in coal spot price will see its revenue rise 30% to about US$98m, and PBT rising to US$34.2m. Conversely, a 30% fall in coal spot price will see its revenue fall 30% to US$52.5m and PBT falling to -US$10.8m. Assuming coal has a bad year and this result is duplicated throughout the year, the PBT for the entire year will be -US$43.2m. And let us not forget its increased finance cost of US$10m from the increase in US$125m 8% of notes. Which brings the PBT to our hypothetical situation of a bad coal year to about -US$53m. This assumes GER has not yet made additional acquisitions of mines with the money raised from the notes; which will invariably cause PBT losses to be much higher than US$60m, since more coal will be sold for below cost. How many of such years can GER withstand before it is no longer able to refinance, or before it runs out of liquidity?

2) The issue is also not about whose financing costs are lower. It is the fact the financing costs are high, and the company's capital structure has a high proportion of debt. GER currently has US$73m of notes against US$160m of equity, debt/equity is 45%. Taking into account the increase of US$125m in notes, total debt will be about US$200m, bringing debt/equity to 125%. If coal prices fall, the mines on GER's book will not be worth as much as it states. And the huge losses from a falling coal price will also eat away equity; the debt/equity ratio will be much higher than 125%. In such a hypothetical situation, how will GER be able to refinance its notes? If no one is willing to lend and GER does not have the money to repay, note holders will seize all assets. Will shareholders not lose everything?

I am not saying that coal price is going to fall, or GER is surely going bust. I am highlighting the risk of what may happen should the coal market experience a bad year. It may be good, or bad, I don't know. Such business models are not new, and the fallout from poor market prices has happened time and again. Some only recently; commodities trading, shipping, fishing, oil and gas. They all share the same characteristic of expensive financing, high debt, and over exposure of selling prices to market forces.

Whether these risks are real or imaginary is up to investors to decide for themselves.

[TTTI]

1) The issue is not about the size of GER's inventory relative to peers. GER has about 80 million tonnes of coal. At the rate it is currently producing -- about 8 million a year -- it will take 10 years for them to sell this inventory. Fewer years if they're faster of course. But the exposure to spot market prices is undoubtedly in years. This is the risk. Very few business will allow themselves to be exposed to spot market prices for this long. Not to mention the highly volatile commodities market. The fact that there are peers in the industry that is similarly exposed to the spot market does not pardon GER. Some simple calculation will illustrate this risk.

From its latest quarterly, GER has revenue of US$75m and PBT of US$11.7m. Assuming that its production volume and expenses remain the same, a 30% rise in coal spot price will see its revenue rise 30% to about US$98m, and PBT rising to US$34.2m. Conversely, a 30% fall in coal spot price will see its revenue fall 30% to US$52.5m and PBT falling to -US$10.8m. Assuming coal has a bad year and this result is duplicated throughout the year, the PBT for the entire year will be -US$43.2m. And let us not forget its increased finance cost of US$10m from the increase in US$125m 8% of notes. Which brings the PBT to our hypothetical situation of a bad coal year to about -US$53m. This assumes GER has not yet made additional acquisitions of mines with the money raised from the notes; which will invariably cause PBT losses to be much higher than US$60m, since more coal will be sold for below cost. How many of such years can GER withstand before it is no longer able to refinance, or before it runs out of liquidity?

2) The issue is also not about whose financing costs are lower. It is the fact the financing costs are high, and the company's capital structure has a high proportion of debt. GER currently has US$73m of notes against US$160m of equity, debt/equity is 45%. Taking into account the increase of US$125m in notes, total debt will be about US$200m, bringing debt/equity to 125%. If coal prices fall, the mines on GER's book will not be worth as much as it states. And the huge losses from a falling coal price will also eat away equity; the debt/equity ratio will be much higher than 125%. In such a hypothetical situation, how will GER be able to refinance its notes? If no one is willing to lend and GER does not have the money to repay, note holders will seize all assets. Will shareholders not lose everything?

I am not saying that coal price is going to fall, or GER is surely going bust. I am highlighting the risk of what may happen should the coal market experience a bad year. It may be good, or bad, I don't know. Such business models are not new, and the fallout from poor market prices has happened time and again. Some only recently; commodities trading, shipping, fishing, oil and gas. They all share the same characteristic of expensive financing, high debt, and over exposure of selling prices to market forces.

Whether these risks are real or imaginary is up to investors to decide for themselves.

You brought up Adaro and Indika as comparison. You also mentioned that GER's inventory is "large". You also said GER's financing costs are high.
I'm just pointing out why these arguments are all flawed.

If now you're saying that it doesn't matter what GER's peers are doing, that your opinion is that GER's inventory is "large" (regardless of their peers' inventory), and that you are just merely judging GER relative to coal prices (no comparison to their peers), then again, the conclusion is what I said earlier: You're just saying that GER is exposed to coal prices.
And again, I reiterate, that's the only statement I can agree with.
But everyone knows that.
Similarly, you could also say company "____" (INSERT SHIPPING COMPANY) is exposed to freight rates.
And so on and so forth.

In your above example, you realize I can bring up ANY coal mining company, and use those figures (30% fall in coal prices that you mentioned) and derive the same conclusions.

Like I said, GER has risks, but not those that you brought up. IMHO.

[zz...]

China implemented coal price cap, will have some impacts on Geo Resources' profitability

http://www.sxcoal.com/news/4568385/info/en