Excerpts from RHB Research report

Ramping Up Production

Golden Energy & Resources

Share price: 
39 c

71 c

We believe GEAR is on track to deliver FY18 coal production target of 18m tonnes (vs 14m tonnes in FY17) aided by:

1. The appointment two coal industry veterans – Mr Bonifasius and Mr Utoro as GEMS’ president director and director respectively;

2. The renewal of its contract with mining contractor, SIS.

GEAR should complete its equity restructuring by end-Dec 2017, which would allow it to facilitate future equity-related fundraising.

Maintain BUY 
with SGD0.71 TP (82% upside), implying a 13.1x FY18F P/E.

Ramping up its coal production to 18m tonnes in FY18F (vs 14m tonnes in
FY17). Golden Energy and Resources (GEAR) has proved its ability to ramp up its coal production to 9.5m tonnes in 2016 from 4.4m tonnes. It is on track to deliver its FY17 coal production target of 14m tonnes.

bigmachine4.17Overburden being removed @ GEAR's mine in Kalimantan (PT Borneo Indobara). NextInsight file photo.To ensure the ramp up in coal production, GEAR has appointed two coal industry veterans, ie Bonifasius 
and R Utoro as the president director and director respectively of its 66.9% subsidiary, Golden Energy Mines (GEMS) effective 1 Jan 2017.

Mr Utoro was 
formerly Kaltim Prima Coal’s (KPC) chief operating officer and instrumental in increasing that company’s coal production to >60m tonnes pa (mtpa) from 2 mtpa. We believe GEAR would be able to deliver its FY18 coal production target of 18m tonnes as it has renewed its contract with mining contractor Saptaindra Sejati (SIS), a subsidiary of Adaro Energy, for a period up to Dec 2020. We are monitoring for news on the Indonesian Government’s approval to increase FY18F coal production of Borneo Indobara (BIB) to 15m tonnes from 12m tonnes in FY17F.

Restructuring its equity to facilitate future equity-related fundraising exercises. In Oct 2017, GEAR embarked on a capital reduction exercise to restructure its finances, rationalise its balance sheet for it to accurately reflect the value its underlying assets and financial position. It is also to facilitate future equity-related fundraising exercises.

Maintain BUY. We also maintain our DCF-derived-TP of SGD0.71 (WACC:10%. long-term growth: 0%), which implies our FY18F P/E of 13.1x. Key main catalyst is a sizable increase in earnings ahead due to substantial increase in coal production.

In connection with the capital reduction exercise, GEAR would reduce its share capital by USD401.2m and cancel an equal amount of accumulated losses. There would be no change in the total number of issued and outstanding ordinary shares. The capital reduction exercise is expected to be complete by end-Dec 2017.

Key risks to our call include execution risks in ramping up coal production, weaker-than-expected coal demand, weaker-than-expected coal price and regulatory risks.

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