$Geo Energy Res(RE4.SI)

From the posts and comments, it’s obvious that many SHs have been scared shitless. Lol.
But of course.
I’ve gotten quite a few questions, so this post will answer it all. Hopefully.
1stly, why the big drop today?
The clear answer is the big drop in GAR 4200 coal prices.
It’s not just Geo, most of the Indo coal players have dropped of late.
Geo’s drop is compounded by their comparative yoy drop in earnings.
Revenue has actually increased, production cost has increased, but only slightly. The bulk of the decrease in earnings comes from the massive debt financing costs.
So the 2 causes are:
1) Drop in coal prices
2) Lower earnings compared to the corresponding period yoy

Let me explain why I’m not overly concerned. And this is where some DD comes into play.
Let me start with 2) first.
The financing costs in the form of the bonds are indeed high and eating away at the profits. And I do fault Tung for not deploying the funds faster, but at the same time, now is exactly the wrong time to be bailing out Cos of financing fees. Cos now that TBR offtake is finalized, the overburden removal is completed, increasing of barge and export facilities are upgraded... and TBR has exported its first 0.2mil tonnage, what remains is to ramp up production in subsequent quarters. Which doesn’t require much effort.
Managements next step is to look at deploying the funds, both from the bonds and from Macquarie, into acquisitions.
So forget about 2018, I think the lowered earnings would reverse in 2019.

Now, back to 1)
This is the major worry. China has scaled back their imports, resulting in a crash in coal prices.
Traders have stopped restocking, leaving miners and middlemen with too much coal stocks on their hands, and they’re trying to dump them on the market, hence undercutting each other.
Also, as prices come down, the higher calorific values are now value for money as thermal coal, displacing the 4200 low sulphuric coal for “coal mixing” to keep within the max sulphuric levels requirement.
Just to give a sense, Gar 4200 prices were as high as $70/t, dropped to an average of $41.50 in Q3, and Went as low as $29, $30 /tonne last week (just once!)
It has rebounded slightly and right now, is at $32/t.
I don’t agaration and put up these figures.
I do my homework while everyone else guesstimates the cause of the drop. (See attached)

Now, what gives me the guts to average up and continue adding if necessary?
Cos I think the $30/t is the floor for Gar 4200.
Why so?
Simply cos the production costs for most producers in Q3 is around that level!
Selling coal below that, is to sell it at a loss.
Geo’s production cost is $30.72/tonne in Q3, and that’s including the costs of starting a new mine (TBR).
It always costs more at the start Cos of the higher overburden removal, higher strip ratio, and all the misc costs of laying new access roads etc.
(See attached, I’ve even highlighted the paragraph for Geo for u)
GEAR’s production costs in Q3 is slightly higher than Geo’s, although admittedly, it’s lower than Geo’s in 1H.
Average Selling Price (ASP) - Production costs = Cash Profit

In Q3, Geo’s ASP is $43.48/t, production cost is $30.72/t, giving a profit of $12.76/t.

GEAR’s ASP is $40.80/t in Q3.
Adaro energy doesn’t release its exact ASP, but it’s a 9% increase in Q3 compared to Q2, which is lower than Geo’s increase.

In other words, at below $30/t, almost all the producers are going to sell coal at a loss.
Would they start dumping at a loss? I doubt it.
That’s why there’s a shipment last week at below cost, but it quickly rebounded back to $32 today.
China has suddenly increased import restrictions ahead of the seasonally high demand Q4 period and that has taken many miners by surprise. I don’t think this would last. Currently, coastal supplies can last 33days, so it’s on the high side. Once the stockpiles go down, China’s own production is insufficient and they’d have to start importing, and if there’s a brutal enough winter, they’d have to start importing with a vengeance.

Let’s look at Geos numbers now. In Q3, cash profit is $12.76/t.
I’m going to be more aggressive than all the analysts and assume coal prices remain low for a prolonged period of time into 2019.
Let’s assume a $35/t basis, giving Geo a cash profit of $5/t
(Rem production costs come down in 2019 due to synergies between SDJ and TBR)
Assuming a total production of 10mil tonnes
(Revises tonnage guidance given by management is 10-15mil for 2019)
That gives Geo a profit of $50mil.
With the increased number of shares from Macquarie stake, it’s still EPS of 3.6 US cents.
Taking away 20% as an additional MOS, with a forex conversion of 1.35, I’m left with 3.86 SG cents.
At the current price, that gives me a forward PE of 4.8x.
Also, the div of 2 cents gives a yield of about 10.6%.
And even if we cut away the interim div, it’s still 5.3%, which is pretty respectable.

Going forward, the key is the ICI4 prices in the coming months.
So let’s see how it goes.
Of course, coal prices can tank and undergo a multi year bear market like in 2011,2012, and my bet will fall flat on its face.
(But I don’t think so)

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Reply to @ThumbTackInvestor : Agreed. Not trying to be gloofing when some one is shivering out there. But cold winter is what we need. But i suspect we need more that a temporary cold draft to push up price. Indo export is lower current month, they can easily up the production to meet prc demand. I guess they are alot of spare coal laying around. Can we have some tightening of natural gas supply also ;)

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Reply to @christophertan0 : That’s the risk we have to take! Cheers bro!

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So red.
So scary.


Reply to @wenyou : recovered slightly to around USD35/mt
But still weak.
I don't have "such confidence".
It's still a reasonable position size for me, relative to my portfolio size.
My thesis is that quoted coal prices will recover after the end of this month, when china NDRC's quota is "reset".
Also, each time they put in such measures, there's always some collateral impact, or impact that'd appear sometime down the road.
Already now, some of the coastal power producers are starting to buy forward coal contracts for delivery in 2019.
I've also traded around some of my positions for some additional small profits because I think it'd be fairly stable without any major news from now to end 2018.

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Thanks Brother, love your analysis.


Self explanatory chart attached.
After 3 weeks of decline due to China's NDRC's import ban, prices ticked up gently this week.
Will this uplift be sustained?
Or is it just a temporary respite?
I don't know.
Market conditions based on my DD on the ground is that demand from end users is still stifled, as everyone is expecting traders and middlemen to dump more inventory in view of NDRC's uncertain policy. Reportedly, NDRC doesn't want the total coal imports in 2018 to exceed that of 2017, and we're kinda at the 2017 levels now.
So market participants are expecting the import ban to last for the rest of 2018 (1 more month), and following which, it's anyone's guess what happens in 2019.

TTI's investing hypothesis:
China has to keep domestic coal prices elevated to prevent many coal miners from going BK.
Yet, the power producers are all losing money at these levels, so they have to find a balance.
There's no incentive to accept coal imports now, as power producers are well supplied going into winter, and imported coal costs more than domestic coal.
They'd rather support their own local enterprises, yet these local enterprises have a poor safety and operational record.
After a year of enforced closures and forced mergers, they have managed to close down many smaller miners, to form larger conglomerates.
NDRC has also forced these larger entities to sign long term contracts to supply coal to the power producers, hoping that it'd give the end users more stability in their supply.
Due to the continued crack down on smaller mines, and the poor transportation infrastructure, NDRC will eventually have to allow imports again.
And when that happens, it'd be a boost to the overall market sentiment again.
These things happen periodically, as seen in the chart, which is why china's coal prices fluctuate up and down in this fashion.
It'd be at least a month, maybe longer, before we see a reversal in this current coal import ban.
The last time NDRC instituted a complete ban on coal burning for heat during winter, it resulted in a massive power shortage and they had to quickly do a 180 degrees reversal.
This current ban will serve the same purpose.
When they reverse the policy, import volumes will come roaring back with a vengeance.

This doesn't mean we ignore the long term dynamics though.
Since just a year ago, China has greatly improved coal transportation. In some counties, they no longer accept transportation by trucks. Coal has to be transported by rail, which is faster, cheaper, safer and more efficient. The more domestic coal is transported by rail, the lower the reliance on coal imports.

Geo's share price has dropped significantly in line with the overall drop in coal prices in china, yet it has hardly shown any signs of recovery despite the slight recovery in coal prices.
As stockpiles drop, the demand will come back, and prices will rise again (or at the min, volumes will increase if domestic supply is unable to match).


Is this the article that you are referring to with regards to the 33 days of stockpile remaining:


Reply to @w3iw3i : There r several articles that mentioned it.


Added 100,000 at 0.174


Reply to @ThumbTackInvestor : wow!!! proton canon shoot again!!!

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Maybe enter under 0.17 would be the right bottom lol


Reply to @wongchinfatt : me too... so scary recently

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KGI just assigned a target price of $0.21


Thanks for sharing :)

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