Share Price S$0.36
Expanding its portfolio and takeaways from site visit
• Geo Energy (Geo) is currently trading at 13.1x 2012 PE and 2.6x P/B.
• Expanding its portfolio. In a span of six months, Geo has entered into conditional sales and purchase agreements for five new mine concessions. These new concessions’ coal (GAR ranging from 4,000- 7,200 kcal/kg) expands Geo’s current offering of only low ranked coal (GAR: 3,400 kcal/kg) from its BEK concession to its customers, and also relieves previous concerns of Geo’s dependency on a single asset.
• Stable margins. Despite weaker coal prices since 2011, Geo has maintained stable gross profit and net profit margins of about 38% and 20% respectively from 2010-1H13. This is attributable mainly to the lower-than-expected strip ratio in its BEK concession, resulting in a lower cost of production. Geo’s possession of its own fleet of mining equipment also provides the company with better control over production schedule and costs.
• Continued coal price weakness may drag on earnings. As oversupply continues to be an overhang on the industry, the Newcastle coal index dropped to its lowest since 2009 to US$76.1/metric tonne. According to Bloomberg, the supply glut is likely to persist with Australian coal miners boosting production as a softer Aussie dollar helps lower their cost of production. In China, authorities have also announced a 3% tax on imports of steam coal with low calorific value (CV). While it is still unclear if Indonesia will be subjected to the tariffs, the imposition may negatively impact Indonesian coal producers who are the largest exporters of coal to China.
• As a seasoned mine operator, Geo has been successful in reining in costs and maintaining its profit margins despite weaker coal prices. With options to add new mines with a higher CV, it increases Geo’s product offerings to clients and reduces risk exposure to tariffs imposed on low ranked coal. However continued weakness in coal prices may ultimately hit earnings if the industry supply glut persists.