Excerpts from analyst's report
Recovery of Coal Price Brings Geo Energy Back to Focus
NRA Capital analyst: Liu Jinshu
 Tung Kum Hon, CEO of Geo Energy Resources. Photo by Colin Lum.High return / high risk. We expect Geo Energy Resources Limited (Geo Energy) to report PATMI of US$1.4m for 2Q FY16 and US$6.7m for FY16 following a net loss of US$2.6m in 1Q16. The turnaround is supported by a ramp up in production volume to 1.0m tonnes in 2Q16 and 5.5m tonnes in FY16, and higher coal prices since 2Q 2016, as major coal mining countries cut back on production thus resulting in a supply shortfall. We value Geo Energy at around 2.2x P/BV or S$0.225 per share, representing upside of 118%. Key risks arise from Geo Energy’s leverage at 80.8% as of 31 March 2016 and potential placement on the Watch List due to the minimum trading price criteria. On balance, we rate Geo Energy Overweight with a high return/high risk classification. |
♦ Coal prices rebounded amidst sharp production cuts. Global production coal has fallen thus far in 2016. China, in particular, plans to reduce coal capacity by 750m tonnes by 2020 and will be sending inspection teams to local governments to enforce these capacity reductions. The decline in domestic production has led to higher coal imports to China and higher prices. As larger miners cut back production at peripheral mines, we hold the view that coal prices may have stabilized after five years of decline.
| Geo Energy Resources | |
| Share price: 10.3 c |
Fair value: 22.5 c |
♦ Geo Energy’s low sulphur, moderate ash coal attracted US$1.2 billion offtake agreement. Geo Energy’s coal is relatively low in calorific value, but has extremely low levels of sulphur and ash.
China has banned the import of high sulphur and high ash coal, in spite of their calorific value. Geo Energy’s coal is useful as blend stock to meet these regulatory requirements.
Geo Energy has shipped about 1.5m tonnes of coal in 1H 2016 and has recently obtained a US$1.2 billion offtake agreement over the life of its SDJ mine, pointing to robust demand for Geo Energy’s products.
| ♦ Profit of US$13.86 m in FY17? |
 "...we remain conservative and assume an ASP of US$26.00/metric tonne for 2Q16. Based on an ASP of US$30/metric tonne, we further project that Geo Energy may make US$13.86m in FY17F, translating to a forward P/E of 7.4x. Given the upside potential, we initiate coverage on Geo Energy."-- Liu Jinshu (photo) |
♦ New TBR acquisition to provide additional upside. Geo Energy is currently in the midst of completing the acquisition of an adjacent concession holding another 41.6m tonnes of coal reserves.
This acquisition allows us to project total group coal output of 79.48m tonnes from FY16 to FY24, thus justifying the upside presented.
♦ Prospective turnaround makes for reasonable investment case. During 1Q16, Geo Energy’s ASP was about US$24.52/metric tonne. Benchmark prices of similar coal products reached US$29.58/metric tonne as of 25 July 2016. Should the supply shortfall continue, we may see coal prices rising further.
Full report here.
