Geo Energy Resources attracted investor appreciation when it gave out 9 cents/share as dividends in 2020 and 2021. 

coal hand picFew investors are hoping for payouts of this magnitude this year.

The stock price action seems to indicate this, with the stock (currently 22 cents) being 40% lower than a year ago.

The slide is not surprising because:

• A higher stripping ratio at Geo Energy's mines has resulted in a higher cost of production.
• The royalty rate payable to the Indonesian government has doubled or thereabouts since Sept 2022.
• Coal prices have been much lower this year than in 2022 and 2021.

However, make no mistake -- current coal prices are still much higher than in prior years given robust demand from China and India.

This is a key reason for anyone to expect Geo Energy to generate ample cashflow to keep dishing out quarterly dividends and maintain its 30% or higher payout ratio.


This has been borne out two quarters into 2023, as the table shows: 

DIVIDENDS FROM GEO ENERGY

Yr

2021

2022

2023

 

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

Cts

0.5

0.5

3

5

2

2

1

4

0.5

0.5

Sum

9 cents/share

9 cents/share

 

 

Dividends track profits, so the hope is that coal prices stay stable, if not rise, in 4Q 2023. (Coal prices tend to be higher in 4Q owing to winter demand).

For 1H2023, Geo Energy reported strong business performance but it was a sharp fall compared to 2022, including:

• Revenue of US$239.8M.
• EBITDA of US$55.0M, translating to a low 0.5 ratio for Enterprise Value / EBITDA.
• Net profit of US$28.0M (or EPS of 1.94 US cents/share).

Annualised, this translates to a PE of 4.2 for 2023. 

 

"Coal supply constraints are increasing due to the ageing resources of the existing mines and a lack of mine approvals resulting from the net-zero initiatives. The lack of accessibility to financing further restricts the growth in coal supply. Consequently, the coal demand uptick is expected to outpace supply, resulting in a price premium in the medium to long term."

-- Geo Energy, 1H23 results release

So just when Geo Energy (and its coal peers in Indonesia) is leaving behind extraordinary times, the Singapore-listed company with a market cap of about S$300 million has finally sealed deals that will massively expand its business scope.

Information released by Geo Energy in the past week and expanded on at an investor briefing this week relates to its proposed acquisition of 58.65% of PT Golden Eagle Energy Tbk, an Indonesia-listed coal mining group: 

• The latter's Triaryani Mine, which is currently in production (2.5 million tonnes annually), has recently been independently valued at approximately US$1 billion. The mine has 275 million tonnes of coal reserves.

Compare this to the US$154.1 million that Geo Energy is paying for its 58.65% stake. (Geo Energy has an intent to increase its stake to 75%. See: Coal demand will not vanish, this company is upping its resources via a big buy of a peer)


• Triaryani Mine coal will be transported via a new and shorter road (92 km versus existing 137 km) to a new port.

When phase 1 of the road is completed over the next 2 years, Triaryani's annual coal production could be ramped up. Phase 2 will start in 2030.

Then, thanks in part to lower transport costs, the mine is forecast by Geo Energy as having the potential to generate ~USD250M cash profit per annum assuming USD10 per tonne cash profit.


Geo Energy is financially equipped to finance its acquisition.

Thanks to two solid years of profits, it had accumulated net cash of 
US$205 million as at end-1Q2023.

It also recently
 secured up to US$220 million senior term loan facilities from PT Mandiri (Persero) Tbk., Singapore branch and/or its affiliates.


Adam Tan CFO"Our core business remains in coal -- but at the same time we've been looking at diversifying into an area of growth. We have identified Charged as a perfect target given the industry growth and also the first mover advantage it has in the Indonesian market."

-- Adam Tan, CFO

Adding more potential upside further out in the future is Geo Energy's new investment in an electric vehicle start-up via an initial US$4 million loan that carries an option to convert it into equity.

The start-up, Indonesia-focused Charged Asia Pte. Ltd, is in the business of producing electric two-wheelers and has delivered 1,000 units.

 

Its investors include DeClout Ventures of Japan and Vmoto of Australia.

Geo Energy's core business will, for quite sometime more, still be coal mining, which is expected to continue to be very profitable as demand stays around while supply shrinks.

 

The EV business looks to be a side-show that will take time to scale up and prove itself in a fast-evolving and competitive industry. 

» For more on the EV investment, see Geo Energy's announcement here.
» Geo Energy's 1H2023 Powerpoint deck is here.




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