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.
Investment Highlights
1) Record Coal Prices
Like most commodities right now, coal prices have surged several times as shown in Diagram 1.
Diagram 1: Indonesia coal prices (Source: Coalspot.com)
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.
Diagram 2: Increasing trend of Geo Energy’s financial performance
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.
Diagram 3: Sales volume of Geo Energy (Source: Company)
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.
Investment risks
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 $0.42 Vested at SGD 0.23 since July 2021.
This article was published on 19 September 2021.
Here is also an article comparing the various brokerages that I have used to purchase my stocks.
Disclaimer: The information contained herein is the writer’s personal opinion on his blog and do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein.
insightful post as always. however there’s multiple names that will benefit from macro tailwinds in coal. A bad mgmt would not be able to ride it well regardless. wondering if you have considered bigger plays e.g. BTU, ARCH that seem to be correlating well with coal prices?
Thanks, truly agree with you that bad management will not be able to capitalise on any macro tailwinds. I am not familiar with the coal producers that you have mentioned unfortunately. Guess I need to do more research first!
I have been invested in Geo Energy for a few months now and I just found your post:
My biggest ‘fear’ is that they waste money on acquisition unrelated to the main business. I have personally contacted management and suggested they should do a buyback at its current share price (they’re trading at a PE < 2 + net cash as you said) but they said the share had liquidity issues to implement a buyback.
On the other hand the company is too cheap right now and they have a dividend policy of 30% of net income, so even if not all the money is used productively we should get some very healthy dividends over the next months.
Also, the IC4 coal futures jumped a 15% today for most months, and it's trading at almost 100$/t for Q4. At that rate Geo will be making absurds amount of money, even though as you said their cost structure is uncertain.
Hi Alex,
Do you have any idea how their cost structure is determined? Its share price doesnt seem to track coal prices- so I am worried I am missing something here as well
Hello,
No I do not know the details of their cost structure, I will send an email to IR and see if they’d be willing to share it.
Anyways in their latest update from the 20th of september they mention this: ” In just one month of July 2021, the Group achieved an EBITDA of US$26.5 million and net
earnings of US$18.6 million”
18.6M of net income in July = that would be 111M$ of net income in 2H if they keep the performance or 150M SGD$. So they’ll be earning almost a half of their market cap over the next 6 months, at least.
Everything seems to point that next months are going to be even BETTER than july, since IC4 prices for july were around ~65$/t, in september they have been ~75$/t and futures for Q4 have just risen today another 5% and they are trading at above 100$/t. Plus, they just redeemed their bonds which will save around 4.8M$ of interest payments annually. Plus they have just obtained the rise in the production quotas from 10M to 11.5Mt.
At this point I think it’s a matter of how they spend the money/how they reward shareholders instead of if they are going to earn the money.
It’s a bit frustrating since I’ve been invested for a few months and the company seems much cheaper now than a few months ago. I’ll try to contact management and suggest increasing the dividend or actually implementing a buyback to force the market to react to how well the company is doing. Also it’d be helpful if they were willing to share their cost structure as you said.
By the way, I’d be happy to talk more about the company in private, my twitter is @NateValuetw if you want to dm me.
Congrats on another great call! Your done so well on Geo and Uni-Asia, handily beating both the STI and S&P500. Does this encourage you to spend more time looking for stocks and less time on <1.5% annual yield insurance time deposits?
Hi Tim,
Thanks for following my blog and calls. I cover a wide spectrum in finance investment topics so that it can cater to all types of investors as my readers are quite varied.
This stock has been on a steady decline despite the high coal prices. Any new insights and are you still holding?
Hi Jason,
No new insights. I am just wary of corporate governance issue – not exactly comfortable with the Chairman replacing the CEO.