+ Riding on benign coal prices: In 1Q18, the ICI 4,200 GAR price continued to rise by 12% to US$48/tonne. Though coal price corrected moderately in March and April due to a slow season and the domestic price cap, it is expected to be a stable. According to IHS Markit, 4,200 GAR FOB is projected to stay at high US$40/tonne in 3 years since seaborne coal market is expected to stay in healthy dynamic. Accordingly, GEO will continue to benefit from the favourable ASP moving forward.
– Production target on track but cash cost jumps: See the table below, 1Q18 production volume arrived at 1.9mn tonnes (17.3% of annual target of 11mn tonnes). According to the mine plan, 8mn of production will be from SDJ mine, and 3mn is from TBR mine. TBR has effectively commenced production in May, but it will be subject to a high strip ratio this year owing to more overburden. The production-weighted average strip ratio (SDJ and TBR mine) will be 3.9 in FY18 (SDJ mine: 3.4 in FY17). Accordingly, the estimated annualised cash cost will be at low US$30/tonne in FY18 (SDJ mine: US$28/tonne in FY17).
As of Mar-18, GEO held US$248mn cash in hand. With the war chest, GEO has been actively seeking assets that are aimed to generate ROI of 20%. The potential targets could be low calorific value coal mine with reserves of around 50mn to 60mn tonnes. Management believes the consolidation of smaller mines aligns with the strategy of fast cash cycle. In other words, GEO aims to monetise assets within 5 to 6 years to avoid long-term holding cost. We are upbeat on the potential acquisition in the near term.
Maintain BUY call with a lower target price of S$0.41 (previously S$0.47)
We maintain our forecasted 10.8mn tonnes of sales volume and revise ASP from US$39/tonne to US$41.5/tonne in FY18. Meanwhile, we revise the cash cost upwards to US$30.5/tonne (previous US$27.6/tonne). Accordingly, FY18e EPS is cut to 3.0 US cents (previously 3.5 US cents). Based on unchanged forward PER of 10x (average of regional peers) and the exchange rate (USD/SGD) of 1.36, we maintain our BUY recommendation but with a lower target price of S$0.41.
Our visit to SDJ mine in May-18
Figure 1: SDJ mine pit
Figure 2: Dumping overburden by the pit
Source: Phillip Securities Research