restaurant1.17Key presenters at the roadshow: Mark Zhou, head of investments of GEAR, and Joel Ng, a KGI Securities analyst. Photo by Leong Chan Teik A month to the day it resumed trading on the SGX, Golden Energy & Resources (GEAR) had a roadshow last Thursday (12 Jan). That was also the day the first analyst initiation report on GEAR was released.

Golden Energy & Resources
Share price: 
Target price: 
95 c

JoelNg10.16Joel Ng, analyst

Target price based on DCF. 

♦ WACC of 12.5% based on 14% cost of equity and 8% cost of debt. 

 Life of mine until 2035 based mainly on BIB concession of up to 30 years.
 Long term average selling price of US$42/tonne. This is a 10% discount to the current market price.
♦ Cash cost (production and operating cost excluding royalty and D&A) of US$20.0/tonne. This is higher than GEAR’s current cash cost of US$19.7/tonne in 9M16.

The roadshow was attended by some 200 investors, largely clients of KGI Securities whose analyst has issued a buy call on the stock: Joel Ng estimated its fair value to be 95 cents.

The stock recently traded at 50.5 cents. That is a lot cheaper than the 67 cents that it sold at during the post-RTO compliance placement in December last year. 

KGI Securities, using GEAR's announced plan to 
produce 14m tonnes of coal this year (+40% YoY), forecasts GEAR's FY17 earnings at US$96 million. Its forecast is of US$17 m for 2016. 

The investing story of GEAR can be distilled into three things: the price of coal, the cost of production and the coal reserves in the ground.

The price of coal depends on macro conditions and is the key risk factor for GEAR. Any discussion on the multi-year outlook for coal can be never-ending, given its complexities and uncertainties.

So, perhaps simplistically, demand from China is a big factor in the near term while further out, Indonesia's relentless growth in power generation could shift the demand-supply equation in favour of domestic coal miners such as GEAR. 

Unlike such external factors, GEAR's cost of production is what GEAR has great influence over. 

It has continued to improve 
operational performance, bringing down cash cost to US$19.7/tonne during the 9M16 period -- from US$28.5/tonne and US$23.8/tonne in FY14 and FY15, respectively.

markzhou1.17Mark Zhou, head of investments, GEAR. Photo by Leong Chan Teik The relatively low cost is owing in part to GEAR's key concession, BIB, being just 25 km on average to the sea, unlike in the case of some peers which depend on rivers to transport coal to the mother ships at sea, says Mark Zhou, head of investments at GEAR.

Mr Zhou adds that part of BIB overlaps with a forestry concession owned by United Fiber System (the company that GEAR did a RTO on in 2015).  

Thus -- and here's something uncommon among coal miners in Indonesia -- there is savings on certain costs that are otherwise payable to a forestry concession owner. 

When it comes to reserves, GEAR has the fourth largest coal reserves in Indonesia -- 780 million tonnes as at end-Oct 2016. At the 2017 production rate of 14 million tonnes, it would take about 55 years to fully mine the reserves.

That is yet another factor that sets GEAR apart from competitors because its large enough reserves qualifies it to tender to supply to independent power producers which require a reliable supply for more than 20 years.

In the absence of any major decline in overseas demand, the reserves could become increasingly valuable as domestic demand rises with the country's planned construction of coal-fired power plants.

From above 100 million tonnes currently, by 2024, the country's annual coal demand for power generation alone is projected to reach 360 million tonnes. This is roughly what the country produces currently from all its coal mines.

Not all of the production is suitable for power generation while GEAR's coal (4,200 GAR) is.

The 4Q2016 net profit of GEAR is expected to come in at about US$10 million, going by forecasts of KGI Securities in its initiation report released last Thursday.

KGI Securities net profit forecasts
2016 US$16.9 m PE 48.1x
2017 US$95.8 m PE 8.3x 
This can be deduced by using KGI's full-year forecast of US$16.9 million and deducting the already announced 9M2016 net profit of US$6.9 million. 

Underpinning the robust expectation for 4Q2016 are higher selling prices for GEAR's coal and a ramp-up in its production. 

Given the planned increase in production in 2017 and assumed buoyant prices of coal, KGI's forecast for this year is a whopping US$95.8 million of net profit.

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