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One of the world’s most competitive coal mines is on track for another record year: KGI

KGI Securities is maintaining its “buy” on Geo Energy Resources after a recent visit to its SDJ coal mine in Indonesia showed the latter is on track to achieve another record year.

Research house KGI says the SDJ coal mine is very accessible given the distance between the mines and the jetty is just 17km. From the jetty, the coal is then transported to an anchorage point that is 15km away.

“Relatively short delivery cycles and uninterrupted coal delivery have enabled Geo Energy to reduce the amount of coal inventory stockpiles, thereby reducing its inventory cost and working capital requirements. This allows Geo Energy to be among the most cost competitive coal mine globally,” says analyst Joel Ng in a Monday report.

Geo Energy’s assets are all located on Kalimantan, Indonesia. Its current operations are mainly concentrated at its SDJ mining concession, with the other TBR mine expected to ramp up production in FY18. Despite its small reserves compared to other domestic mines, Geo Energy’s mines enjoy a low stripping ratio of 3.0 to 4.0 that enables it to achieve an all-in operating cost of US$30/tonne ($40/tonne). A stripping ratio of 3.0 means to get one tonne of ore, three tonnes of waste rock have to be removed.

In addition, Geo Energy prefers offtake arrangements over coal trading as they allow the group to receive prepayments which provide stable cashflows. In FY17, offtaker Engelhart CTP (ECTP) was guaranteed minimum delivery of 7 million tonnes of coal for a prepayment of US$40 million. Currently, GEO is finalising the coal offtake agreements for TBR mine with various parties.

In 1Q18, Geo Energy reported earnings of US$8.9 million, 39% lower y-o-y due to higher rainfall. As a result, it sold 1.9 million tonnes of coal in 1Q18, 14% lower y-o-y and making up 16-18% of management’s full-year target of 11-12 million tonnes.

Geo Energy’s Average Selling Price (ASP) of SDJ coal was US$46.49/tonne, an increase of US$3.08 from 4Q17. Average cash costs (excluding exceptional items) increased to US$33/tonne in 1Q18 as 50% of mining costs are pegged against the ICI coal benchmark. There was also a higher stripping ratio of 2.8 in the quarter. However, stripping ratio is expected to decline going into 2018, which could lower average cash costs back below US$30/tonne.

Looking ahead, Ng says valuations of the coal-mining sector as a whole remains weak as countries seek to cut carbon emissions and shift to renewables. However, coal remains cheaper than other fuel sources and the drop in coal demand in the US and Europe is being offset by demand from South East Asia and India.

KGI has a DCF-derived fair value of 30 cents or 6 times FY18 earnings which is at a 20-35% discount to peers. As at 3.16pm, shares in Geo Energy are trading flat at 22 cents.
Source: The Edge

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