Singapore — Moody’s Investors Service said that GeocEnergy Resources Limited’s decision to upsize its 8.0% senior notes issuecto US$300 million has no impact on its B2 corporate family rating and thecB2 senior unsecured rating assigned to the notes issued by its whollycowned subsidiary, Geo Coal International Pte. Ltd.
The outlook on the ratings is stable.
The notes are unconditionally and irrevocably guaranteed by Geo Energycand substantially all its subsidiaries. The bond proceeds will be primarily used for refinancing existing debt — specifically the outstanding notes of S$100 million (US$73.7) million due under Geo Energy’s US$300 million Medium Term Notes programme — repaying advances received under the company’s offtake agreement, potential acquisition of new mines for business growth and general corporate purposes.
“Successful completion of the notes issue alleviates refinancing pressure with regard to Geo Energy’s upcoming maturity of S$100 million in January 2018. The company will now pre-pay this amount in October 2017,” says Nidhi Dhruv, Moody’s Vice President — Senior Analyst.
Geo Energy’s original plan was to raise US$250 million, and the company upsized the transaction amount to US$300 million based on investor interest. Such additional debt can be accommodated within the company’s financial metrics and will contribute to improving its liquidity and financial flexibility. The funds will remain invested in short-term fixed income instruments pending deployment into acquisition opportunities.
“Management has confirmed that the additional funds will be maintained on balance sheet for future acquisitions and working capital purposes. The bond indenture restricts payments to shareholders and the company management remains committed to the prudent and judicious use of its balance sheet liquidity,” adds Dhruv, also Moody’s Lead Analyst for Geo Energy.
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.
“Geo Energy’s improving financial and cash flow metrics should allow 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%,” adds Dhruv.
Moody’s draws comfort from Geo Energy’s stated acquisition strategy of acquiring only brownfield or producing coal assets, which have potential synergies with existing assets.
The B2 rating remains supported by Geo Energy’s moderate financial profile, position as a low cost coal producer in Indonesia, and its ongoing partnerships with significant operators within the Indonesian coal sector.
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.
Following the bond issue, Geo Energy has a strong liquidity position with cash holdings of over US$100 million on an ongoing basis.
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. As of 30 June 2017, its promoter shareholders, including Charles Antonny Melati and Dhamma Surya own 47.9% of the company, while the public owns 37.6%.