Golden Energy and Resources

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On 27 Oct, China has set a cap for the thermal coal price at CNY1200 pt, since then GEAR has dropped nearly 40%. In comparison, for the same period:

- China Shenhua Energy - down 7%
- China Coal - down 23%
- Shaanxi Coal Industry - down 14.3%
- Coal India - down 12.5%
- Golden Energy Mines (GEMS) - down less than 1%
- Adaro Indonesia - down 7%
- Bukit Asam - down 8%

China's coal policy is set for the Chinese miners, I don't think that they have the invinsible power to affect the global price should China survives on coal imports. The last 3 are the Indonesia coal miners and as can see from the share price movement, they are less impacted by the Chinese policy. Probably we can relate this to the Indonesia Coal Reference prices:

The latest coal reference price for Nov was set at USD215 pt which is 33% higher than a month ago. Agung Pribadi, the Head of Communication Bureau of ESDM Ministry, explained that this increase was driven by winter and coal crises in China. “The coal demands from China keeps getting higher following the beginning of the winter, while the bad weather disrupts the production and transportation in coal-manufacturing provinces,”. This statement was made in November despite China's policy to cap the coal price.

GEAR's business is largely represented by the 62.5% ownership in GEMS. Today, GEMS has a market capitalisation of IDR24T, which means GEAR's interest in GEMS can be valued at SGD1.4B. In addition, GEAR also owns 60% in Stanmore Resources and 50% JV in Ravenswood Gold Mines, both can be valued at a total of SGD300M (p/s: Stanmore's market cap is AUD280M and Ravenswood was acquired for AUD300M when gold price was USD1500/oz). With this valuation of SGD1.7B, GEAR's current market capitalisation of SGD670M is very much underpriced in my opinion.

A week ago, competitor Geo Energy annouced a quaterly profit of USD45.5M (comparing to USD6M loss a year ago), declaring 3cent dividend on top of 1.8cent dividend paid 6 months ago, deriving a whopping 15% dividend for the year. I must emphasize that this comes after Geo announced early redemption of USD60M bond last month. GEAR has by far reported the earnings for H1 2021 which is 77% higher than a year ago.

A big question is that, do we see future for coal? To me, the world can't live without coal in the next 10-20 years. Coal is by far the cheapest energy source despite the recent run up in prices. Take a look at the alternatives, oil prices going up, uranium is going up, natural gas is going up, lithium is going up, base metals prices for green energy are going up. Despite China's commitment to net zero, it has recently ordered coal mines to expand their production levels to produce 220 million tonnes a year of extra coal, this shows that China is not ready to give up coal energy. One big step for China to move towards net zero is to reduce the mining activities and that's means China will import more coal from Indonesia. It is reported that cargoes of coking, thermal and brown coal from Indonesia to China surpassed 21 million tonnes in September, from just over 17 million tonnes in August this year. I think that the future of Indonesia coal remains on the bright side.

Next, Ravenswood gold mine is at the stage of expansion and aiming to be the largest gold producer in Queensland targeting ourput of 200,000 oz per year by 2022. Article published last week shows that the Queensland government continue support the gold mine ( Currently Ravenswood is making losses but things would be different when it is running at full capacity. Furthermore, it is reported that it has 2.6M oz of gold reserves and hence the mines would be running for the next decades. So what is the margin we are looking at? Resolute Mining (ex-owner of Ravenswood gold mine) reported all-in-cost of USD980/oz, Barrick Gold (argueably world largest gold producer) reported all-in-cost of US$1,034/oz. For Ravenswood, let's add 40% to the average cost which arrives at USD1,400/oz. Gold price right now is +/- USD1,800/oz, which means, when running at full capacity, assuming no changes to the production cost and gold price, Ravenswood can generate USD80M profit a year. (note: GEAR's share is 50% in Ravenswood and current market cap is SGD670M).

Lastly, is there a future for Gold? A sure yes, the world is heading towards inflation (if not stagflation or hyperinflation), despite the world leaders repeatedly denied this a year ago. Commodities prices are getting higher but not gold and silver, countries like China, India, Russia are buying more gold, but the price doesn't appreciate. The only reason I can think of is that - not yet. I strongly believe that when it's time to move, gold will fly.

The prominent gold analyst, the winner of multiple LBMA annual precious metal forecast, Ross Norman, once said this: "If you didn’t get the memo about the beginning of a new gold bull run in Q3 2018 then this is your last call."

Conclusion, how much should we value GEAR? Perhaps we wait until the full year result 3-month from now? Perhaps it's too late by then.
A few questions:

- How much conglomerate discount is fair?
- Are the underlying entities correctly valued by the market? 
- How much earnings to shareholders would Golden Energy make for this year when the results come out 3 months down the road?
I think 10-20 years seems like a conservative estimate for the useful life of coal. I will put it somewhere 30-40 years, at least.

Even so, I do not encourage long-term investments into companies with direct exposure to coal prices. Or for that matter, the price of any commodity.

These coal companies only look sexy now because of their sudden windfall earnings, which just a year or so ago, nobody (well, at least not the major financial wires) saw coming. And two years ago, the whole industry was so deep in the hole. So, it could just as well occur that demand comes off and prices crash in the next 6 months or who knows when.

Besides, it seems the in thing nowadays is to hate coal. Environmentalism has a long history of an oscillation in popularity. But since Al Gore's inconvenient truth, its message seems to have stuck to the minds of many Greta Thunbergs. So unless you are looking at a cigar butt or a coal company of graham style kind of undervaluation, it is probably safer to not bet against something which everyone hates.

And as most of these coal companies are now trading at multi-year highs, I would suppose the probability of loss is even higher than before if one were to initiate a long-term coal investment right now.
Early this year, when coal price is at USD90pt, GEAR sold 4.5% in GEMS to Ascend Global Investment Fund SPC for USD50M, if we suspect that the market is not valueing GEMS correctly, then we can also use this as reference. At this price, GEAR's 62.5% in GEMS worths SGD1B, not to mention that coal price today is at USD150pt (and not to mention that China capped its coal price at USD180pt).

Coal is just like other commodities, there are booms and bursts, but as humankind are facing unprecendented energy crisis, it is more likely to expect a boom cycle in the coming years, but bear in mind no boom will last a "long-term" period.

Finally, coal is not just a dirty energy:

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