Geo Energy optimistic about prospects after restructuring

Having restructured its business to focus on mine ownership rather than mining services, Geo Energy is now ready to stretch its sails to catch the new wind in coal prices.

On the cards are plans to expand coal production and acquire even more mines to boost its reserves. The group has come a long way from the days when it was just a step away from being added to Singapore Exchange's watchlist for companies that have been in the red for three years, CEO Tung Kum Hon told The Business Times.

Brought in to turn around the struggling group in December 2015, Mr Tung made a radical decision: dispose the group's mine operation and contracting services business that it had listed with.

With a subsidiary of Jakarta-listed Delta Dunia, PT Bukit Makmuar Mandiri Utama (Buma), providing the group overburden removal and coal haulage services at very competitive rates since mid-2015, the businesses didn't make sense for the group anymore, said Mr Tung.

So out went the division which incurred huge capital expenditure - Geo Energy previously had its own mining equipment and machinery - and was suffering due to the mining downturn in the past few years. The group sold its entire stake in All Win Holdings, which held the mining and coal haulage services businesses, for US$10 million in June last year.

At the same time, Geo Energy embarked on mine acquisitions with a vengeance. Last year alone, it entered into three agreements to acquire mines in East and South Kalimantan, and also completed the acquisition of a coking coal mine first announced in April 2013.

But coal mines themselves are by no means new for the group. Geo Energy, which was established in 2008 by the Indonesian-Chinese Melati family, obtained its first mining concession in 2011 in the wake of a law introduced at end-2009 that disallowed mine contractors from excavating and selling coal.

In mid-2014, it bought a 66 per cent stake in the Sungai Danau Jaya (SDJ) mining concession in South Kalimantan, which expanded its coal reserves from 11 million tonnes to over 50 million tonnes. With coal from this mine carrying a higher calorific value of 4,000-4,200 kcal per kg, it gave the firm flexibility to export to power plants in China and India as well.

Geo Energy took over the remaining 34 per cent stake in SDJ at end-2015, about the same time it started production at the mine.

"At that time, nobody was funding Geo Energy," Mr Tung recalled. "It wasn't easy to find funding."

Hence, a deal was struck with Engelhart Commodities Trading Partners (Singapore) in July 2016 to supply coal to the global commodities group for the entire lifespan of the SDJ mine. Under the agreement, ECTP would take care of coal trading and sales, so that Geo Energy could focus on coal production.

The deal helped provide funding for the group, said Mr Tung. ECTP had agreed to make prepayment of US$20 million - which was further raised to US$40 million in December - for further development of the mine, and also provided an advance of US$4 per tonne on future coal supply, helping to strengthen Geo Energy's cashflow and financial position.

Mr Tung added that Geo Energy plans to continue using offtake agreements with global trading houses as a way to reduce its operating costs and mitigate market risks. With both mining services and coal trading operations outsourced, Geo Energy is now a very lean outfit. "We don't have much fixed overheads, other than the corporate office expenses in Singapore and Jakarta."

These measures combined, plus the tailwind of higher coal prices, propelled the group to its highest quarterly profit - for the fourth quarter of 2016.

Geo Energy made US$14.7 million in net profit for the three months ended Dec 31, against a loss of US$6.3 million for the same period a year earlier. Quarterly revenue surged to US$91.9 million, from US$3 million for the year-ago period, thanks to both higher coal production at the SDJ mine and stronger coal prices.

The stellar results led the group to announce a dividend of one cent a share last year - its first since its listing. "It's to reward those people who have put their trust in Geo Energy," Mr Tung said.

Still, the path ahead is not all smooth-sailing. The group in late March announced that the conditional sale and purchase agreement of PT Cahaya Lemusuana in East Kalimantan - one of the three it signed last year - has lapsed after the vendor failed to comply with certain precedent conditions.

Nevertheless, the group said that it has managed to reduce the consideration it is paying for the acquisition of PT Parisma Jaya Abadi in East Kalimantan, though it did not reveal the final price; the proposed consideration when it was first announced last year was US$18 million. Geo Energy hopes to complete the deal this month.

The group is also in the process of completing the acquisition of PT Tanah Bumbu Resources, which is next to its SDJ mine. All in, the group will have expanded its proven and probable coal reserves to over 90 million tonnes - from 12.5 million tonnes when it first listed - if these acquisitions are completed as planned.

The group produced 5.5 million tonnes of coal last year, falling slightly short of its target of six million tones. It now aims to produce 10 million tonnes this year, which will make it one of the largest coal producers in Indonesia.

It is also looking to optimise its capital structure, including a potential restructuring of its medium term note facility that is due in January next year.

But this is not because the group will have problems redeeming the bonds, Mr Tung said. Rather, the current facility is inefficient due to the currency mismatch between the Singdollar bonds and its operational currency of the US dollar, as well as the structuring of the bond at the listed company level.

With its housekeeping work mostly completed, Geo Energy is now exploring various ways to raise funding for its expansion. "We have to invest in the future," said Mr Tung. "If we don't invest, my earnings capacity is limited."

Andrea Soh

15 April 2017