coking coal

GOLDEN ENERGY & RESOURCES: IFA and Gear unleash lengthy rebuttals to SIAS, BT

With its professional judgement called into question by SIAS over a listed company's delisting proposal, an Independent Financial Adviser (IFA) unleashed a lengthy rebuttal yesterday.

W Capital Markets is the IFA appointed by Golden Energy & Resources (Gear)to provide an opinion for the proposed distribution in-specie of its GEMS shares to Gear shareholders and an exit offer.

Gear owns stakes in Indonesian thermal coal player GEMS, metallurgical coal player Stanmore Resources, and unlisted Aussie gold miner Ravenswood Gold.

SIAS, on its website on 30 May 2023, had said:

• “Disappointingly, the IFA has conflated the two corporate actions despite SIAS’ highlighting this specific concern at the meeting with GEAR”

• “Clearly, SGX RegCo’s reminder to the IFA regarding the utilization of appropriate valuation methodologies and the necessity for analysis supported by reasonable grounds and assumptions capable of withstanding scrutiny has seemingly fallen on deaf ears”

• “SIAS feels that the IFA has not met the expectations set specifically by SGX RegCo”.

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W Capital said it wished to "categorically refute the above allegations which we view to be misconceived and injurious."

Its response covers:

1. Scope of the IFA's opinion and allegation of conflating of two corporate actions
2. Approach taken by IFA for the valuation of GEMS Shares
3. Valuation methodologies adopted in respect of the assessment of the Proposed Distribution and Exit Offer

Firm belief

“We firmly believe that our IFA opinion in respect of the Proposed Distribution and Exit Offer is based on appropriate valuation methodologies and supported by reasonable grounds and assumptions."

-- Wayne Lee,
Chairman & CEO,
W Capital Markets

W Capital concluded: "Whilst we acknowledge that no single method of valuation will be met with universal acceptance and we humbly respect differences in views and opinions, the Board of W Capital Markets would like to put on record that we have always been mindful and use our best endeavours to ensure that we exercise due care, skill and professional judgement in all advisory engagements and firmly believe that our IFA opinion in respect of the Proposed Distribution and Exit Offer is based on appropriate valuation methodologies and supported by reasonable grounds and assumptions."

W Capital's full response can be found here.

The Business Times on 29 May 2023 had also taken issue with W Capital's opinion on Gear's offer.

Business Times senior correspondent Ben Paul opined that the IFA opinion is faulty as:

(i) the IFA has valued the stake of Gear in its Indonesia-listed thermal coal arm (GEMS) inappropriately in its sum-of-the-parts model; and

(ii) the IFA has not provided any analysis on whether the exit offer for Gear (which takes place after its Indonesian arm has been separated) is fair and reasonable.

W Capital's response covers:

1. Approach taken for the valuation of GEMS Shares
2. IFA opinion in respect of the Proposed Distribution and Exit Offer

W Capital's full response can be found here.

Gear, for its part, also issued a response to SIAS's "inaccuracies and omissions" reportd by Business Times and The Straits Times, in particular, SIAS’ commentaries on:

(i) the scope of the IFA's opinion, the IFA “conflating the two corporate actions”, and the IFA’s utilisation of methodologies in its opinion; and

(ii) the framing of the Company’s corporate actions to Shareholders as being two simple decisions.

"The Non-Conflicted Directors maintain their recommendation to Shareholders to vote in favour of the Distribution Resolution and the Delisting Resolution, and to accept the Exit Offer."

- Golden Energy & Resources

Notably, Gear said the "Non-Conflicted Directors" of Gear concur with the IFA’s approach for the valuation of the GEMS shares and the valuation methodologies adopted in the assessment of the Proposed Distribution and Exit Offer.

The Non-Conflicted Directors who are considered independent for the purpose of making the recommendation to Shareholders in respect of the Proposed Transactions are: (a) Mr. Dwi Prasetyo Suseno; (b) Mr. Mark Zhou You Chuan; (c) Mr. Mochtar Suhadi; (d) Mr. Lim Yu Neng Paul; (e) Mr. Lew Syn Pau; (f) Mr. Irwandy Arif; and (g) Ms. Noormaya Muchlis

The Non-Conflicted Directors maintain their recommendation to Shareholders to vote in favour of the Distribution Resolution and the Delisting Resolution, and to accept the Exit Offer.

The all-cash offer -- ie a Gear shareholder accepts cash for his GEMS entitlement in addition to cash for the delisting of Gear -- is a total of 97.3 cents for every Gear share he holds. Gear last traded at 94.5 cents yesterday.

>> Gear's full response -- as a filing on the SGX website -- can be found here.

>> Gear's circular to shareholders can be found here.

GOLDEN ENERGY & RESOURCES: Revised higher offer favours all-cash acceptance

A higher all-cash offer has been made for Golden Energy & Resources (GEAR) shares which encourages shareholders to opt for the all-cash option -- instead of part share and part cash.

From 84.6 Singapore cents a share in the original all-cash offer announced in Nov 2022, it's now 97.3 cents, a 15% increase, said GEAR and offeror Duchess Avenue in a joint statement over the weekend.

The 97.3 cents all-cash option is slightly superior to the revised 96.4 cents value that a shareholder will get if he opts for part share and part cash, according to GEAR's illustration.

aerialport5.18 Thermal coal operations at GEMS. File photo.

Highest ever

“Since the resumption of trading of GEAR shares in December 2016 following completion of the reverse takeover exercise of the Company, the closing prices of the shares have not exceeded the Revised All Cash Consideration of S$0.973.”

-- Golden Energy & Resources

Being more attractive, the new all-cash option addresses the complaint that shareholders had regarding the trading illiquidity and forex risk from accepting shares under the original offer of PT Golden Energy Mines (GEMS), a Jakarta-listed entity, in a partial exchange for GEAR shares.

GEAR owns 62.5% of GEMS.

Golden Energy & Resources
Subsidiary	Commodity	Ownership by GEAR	Jurisdiction
GEMS	Thermal coal	62.5%	Indonesia
Stanmore	Metallurgical coal	64.1%	Australia
Ravenswood	Gold	50.0%	Australia

The all-cash offer, which increased to 97.3 cents from 84.6 cents, comprises:

• Increase in cash price by 18%, to IDR6,500 from IDR5,500 for GEMS shares.

This will be paid in Singapore dollars based on fixed SGD:IDR exchange rate, thereby removing forex risk up to date of payment.

• Increase in exit offer price by 13%, to 18.1 cents from 16.0 cents.

The exit offer covers GEAR's stakes in various assets, especially 64%-owned ASX-listed Stanmore Resources and 50%-owned Ravenswood Gold Group, an unlisted gold miner in Australia.

Factors considered in determining the increase:

(a) the financial performance of GEAR and its subsidiaries for the year ended 31 December 2022, and the business outlook as described in GEAR’s results announcement published on 27 February 2023;

(b) the financial resources available to GEAR, the Offeror and DSS to implement the proposed transactions (including the payment of the revised cash alternative price by GEAR and PT Dian Swastatika Sentosa Tbk (DSS)*, and the revised exit offer price by the Offeror); and

c) the historical traded price of the Shares.

GEAR notes that since the resumption of trading of the Shares in December 2016 following completion of the reverse takeover exercise of GEAR, the closing prices of the shares have not exceeded the revised all-cash consideration of S$0.973.

* With a 77.5% stake, DSS is the majority shareholder of GEAR.

STANMORE RESOURCES: Golden Energy subsidiary "looks far too cheap"

Singapore-listed Golden Energy & Resources, as a holding company, has a key subsidiary, 64%-owned Stanmore Resources (SMR) which is listed on the Australian Exchange. A$3.4 billion-market cap Stanmore produces coking coal used in steel production.

Excerpts from Morgans report
Analyst: Tom SARTOR

Resilience pays

• 4Q sales beat our expectations despite 2022 wet weather.

Stanmore
Share price: A$3.73	Target: A$4.45

• End-CY22net debtmateriallybeat ourforecasts, and we forecaststrongde-gearing to a netcash position in 2HCY23.

• TheJanuarydelugeimpacting port operations is a short-term risk to CY23 sales/costs although HCC (hard coking coal) prices/ realisationsagainprove to bea strong net offset.

•SMR enjoysM&Aadvantages in the Bowen Basin and we think positioning for further acquisitionsin 2023will out-rank dividends in the near term.

•SMR looks too cheapto ustrading on a +25% free cash flow yield and with near 30% capital upsidepotential.

Stanmore pic

Events
▪4Qproduction,pricing upgrades, QLD wet weatherimpacts.

Analysis
▪Impressive4Q:4Q sales(3.47Mt)were 300kt (~10%) above our forecasts despite ongoingwetweather.HighROM/productstocks,additionalminingcapacity/flexibility and opportunistic use of available logistics explained theresilience.

Strong volume and the lower AUD helped SMR to beat cost guidance atSWCand Poitrel;however,bothtailwinds are now abating.

▪Rain impacts:Mackay received ~650mmof rain (nearly 2.4x the January average) in the 7 days from Jan-12. While the mines and rail network have fared better, the trade press suggests port operations at DBCT may take up to 3-4 weeks to fully recover (coal dewatering) significantly slowing exports for all users.

We reduce our CY23 sales forecasts butdo seefurtherpossibledownside.Importantly,lostsales area basin-widephenomenon contributing to significant HCC tightness/ pricing.

▪De-gearing ontrack:End CY22 net debt of $182m(cash$433m,debt ex-leases $615m) was $179m better than our forecast.The higher volume at better than forecast realisations(PCI tracking close to PHCC)likelyexplains much of the delta, along with higher tax accruals as the business re-bases toahigher NPAT.

▪CY22result preview late February: We expect wider-than-usual CY23 guidance and with some risk to volumes/costs versus market expectations (wet weather
uncertainty).

"SMR looks far too cheapto us offering ~30%upsidepotential to our base case valuation."
-- Tom Sartor

We don’t expect a final dividend as we expect SMR to preference de-gearing(senior debt cash sweep due in February, possibly +$300m)andto build fundingcapacity forpotentialM&A.

▪M&A focus:Thetrade press reports that BHP’s Dauniaand Blackwater mines may soon come to market. Operating synergies with Daunia are obvious(adjoining leases, shared infrastructure) and we expect SMR tobe a keybidder.

Peabody appears to be a logical rival forQLDassets (recent appetite, strategic imperative, ~3Mtpa of unused DBCT capacity).

Forecast and valuation update
▪We lower forecast CY23 sales by 4% (to 12.6Mt).We also adjust for:
1) materially higher CY24-25 PHCC assumptions (+20%);
2) higher CY23 PCI realisations (to 84% with ongoing upside); and
3) higher cost assumptions. Price more than offsets short-term weather.

▪Our base case valuation/targetadjusts to $4.45ps (from $3.90).

Investment view
▪SMR looks far too cheapto usoffering ~30%upsidepotentialto our base case valuation.We’reattractedto:

1)highercapitalupsidevspeers;
2)strong cashflow/valuation leverage,
3) low-cost “BHP-like” cost structures at SWC and ED, and
4) clear M&A advantages/ opportunities in QLD met coal.

Price catalysts
▪Potential external M&A.

Risks
▪Production disruption, cost inflation, logistics interruption/ availability.
▪Macro-economicweakness.

Full report here.

STANMORE: Golden Energy subsidiary "too cheap" trading on +25% free cash flow yield

Singapore-listed Golden Energy & Resources has a key subsidiary, 64%-owned Stanmore Resources (SMR) which is listed on the Australian Exchange. Stanmore (A$3.4 billion market cap) produces coking coal, a necessary ingredient in steel production.

Excerpts from Morgans report
Analyst: Tom SARTOR

Clear growth options and agenda

• Key CY22 financials easily beat our expectations on higher PCI price realisations.

Stanmore
Share price: A$3.68	Target: A$4.80

• We now forecast SMR to reach a net cash position during the 1H23.

• SMR enjoys clear M&A advantages in the Bowen Basin and we think positioning for possible acquisitions will far out-rank dividends through 2023.

• SMR looks too cheap trading on a +25% free cash flow yield, with +30% capital upside and upside to tight/buoyant HCC (hard coking coal) pricing.

Stanmore pic
CY22 result snapshot
▪ Key CY22 financials easily beat our forecasts. Revenue and EBITDA were 2% ahead and operating cashflow 12% ahead helped by higher tax accruals as the
business re-bases to a higher NPAT.

Prefer M&A

“We think SMR enjoys a clear opportunity to grow its portfolio of world-class, long life met coal assets, as the majors potentially continue to exit coal. SMR bought BMC (80%) well and the Mitsui stake (20%) incredibly well. It enjoys M&A advantages over peers re regional synergies (infrastructure, marketing), proven funding ability and perhaps most importantly, a demonstrated record of deal execution and good custodianship of large assets. It makes sense to us that SMR positions for/ prioritises M&A over internal growth and dividends.”

-- Tom Sartor

The lack of a dividend didn’t surprise us, but perhaps disappointed the market seeking a sugar hit. This suggests today’s weakness should prove temporary as fundamentals re-assert themselves.

Analysis
▪ Anecdotal guidance only: CY23 outlook comments support the potential for flat volumes across the portfolio (100% basis), but with risks linked mainly to above rail capacity (labour constraints).

High inventories and strong volumes late CY22 provide comfort but we assume 10% higher costs on higher strip-ratios and labour.

That said, we do forecast a ~35% lift in attributable production on CY23 on full year and 100% ownership of the BMC assets.

▪ Very tight PCI markets: 2H coal price realisations again surprised our expectations to the upside (>90%), as very tight PCI markets drive pricing at far higher realisations than the LT average of ~73% of the PHCC (premium hard coking coal) price.

We see upside to our (upgraded) CY23 assumed group PCI (pulverised coal injection) price realisation of ~86%.

▪ Clear inorganic growth agenda: We think it’s in shareholders’ interests for SMR to preference de-gearing and the building of M&A firepower over dividends, given:

1) how successful/ accretive the BMC acquisitions have proven; and
2) our view that SMR enjoys clear M&A advantages in the Bowen Basin (infrastructure, marketing, execution ability, portfolio benefits).

We expect SMR to be an assertive bidder for Daunia, but we have strong reservations should it actively pursue Blackwater given its complexity (product quality, logistics), large rehab liability and history of material cash losses during cyclical low-points.

▪ Organic growth: More detail was offered today, but we think the market still under-recognises SMR’s organic growth options including:
1) higher RMI utilisation (Isaac Downs, third parties?) and
2) potential incremental volumes from Isaac Plains Pit 5/UG, Kemmis North (SWC) and/or Lancewood (Wards Well OC).

Logistics availability appears to be a key ongoing constraint to timing of incremental expansion.

Forecast and valuation update
▪ We make minor adjustments linked to: CY22 actuals, trimmed CY23 production, higher costs, higher sustaining capital, higher PCI price realisations and higher short-term HCC pricing resulting in 2-4% upgrades to EBITDA across CY23-24.

▪ Our base case valuation/target adjusts to $4.80ps (from $4.75ps).

Investment view
▪ SMR looks far too cheap trading on a +25% free cash flow yield and offering +30% upside to our base case valuation. We’re attracted to

1) higher capital upside vs peers;
2) strong cashflow/valuation leverage to buoyant HCC markets;
3) low-cost “BHP-like” cost structures at SWC (South Walker Creek) and ED; and
4) clear M&A advantages/opportunities in QLD (Queensland) met coal.

Price catalysts
▪ Higher HCC pricing driving market recognition of SMR’s large cashflow leverage.
▪ Progress on inorganic growth options as above.
▪ Further accretive M&A activity.

Risks
▪ Production disruption, cost inflation, logistics interruption/ availability.
▪ Ill-disciplined M&A.

Full report here.