Geo Energy Resources

[Louhan]

Is it worth applying for the IPO which closes on 17 Oct 2012?  What is the response for the placement shares so far?

[karlmarx]

Management released an upbeat results briefing which reiterated its business model, and apparent undervalue of its share price.

http://infopub.sgx.com/FileOpen/Geo%20-%...eID=454999

[mulyc]

This is IMHO one very undervalued counter dragged down by the recent report on potential coal oversupply.

DYODD. Vested.

[karlmarx]

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.

[TTTI]

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.

You have only looked superficially at the financials, and hence, your opinion is somewhat misguided.

For eg.
"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."

Wrong. Geo has divested it's mining branch, and subcontracts it out to BUMA (2nd largest provider of mining services in Indonesia)
The PPE is NOT equipment.
Most of it is the mining properties such as mining rights and mining evaluation assets. Aka the mines that Geo owns and the proven coal reserves.
How much is "most of it"?
Specifically, 90.6% of total non-current assets and 35.7% of total assets in the Group’s statement of financial position is accounted for by the mines and coal reserves.
Pls read Geo Energy AR16 Pages 79 and 80.

And anyway, to begin with, it is inappropriate to value coal companies like Geo solely based on the BS. This is because the 1 single overriding factor that affects the prospects of the company... is of course, coal prices. The coal reserves held by the company's mines is constant. The cost of retrieving this coal is fairly stable. But the revenue obtained from selling this coal can fluctuate very very wildly. It is precisely this reason, why coal companies do very very well when the coal prices are relatively high, but before early 2016, when prices were low, many coal companies rather mothball their sites than mine. Cos they're losing money mining.

I can see why based on a simplistic look at the financials, and if you crunch in some of the common parameters like how you'd analyze a typical company, it looks highly overvalued in fact. Cos the earnings u are looking at are very much lagging. The debt that you see is a legacy issue, but right now, it makes it look like liabilities are huge. A refi is currently underway (in the midst of getting approval from noteholders.) and anyway, based on the CFs from the offtake agreement, the notes can easily be covered.

So it is more accurate to look at earnings (particularly forward earnings) and CFs, not at the balance sheet.

"Of course, the key value of GER isn't on its books, but its ability to mine and sell coal for profits."
As I mentioned, the mining is mostly done by BUMA. The selling part is guaranteed by ECTP via offtake agreements.

"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."

Again, inaccurate. The agreement with ECTP is for the LOM (life of mine), although it is true that the committed offtake amount is only determined yearly.
Still, if you base on this year's guaranteed 7mil tonnes in the offtake agreement, you can work out the earnings and CFs from that.

OK, finally about the coal prices.
Now we're talking.
Cos THAT, as I've mentioned, is the key. Not the liabilities, or some historical price range or whatever.
This is a very complex issue, I feel I can write a book on this.
To begin with, WHICH coal prices are we talking about?
The offtake agreement is pegged to Indonesia's HBA. That has been relatively stable. So Geo's selling price will be insulated from other coal prices elsewhere. It is ECTP that has to bear the brunt of fluctuations when they sell to chinese end users.
Chinese port coal prices though, has dropped quite a lot since April.
The main index to look at is the port prices at the QinHuangDao port. 
Prices have dropped because China NDRC introduced a lot of uncertainty with the possible banning of low quality coal.
They are now within the guided range that NDRC has indicated, and it is unlikely it will go below this range.
Why? Because the chinese have to protect their own coal miners.
China's miners have a much higher cost of production than Geo, cos most of China's miners are covered mines. They need to dig underground tunnels etc. Indo's mines are mostly open and above ground mines.
Many of China's miners were defaulting prior to 2016. The 2 most indebted industries in China are the coal and the steel industries. And even the steel industry is related to coal (via coking coal)
NPL ratio was shooting up
And NDRC's job is to make sure there is a controlled default. Small miners are shut down, moderate ones are forced to consolidate.
NDRC gave a guided range (500 yuan to 570 yuan) for GAR 5,500 coal at QinHuangDao. We are now at 560 yuan.
It will not go below this range because otherwise, many of china's own miners will suffer, NPL will spike and chinese banks will suffer too.

Like I said, coal price is the key, and it's a much more complicated issue than simply supply and demand. Just some remaining points quickly:
1. Hydropower accounted for a substantial part of the power needs in Q1 cos of increased rainfall. This has dropped. So the power has to come from coal.
2. Summer is starting in 2 weeks. Utilities have yet to do any restocking as they have been waiting for clarification on the low quality coal ban from NDRC. They will have to do so in 2 weeks with the spike in power.
3.  This year's summer is projected to be the warmest in recent years
4. After summer, the utilities typically restock in preparation for winter, which needs even more power
5. With all the hoo ha, actually, if you really look at the data, the drop in coal prices is all relative. In reality, it hasn't dropped anywhere near early 2016 prices.
For some guidance:

• May 2016 – Nov 2016: Up 96% sharply from 381 yuan/t to 747 yuan/t;
  
• Nov 2016 – Feb 2017: Down 27% from 747 yuan/t to 590 yuan/t;
  
• Feb 2017 – Mar 2017: Up 18% again from 590 yuan/t to 692 yuan/t;
  
• Mar 2017 – May 2017: Down 17% again from 692 yuan/t to 577
  

6. NPL ratio has stabilized in Q1. NDRC will be keen to keep it this way, or improve on it. That means they have to support coal companies.

So what does all these mean? Like I said, it is a complex issue with many factors.
But to simplify it, let's just make 2 assumptions:
1. Management guided for 10mil tonnes in 2017. Offtake agreement is for 7mil tonnes. Let's be ultra conservative and use only 7mil tonnes.
2. Coal prices remain at current prices. (Indo HBA is what really affects Geo and that's been stable. China's port prices has dropped but is within the NDRC's range)

So if you use these 2 assumptions, you can approximately work out the total revenue, and that's being very very conservative. It is not difficult to guesstimate the earnings from there.

Bear in mind there are 2 more tailwinds for the revenue: Coal trading and the consultancy fees paid to Geo by AJE mine, both of which do not exist in FY16, and both of which albeit relatively minute, have GPMs that are higher than that of the actual coal mining.

[karlmarx]

I last read GER's IPO prospectus and was not aware it not longer performed mining operations. It was mentioned that their mining operations was what made them more competitive given the ability to be more efficient. I do not have specifics on GER's mining contract with BUMA, but I think BUMA is paid on volume of coal extracted and is shielded from coal prices, since BUMA does not sell the coal and pay GER a royalty fee, which I believe was GER business model when it IPO-ed. Therefore, will GER runs the risk of continued payment for contracted services even when coal prices are below the cost paid to BUMA?

Now that you mentioned that its PPE are mining assets, it made so much sense to me. I was wondering where all the mines it bought went to. These are better assets to hold than equipment, since it doesn't depreciate. However, this further exposes GER to coal prices. If its profit per ton is $10, then its 90m ton of coal is worth some $900m. But if profit per ton is $2, then it is only worth $180m.

While my understanding of GER is incomplete, I still think GER is risky given its exposure to coal prices. So how will coal prices move? Indeed, that is the question. I am unable to provide any insight with regards to this. You seem to have a good grasp on the situation. In general, it seems then that GER's profitability, and therefore, shareholder's prosperity, is dependent on NDRC to maintain coal prices at present level.

[karlmarx]

Has coal just begun its journey of a long-term decline? If China is serious about reducing emission levels (through Paris Agreement), and if oil, gas, and other alternatives remain as cheap, perhaps?

http://www.businesstimes.com.sg/energy-c...ner-energy

"At the heart of this shift are structural, long-term factors," Mr Dale said. These include "the increasing availability and competitiveness of natural gas and renewable energy, combined with mounting government and societal pressure to shift away from coal towards cleaner, lower-carbon fuels."

However, not all are pessimistic on the future of coal:

http://www.businesstimes.com.sg/energy-c...ek-to-exit

[karlmarx]

More naysayers of coal, some food for thought:

https://www.bloomberg.com/news/articles/...-you-think

I estimate GER's break-even price for coal production to be about US$26 per tonne. In 1Q16, when ASP was US$24.5 per tonne, GER registered a loss of about US$2.6m. In 2Q16, when ASP was US$25.17 per tonne, GER registered a loss of about US$0.7m (gains on disposal of its mining and haulage division was excluded). In 3Q16, when ASP was US$31.40 per tonne, GER registered a profit of about US$7.5m. Information on ASP can be found on AR16 page 19.

A recent search on alibaba shows GAR 4200 coal can be bought for US$36 per tonne:

https://www.alibaba.com/showroom/coal-gar-4200.html

Looks like GER will remain profitable if GAR 4200 coal prices remain at present levels, barring any increase in costs.

[karlmarx]

Higher profitability, but plans for the refinancing of its US$71m notes due January 2018 has yet to be revealed. Current assets are now 0.63 of current liabilities. From bondsupermart, current ask price for the notes are 94.85 (bid at 93.95), giving potential note holders a yield-to-maturity of 20.11% p.a.

http://infopub.sgx.com/FileOpen/GER%202Q...eID=466905

[holymage]

Geo Energy to Invest in an Online E-Commerce Portal in Indonesia

SINGAPORE, 29 August 2017 – Geo Energy Resources Limited (“Geo Energy” or “the Group”), an integrated Indonesian coal mining group, is pleased to announce that its subsidiary, PT Mitra Nasional Pratama (“MNP”) has incorporated PT Geo Online Indonesia (“Geo Online”) with an authorised capital of IDR 10 billion and an issued and paid-up capital of IDR 2.5 billion, to invest in a controlling equity stake in an online e-commerce portal in Indonesia. Geo Online will engage in general trading, e-commerce, information technology and communication businesses.

Wow. Coal miner investing in online e-commerce portal.
So, Geo is potentially going to pit against Alibaba and JD.com.
I wonder what is Mr Jim Rogers' opinion regarding this.

Then again, the 10 billion IDR authorised capital is just 750k USD, a tiny fraction of their profits in 1H 2017.

http://infopub.sgx.com/FileOpen/GER%20-%...eID=468804