The Positives

+ On-track to meet the FY19 production target of 8mn tonnes. In 1Q19, GEO delivered 1.9mn tonnes of production (SDJ: 1mn tonne, TBR: 0.9mn tonne), which accounts for 23.8% of the annual target of 8mn tonnes. According to the updated mining plan, the respective output from SDJ and TBR will be 3mn tonnes and 5mn tonnes. In addition, GEO had communicated plans to increase production quotas, which could further boost FY19e production.

The Negatives

– First gross loss since 1Q16. Gross loss of US$1.5mn was due mainly to the fall of ASPs while cash cost remained relatively high. The price for ICI 4,200 GAR averaged at US$35.5/tonne (-26.1% YoY, +6% QoQ). Correspondingly, the ASP arrived at US$32/tonne (-31.2% YoY, -9.1% QoQ). Owing to the backwards-looking pricing scheme, the 2Q19 ASP is expected to be higher.  On the other hand, the 1Q19 strip ratios for SDJ and TBR were 2.8 and 3.6 (4Q18: 4.4 and 1.1), respectively. The increase in overburden hauling cost and fuel prices offset the savings from the lower SDJ from SR. FY19e cash cost is expected to be above US$30/tonne.

Outlook

With the recent recovery of coal prices, we expect performance to improve for the remaining quarters provided GEO delivers the targeted production. TBR is still at the initial production stage. Therefore, the overburden costs will be relatively high this year. In a nutshell, GEO’s FY19e mining business will underperform FY18.

At the moment, the price of a coal mine with 2P reserve averages at US$6-7/tonne. GEO aims to be one of the top five coal producers in Indonesia in terms of production. Hence, any potential acquisitions of sizable targeted coal mines would require GEO to fork out more than its holding cash as of 1Q19. In other words, GEO is likely to raise debt to pursue inorganic growth going forward. Alternatively, GEO may consider redeeming the Senior Notes (US$300mn) at the end of the year if the deployment of cash fails.   

Downgrade to NEUTRAL with a lower target price of S$0.15 (previously S$0.215)

We lower forecasted sales volume to 7.5mn tonnes (previously 8mn tonnes) and ASP to US$39.5/tonne (previously US$40.2/tonne) for FY19e to reflect protracted unfavourable market conditions. Meanwhile, we revise the cash cost upwards to US$30/tonne (previously US$29.5/tonne). Our FY19e EPS has thus been cut to 1.1 US cents (previously 1.6 US cents). Based on an unchanged forward PER of 10x (average of regional peers) and an exchange rate (USD/SGD) of 1.36, we downgrade our call to NEUTRAL with a lower target price of S$0.15 (previously S$0.215).

Source: Phillip Capital Research - 28 May 2019