I first invested in Geo Energy Resources Limited back in Oct 2017 at an average stock price of 28 cents and exited my investment at 23 cents in May 2018. This resulted in a loss of approximately 18% on my capital. It was a small inconsequential loss since the sizing was relatively small. Nevertheless, I have learnt lessons which I hope would put me in a better stead. Fast forward to today, I have decided to give Geo Energy another shot. Recently, I re-invested into Geo Energy Resources Limited and here are the reasons why.
1) Record Coal Prices
Like most commodities right now, coal prices have surged several times as shown in Diagram 1.
Geo Energy exports coal with Gross Calorific Value (GCV) of 4,200, so it would track the Eco Coal brand index (denoted by the blue graph in Diagram 1). In a media release of its early bond redemption dated 12 Sep, its CEO stated that “ICI4 hits a record high of US$76/tonne as at 10 Sep.” This compares with US$29/tonne in Sep 2020 and US$37/tonne in Sep 2019 (pre-Covid days). The improving coal prices have positively benefitted the financial performances of Geo Energy as shown in Diagram 2.
News of a commodities super cycle and inflation have been dominating the news this year. Investing in Geo Energy is one of the most direct proxies to capitalise on record coal prices. However, rising coal prices is one thing, Geo Energy needs to be able to produce the goods, i.e. mine the coal.
2) Possible increase in production
As shown in Diagram 3, Geo Energy is on track to deliver targeted sales volume of approximately 10.5mt for 2021 based on the latest results presentation.
In addition, Indonesia’s coal sector, where the mines of Geo Energy are located, is a direct beneficiary of the going trade dispute between China and Australia. Chinese buyers are increasingly getting their coal from Indonesia. As a result, Indonesia’s Ministry of Energy and Mineral Resources has raised the national coal production target for 2021 by 14%.
Geo Energy had also applied for an increase in production quotas for their SDJ and TBR mines from the approved 10.5mt to 12.0mt. While this is still subject to regulatory approval, I fancy that its chances should be quite good. If approved, this would really be a shot in the arm for its stock price.
3) Payment of dividends and early redemption of bonds
Ever since coal prices commenced its recovery, the company has been rewarding its shareholders handsomely.
- In 4Q 2020, Geo Energy declared dividend of 0.8 cents
- In 1Q2021, Geo Energy declared dividend of 0.5 cents (surprise!)
- In 2Q2021, Geo Energy declared dividend of 0.5 cents (no dividend declared the year before)
This translates into a trailing dividend yield of 7.2% based on share price of 25 cents. It could potentially go higher if the Board declares a surprise dividend in 3Q2021, just like in 1Q2021.
In the same announcement, Geo Energy could also afford to make a tender offer to redeem the bonds at 2% premium. All these developments bode well for both shareholders and bondholders going forward.
1) Coal is dirty
Let’s get this out of the way first, coal is a dirty fossil fuel and definitely one that is increasingly frowned upon by the investment community and on online forums. On ESG alone, it probably will not be on the radar of some investors/funds.
Well, investors of Geo Energy can at least take comfort that the coal it mines are more “eco-friendly” given their low-ash and low-sulphur properties. Apparently, this is a grade of coal that provides energy with the least environmental impact. I have never done well in my Sciences back in school so I did not expend more effort to verify this claim. What I am more concerned with is the fact that banks around the region have started making commitments to end coal financing. Fortunately, Geo Energy faces no immediate financing risks as it is net cash even after redeeming its outstanding bonds. Therefore, it might find the doors of the banks increasingly closed but it at least need not be at the mercy of them.
2) Not all increase in price translates into profits
In a recent interview with SGX for its kopi-C series, the chairman of Geo Energy revealed that they have “negotiated to keep our costs in tandem with coal prices.” This means that in an environment of rising prices, its cost of production is adjusted upwards as well. However, without publicly disclosing how its cost of production is linked to the index, I am unable to ascertain how much of the rise in prices will directly translate into profits.
In addition, do note that Geo Energy needs to set aside 25% of its production to meet Domestic Market Obligations (‘DMO’)- i.e. sell to the local market at significant lower prices.
Interestingly, the preceding kopi-c report featured Uni-Asia, which I also highlighted as an interesting turnaround play. Talk about pure coincidence!
3) Management might invest in something out of line
To secure its long-term future, the Management of Geo Energy have stated their intention to diversify into new businesses to reduce its reliance on coal.
Well, I have been investing long enough to know that there is always a temptation to be more ill-disciplined when one is sitting on a hoard of cash pile, especially one that is a result of a bonanza. That is certainly the case for Geo Energy, given that it disclosed that it had accumulated US$36 million in a short span of over 2 months (30 June to 5 Sep). This represents 14% of its current market capitalisaton. At this frightening rate and assuming coal prices keep up its momentum, its cash pile would have exceeded its market cap by the next 12 months.
My worry is that the Board approves of an investment that Management has no expertise in and one that is not even a close adjacency to its existing business. Furthermore, it does not have an acquisition track record that I am very comfortable with. After all, it raised an 8% US$200million bonds but made no acquisition thereafter.
After balancing the potential risks and rewards, I have decided to re-invest into Geo Energy. Hopefully, it will be a happy ending this time.
Analyst report from KGI indicate a target price of $0.42 Vested at SGD 0.23 since July 2021.
This article was published on 19 September 2021.
Here is also an article comparing the various brokerages that I have used to purchase my stocks.
Disclaimer: The information contained herein is the writer’s personal opinion on his blog and do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein.