Singapore, July 07, 2017 — Moody’s Investors Service has assigned a
Corporate Family Rating (CFR) of B2 to Geo Energy Resources Limited (Geo Energy). At the same time Moody’s has assigned a B2 rating to the proposed senior unsecured guaranteed notes to be issued by Geo Coal International Pte. Ltd., a wholly owned subsidiary of Geo Energy.
The outlook on the ratings is stable. This is the first time Moody’s has assigned a rating to Geo Energy.
The proposed notes will be unconditionally and irrevocably guaranteed by Geo Energy and all its subsidiaries. The bond proceeds will be primarily used for refinancing existing debt — specifically the outstanding notes of US$68.7 million due under Geo Energy’s US$300 million Medium Term Notes programme — and acquisition of new mines for business growth.
The B2 rating is supported by Geo Energy’s position as a low cost coal
producer in Indonesia, its strong financial and leverage profile, and its
ongoing partnerships with significant operators within the Indonesian
coal sector. Geo Energy has contracted Bukit Makmur Mandiri Utama (P.T.) (BUMA, Ba3 stable) as its mining service contractor for the life of its mines.
The company is well positioned on the cost curve as outsourcing its mining services to BUMA significantly reduces capex and working capital requirements. With expected cash costs of production in the range of US$26-28 at its existing mining concession (PT Sungain Danau Jaya “SDJ”) and newly acquired mining concession (PT Tanah Bumbu Resources “TMB”), the company could weather minor coal price adjustments.
“Geo Energy has strong financial and cash flow metrics for its rating
level, which allows the company flexibility to make acquisitions as well
as reasonable shareholder payments. The company’s adjusted debt/EBITDA is expected to be about 3.0-3.5x over the next 1-2 years, and (RCF-Dividends)/Debt is expected to remain in the range of 10-20%,” says Nidhi Dhruv, a Moody’s Vice President-Senior Analyst.
Geo Energy’s B2 rating also reflects the company’s relatively short
track-record of operating as a pure-play coal producer, the small scale
of its business, a high degree of operational concentration and the need
to continue making acquisitions in order to grow the business.
“With total proved and probable reserves of 90 million MT, Geo Energy has a relatively short reserve life of about 6 years at production levels of 15 million MT per annum. As such, the company will need to keep
reinvesting in the business and make acquisitions in order to grow and
replenish its mining reserves,” adds Dhruv, also Moody’s Lead Analyst for Geo Energy.
The ratings also consider Geo Energy’s lack of diversification — given
its single operating concession (SDJ) and single product — and its
exposure to commodity cycles, as well as the uncertainty in the
“It also faces a high level of concentration risk, with Engelhart
Commodities Trading Partners (ECTP) being the sole offtaker of coal from the SDJ mine. However, Geo Energy’s coal trading experience and its relationships with the end-users of its coal provide some mitigation
against this sole offtaker risk,” adds Dhruv.
Geo Energy transitioned into a pure play coal producer in 2016, prior to
which time it was an integrated mining company. The company sold its
mining services and coal haulage business in June 2016.
Pro-forma for the bond issue, Geo Energy will have a good liquidity
position with cash holdings of US$100 million on an ongoing basis.
However, absent the bond, the company will need to tap other sources in order to meet its debt repayment of US$68.7 million in January 2018. However, we consider the refinancing risk to be manageable.
The stable outlook reflects our expectations that Geo Energy will execute its business growth strategy as planned, while maintaining its cost competitiveness and strong financial profile.
What Could Change the Rating — Up
Upward pressure on the ratings could emerge if Geo Energy expands its
production capacity as planned while improving its financial profile.
Moody’s would also like to see a track record of the company’s ability
to acquire new mines and ramp up production, while improving its mine
reserve life. Some indicators that Moody’s would consider are adjusted
consolidated debt/EBITDA below 3.0x and (CFO-Dividends)/Debt of above 20% on a sustainable basis.
What Could Change the Rating — Down
Downward pressure on the rating could emerge if industry fundamentals deteriorate, leading to a decline in free cash flow that would constrain Geo Energy’s ability to grow its business. Some of the indicators Moody’s would consider are adjusted consolidated debt/EBITDA rising above 4.0x or adjusted consolidated (CFO-Dividends)/Debt below 10% on a sustainable basis.
Any change in laws and regulations, particularly with regard to the
mining concessions, which would adversely affect the business could also pressure the rating.
Geo Energy Resources Limited is a coal mining group, established since
2008, with offices in Singapore and Indonesia. The company owns mining concessions in South and East Kalimantan. Geo Energy has been listed on Singapore Stock Exchange’s main board since 2012. Its promoter shareholders, including Charles Antonny Melati and Dhamma Surya own 52.7% of the company, while the public owns 37.7%.