Company Update: 26 January 2024
Stepping up production and securing growth
- Inorganic growth to expand sales volume. As of 31 December 2023, Geo Energy owns 73.11% of PT Golden Eagle Energy Tbk, listed on IDX, and it owns 85% of TRA mine. In December 2023, after the acquisition, TRA had its first export shipment of coal valued at around USD3.2mn based on the ASP of approximately USD58.98 per tonne, which was sold at a premium to the Indonesian Coal Index (ICI) price of USD58.05 per tonne at that time, indicating the favourable demand for TRA coal. TRA produces 3,800 kcal/kg gar coal and has 275Mt of 2P coal reserves, leading to a 262% increase in reserves after the acquisition.
- Ongoing exploration and development. Geo Energy is conducting further exploration on TRA coal mine which is expected to add significant reserves this year. Furthermore, it’s 49% owner IPC (other 51% is owned by Bukit Asam, state-owned coal mining company) is also expected to add further reserves in 1Q24.
- We initiate an OUTPERFORM recommendation and a target price of S$0.80 based on a DCF valuation method.
Long life of mine and low operating costs.
Geo Energy obtains a strategic advantage stemming from the extensive lifespan and projected coal production of its mines, instilling confidence in long-term clients to engage in supply contracts with the company. Boasting over 351 million tonnes of thermal coal reserves, Geo Energy holds a prominent position in Indonesia. Additionally, its commendably low stripping ratio, approximately 4.8 for a large-scale coal operator, equips Geo Energy with resilience against cyclical fluctuations in volatile coal prices.
Benefiting from Asian developing countries.
Coal demand in the Americas and Europe experienced a temporary rise in the past year amid concerns about energy shortage, particularly in thermal coal. However, the availability of alternative energy sources has led to a subsequent decline in demand from these regions – a trend expected to persist. Conversely, emerging nations like India are anticipated to counterbalance this decline, emerging as significant coal consumers and potentially rivalling China, the current leading importer.
Valuation & Action
We initiate an OUTPERFORM recommendation with a TP of S$0.80, based on a DCF valuation method with a WACC of 13.5%.
Risks
Coal prices are susceptible to global demand and supply fluctuations. The shifting energy landscape might pose long-term challenges for the coal industry. Weather uncertainties and execution risks may also impact production.
