JAKARTA (TheInsiderStories) – Indonesian coal miner Geo Energy Resources Limited (B2 negative) announced on 14 June that flooding was affecting coal production and delivery from its mine at subsidiary PT Tanah Bumbu Resources (TBR).
In its announcement, Geo Energy said that the Regent of Tanah Bumbu Regency in the Indonesian province of South Kalimantan has declared a temporary flood emergency for 14 days between 10-23 June.
Should the flooding risk dissipate in two weeks, Moody’s Investors Service expects the impact to Geo Energy will be minimal. However, prolonged flooding will be credit negative as it could limit coal production. This would hurt the company’s already strained credit metrics, which are susceptible to further weakness because of the company’s small scale.
Geo Energy’s adjusted leverage, as measured by adjusted debt/EBITDA, has increased to 6.8x for the 12 months ended March 2019 from 4.0x in 2017 because of lower earnings on the back of lower sales volume and higher operating costs because of the commencement of operations at TBR in mid-2018.
The company had a large cash balance of US$206 million as of 31 March 2019, which it plans to use to acquire a coal mine in the near term to improve its credit profile. However, in the absence of an acquisition, we expect Geo Energy’s adjusted leverage to be around 5.5x in the next 12-18 months, which will be in breach of its downgrade trigger of 4.0x.
Adjusted leverage could increase even further if Geo Energy is unable to meet its 2019 production target of around eight million tons of coal because of continuing bad weather.
According to the company, its operations are affected by seasonal bad weather, particularly in June and July because of heavy rainfall.
The current flooding has reduced coal production at TBR so far in June. However, if the flooding is not prolonged, Geo Energy expects to adjust its mine plan for the remainder of the year to make up the lost volume.
Geo Energy has had a coal off-take contract for all export-related production at the TBR mine with Macquarie Bank Limited (A2 stable) since November 2018. The terms of the agreement have not been publicly disclosed.
However, typically, coal off-take contracts will contain force majeure provisions that include severe weather. This protects coal miners from incurring penalties if they are unable to deliver contracted volumes under a force majeure event.
TBR is one of Geo Energy’s two operating coal mines adjacently located in South Kalimantan. This exposes Geo Energy to a degree of geographic concentration risk as the mines could both be vulnerable to external factors such as weather. For example, in the first quarter of 2018, heavy rainfall caused coal production to decline 14 percent year on year.
Globally, coal mining companies, have already experienced significant credit pressure because of environmental risks Moody’s reported there are 11 sectors with $2.2 trillion debt have elevated environmental risk exposure. These risks include natural and man-made hazards.
According to the global research company, Wood Mackenzie, Kalimantan province, where Geo Energy’s mines are located, is subject to seasonal weather conditions including excessive rainfall, which can disrupt mining operations.
Written by Lexy Nantu, Email: email@example.com