Singapore Small-Mid Cap - UOB Kay Hian 2021-07-08: Taking Stock Of Coal Producers Amid A Massive Rally In Coal Prices

Singapore Small-Mid Cap - UOB Kay Hian Research | SGinvestors.io GEO ENERGY RESOURCES LIMITED (SGX:RE4) GOLDEN AGRI-RESOURCES LTD (SGX:E5H)

Singapore Small-Mid Cap - Taking Stock Of Coal Producers Amid A Massive Rally In Coal Prices

  • The 67% increase in Indonesia’s thermal coal prices year-to-date, due to shortage in global supply and better-than-expected Chinese coal demand, has triggered renewed interest in the mining sector. The immediate beneficiaries are the upstream Indonesia producers such as Golden Energy & Resources (SGX:AUE) and Geo Energy Resources (SGX:RE4).
  • IDX-listed Golden Energy Mines, a 63% owned subsidiary of Golden Energy & Resources, has reported almost 200% y-o-y growth in earnings of US$101m in 1Q21. Golden Energy & Resources appears attractive given its SOTP-based valuation of S$0.58.


Indonesia’s thermal coal prices near 5-year high, +67% year-to-date.

  • Indonesia’s thermal coal price has started rebounding since late-2020 after hitting a 5-year low in mid-2020, as demand reduced temporarily due to lockdown in many countries to combat the COVID-19 pandemic. In late-20, the faster-than-expected recovery in the Chinese economy coupled with the disruption in coal production have led to a massive rally in Indonesia’s thermal coal price.
  • On 5 Jul 21, the price of ICI 4 Indo Coal Futures (ICI4) has increased to US$64.20/t (31 Dec 20: US$38.55/t). Argus Seaborne Coal Outlook Report dated Jun 21 (Argus Report) highlighted that Chinese coal consumption remains very strong and the pull for non- Australian imports is skewing all coal benchmarks higher. European coal burning is rising as gas price surge.
  • On the supply side, the Argus report highlighted that Australian exports have been soft and Colombia has been stuck at low levels. Indonesian exports have also not been as responsive to higher prices as they were in previous cycles.

The immediate beneficiaries are Golden Energy and Geo Energy

  • The immediate beneficiaries are Golden Energy & Resources (SGX:AUE) and Geo Energy Resources (SGX:RE4) as they are upstream stable coal miners. With the sequential 37.7% q-o-q jump in Indo coal benchmark prices in 2Q21, the upcoming results in mid-Aug should be a standout.
    • Just taking Golden Energy & Resources’s 63% stake in Jakarta-listed PT Golden Energy Mines (GEMS IJ EQUITY, Not Rated), Golden Energy & Resources trades at an annualised 1Q21 P/E of 2.3x (63% stake x S$136m profit in 1Q21 / 2,353m shares = S$0.036 for 1Q21 EPS). This excludes a 60% indirect-stake in Australia-listed Stanmore Resources (SMR AU EQUITY, Not Rated) worth S187m and a 50% stake in Ravenswood Gold mine, a producing mine which has total gold resource of 3.9m ounces (Moz) and a total gold reserve of 2.6 Moz.
    • In 2020, Golden Energy & Resources delivered an all-time high production volume for energy coal of 33.5m tonnes (+9% y-o-y), recording revenue of US$1.16b (+4.2% y-o-y). This came despite the 11.3% drop in energy coal selling price to US$31.03 per metric tonne (mt) due to the global pandemic, Golden Energy & Resources’s 2020 EBITDA rose 14% mainly due to its record low production cost of US$21.04/mt.
    • For Geo Energy Resources, 2020 revenue of US$306.8m came on the back of its highest-ever coal sales of 10.7m tonnes, which also bolstered the record earnings of US$306.8m (+23% y-o-y). Geo Energy Resources trades at 2.1x P/E on its annualised 1Q21 EPS of US$0.0202/share (S$0.0272/share). While it is cheaper, we note that Geo Energy Resources has lower reserves than Golden Energy & Resources.
  • Credit rating agency Fitch cited in Feb 21 that they upgraded Geo Energy Resources based on its improved liquidity but Geo Energy Resources still has a weak operating profile given its limited reserves.

Golden Energy appears attractive given its SOTP-based valuation of S$0.58.

  • On a SOTP-basis, Golden Energy & Resources’s current market cap of S$800m is at a significant 63.4% discount to its SOTP-based valuation of S$0.58, based on 63% stake in GEMS and 60% indirect-stake in Australia-listed Stanmore Resources (SMR AU EQUITY, Not Rated), worth S$2,000m and S$183m, respectively.
  • Additionally, Golden Energy & Resources has a greater production volume and capacity relative to Geo Energy Resources, which should translate to greater operating leverage and sensitivity to coal prices.

Golden Energy & Resources (SGX:AUE)

Geo Energy Resources (SGX:RE4)

  • Business: Geo Energy Resources is one of the leading Indonesian coal producers. It has four mining concessions located in South and East Kalimantan. Currently, Geo Energy Resources is actively operating two mines: SDJ and TBR. It has recommenced its mining operations at BEK while we are planning to start further exploration at STT. The focus of Geo Energy Resources coal sales remains on Indonesia and China as core markets. Geo Energy Resources has also scaled up its presence in other markets such as South Korea, Vietnam and Pakistan.
  • Recent updates: Geo Energy Resources' 1Q21 net profit was US$28.5m (4Q2020: US$3.5m; 1Q2020: US$31.4m), driven by the strong operating profit recorded highest quarterly revenue of US$114.5m in 1Q21, an increase of 30% from US$87m in 1Q20, due to higher sales volume and higher Average Selling Price (ASP). Sold a total of 2.9m tonnes of 4,200 GAR coal from its SDJ and TBR coal mines, a 16% increase from 2.5m tonnes in 1Q20. The average Indonesian Coal Index price for 4,200 GAR coal (ICI4) was US$41.84 per tonne in 1Q21, up from US$31.97 per tonne in 4Q20 and US$34.44 per tonne in 1Q20.
  • Valuation. Geo Energy Resources trades at 2.1x P/E on its annualised 1Q21 EPS of US$0.0202/share (S$0.0272/share).
  • See Geo Energy Share Price; Geo Energy Target Price; Geo Energy Analyst Reports; Geo Energy Dividend History; Geo Energy Announcements; Geo Energy Latest News.

Singapore Research Team UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-07-08
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