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Elite Client Idea #54

Updated: May 1

Geo Energy Resources Ltd. ‘GER’ (SGX Ticker: RE4; Price: SG$0.22/share)

(Financials are in US$; SG $1 = US $0.75)

GER owns four coal mines in Indonesia with 2P reserves of ~76 metric tons. At current production rates, the mines are expected to last ~7 years.

GER has outsourced the operation of the mine, and 80% of its sales are to two trading firms (Trafigura and Macquarie Bank) under offtake agreements for the life of the mines – thereby reducing counterparty risk.

Ultimate sales are to customers in China (55% of FY22 revenues down from 72% in FY21), Indonesia (20%), India (14%), and other Asian countries.

The key factor is future coal prices. The industry lacks financing for new mines due to climate commitments - restricting supply; and demand for coal from Asian economies remains firm.

The Indonesian government increased its royalty take in September 2022 from 3% up to 8% on revenues - depending on coal prices.

GER reported TTM revenues of $713mn (FY21: $642mn), ebit of $202mn (FY21: $239mn), and net profits of $139mn (FY21: $179mn).

FY22 and FY21 results reflected boom pricing conditions. Average ebit over the cycle was ~$85-90mn, and ~$65-70mn after Indonesian corporate taxes of 22%.

The balance sheet as at March 31st 2023 is strong with net cash of $163mn (after a $42mn dividend payment on May 31st), net current asset value of $183mn and tangible equity of $422mn.

Receivables of $70mn is net of ~$50mn of provisions for acquisitions and advance purchases of coal gone sour.

Despite this, management has generated respectable average returns on equity >15%.

Other tangible assets comprise: mining properties of $104mn, deferred stripping costs (for mine access) of $42mn, coal inventories of $34mn, and deposits for land and mining equipment of $40mn.

The equity currently sells for ~$230mn, which is <1x pre-tax earnings (net of cash), and 54% of tangible equity.

Management returned $120mn in dividends and share repurchases in FY22 – demonstrating shareholder orientation. This is partially offset by options issued to management for 35.3mn shares (~2.5% of outstanding shares) at a strike of S$0.27/share.

Management is currently buying back stock on a mandate for 139.7mn shares.

There’s potential risk that management may overpay for a coal acquisition but its track record of capital efficiency provides some comfort.

The short lifespan of the mines should be valued at a low basis. At slightly above net current asset value and 3-4x average earnings, the price appears to offer an adequate margin of safety in asset values and earning power.

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