Soaring coal price and production volume drove a stunning performance: See the table below, revenue from coal mining segment, main top line contributor, was mainly driven by the booming coal prices in 3Q17. The 9M17 sales volume had surpassed 5.5mn tonnes which were the full year result in FY16. Management has revised down the full year target to 7mn to 8mn tonnes from the initial 10mn tonnes of coal sales due to the disruption of prolonged monsoon season in 2Q and 3Q17. The coal price (ICI 4,200 GAR) remains on the bull run, arriving at YTD high of c.US$50/tonne in Oct-17.
Issuance of the new note enhanced solvency and liquidity: GEO issued a new senior note with aggregate principal amount of US$300mn in early Oct-17. The net interest rate of the note will be 5%+ (8% of coupon rate – 2%+ deposit rate). The proceeds were used to partially redeem the S$100mn (US$72mn) MTN which will be due in Jan-18 and repay the advances from ECTP. The balance of roughly US$200mn, together with the cash on hand of US$36mn as of Sep-17, will fund working capital or to fund potential acquisitions of coal mining assets.Â
Higher cash costs suppressed margin in 3Q17: The reported cash costs were US$28.3/tonne in 3Q17, its highest in recent two years. It was attributed to the increase in logistics costs mainly due to the wet season. The strip ratio of SDJ mine in FY17 is expected to be 3.4 and lower in FY18. Hence, the cash cost of SDJ mine will decrease next year. We expect the cash cost for FY18e to be c.US$26/tonne.
Stumbled by the unexpected poor climate conditions, we do not expect GEO to achieve the 10mn sales target set in the early of FY17. However, its still manage to generate 1.5mn to 2.5mn more of sales than it did in FY16. Look ahead in FY18, GEO guides that the production target will range from 12mn to 15mn tonnes, along with the expected commmecment of opertion of TBR mine in 1Q18. As of now, the group is offered three proposals of offtake agreements for TBR mine, and the prepayment price of which will be at least US$4/tonne, comparable to the offer for SDJ mine in FY16. If it pans out, the new offtake will provide more visibility to production volume and further improve the cash position. Moreover, we believe the cash profit of at least US$10/tonne is sustainable for GEO.
We lowered the forecasted coal sales volume to 7.8mn tonnes (previous 8.5mn tonnes) but raised the estimated ASP to US$41/tonne (previous US$37/tonne) in FY17e. Meanwhile, we revised up forecasted sales volume to 10.8mn tonnes (previous 10.2mn tonnes) and ASP to US$39/tonne (previous US$38/tonne) in FY18. Accordingly, FY17/18e EPS are updated to 3.3 US cents/4.4 US cents, or 3.1%/7.3% higher than our previous estimations. Based on unchanged forward PER of 10.0x (the average of regional peers), we maintain our BUY call with unchanged target price of S$0.44.