Fitch Affirms Geo Energy Resources at 'CCC+'; Withdraws Rating

(Fitch Ratings - Singapore - 13 May 2022)--Fitch Ratings has affirmed Geo Energy Resources Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'CCC+'. Fitch has simultaneously withdrawn the rating.

The rating is constrained by Geo's weak operating profile arising from its limited and declining coal reserves and uncertainty over its acquisition and diversification strategy, which will be key to its medium- to long-term business continuity. The company continues to explore investments, including businesses unrelated to coal, which will entail execution risk, in our view.

Fitch has chosen to withdraw the ratings on Geo for commercial reasons. Accordingly, Fitch will no longer provide ratings or analytical coverage for Geo.

Key Rating Drivers

Declining Reserves; Limited Scale: Geo's operating profile reflects its small scale relative to peers, with annual production of around 11 million tonnes (mt), and limited reserves. Geo's operating reserves comprised 17.9mt at its PT Sungai Danau Jaya (SDJ) mine and 55.7mt at PT Tanah Bumbu Resources (TBR) at end-2021, translating into less than seven years of mine life (based on 2021 production), which will continue to fall in the absence of options for organic reserve replacement. Geo has two other mines, but one is in the exploratory phase and the other has minimal production.

Net Cash Position; Uncertain Investment Plan: Geo's financial capacity for an acquisition has improved, supported by high coal prices since 2021. It turned to a net cash position of USD185 million by end-2021 from net debt of USD11.5 million a year earlier. However, uncertainty over its investment plans, given its record, continues to be the key rating constraint. Geo faced challenges in completing coal mine acquisitions in the past despite its USD300 million bond issuance in 2017 for this purpose.

We expect Geo's net cash balance to increase to over USD270 million by end-2022, supported by continued strong coal prices, but subject to any investments and shareholder returns. During 2021, Geo declared dividends of around USD94 million, bought back USD2.1 million of shares and redeemed outstanding notes. Fitch expects such cash outflows to continue over the medium term in the absence of acquisitions in our base case forecasts.

Higher Coal Prices Aid Profit: Fitch expects the increase in coal prices to help Geo's profitability. In line with Fitch's coal price expectation, we expect Geo's EBITDA to decline to USD56 million by 2024, after a record high of around USD275 million in 2022 (2021: USD260 million). This reflects Geo's weak energy-adjusted cost position relative to Fitch-rated Indonesian coal miners. This and its limited reserves result in minimal flexibility to curtail cost, in Fitch's view. Geo continued to operate during a coal price slump in 2020 as it benefited from cost renegotiations with its contractor and service providers.

Regulatory Risk: Fitch believes the Indonesian government's ban on coal exports in January 2022 highlights increased regulatory risk. The ban was subsequently lifted for miners that meet domestic market obligations (DMO) to sell at least 25% of their output locally. Geo faces lower risk, in our view, as it has been DMO compliant, but any deviation can affect its annual production, which is subject to government approvals. Geo has received approval for a production quota of 12mt for 2022 (2021 production: 10.9mt).

We do not expect the ban to significantly affect Geo, but its 2022 financial performance may be affected because the DMO sale price is capped at a much lower level than the export sale price, and Geo sold almost 50% of its volume domestically in January.

Derivation Summary

Geo's Indonesian coal-mining peer, PT Golden Energy Mines Tbk (GEMS; B+/Positive), has a stronger credit profile, with a larger reserve base, longer reserve life and comfortable liquidity profile, which explains why Geo is rated multiple notches below GEMS. The Positive Outlook on GEMS reflects Fitch's expectation that GEMS' credit profile will improve in the next 12 months with production scale reaching a level commensurate with that of higher-rated peers in Indonesia.

The ratings on PT Agung Podomoro Land Tbk (APLN; CCC), an Indonesian property developer, reflect its weak liquidity, which undermines its ability to service debt beyond the next six months. The company has a few options to plug the cash shortfall, but this does not give the company enough headroom to warrant a higher rating, in our view. Geo's ratings are higher as it does not face liquidity risks.

Key Assumptions

- Coal prices in line with Fitch's mid-cycle commodity-price assumptions, adjusted for the difference in calorific value (average Newcastle 6,000 kcal free on board or FOB/tonne: USD220 in 2022, USD104 in 2023, USD87 in 2024 and USD80 in 2025);

- Annual total coal production from SDJ and TBR mines of above 10mt over the medium term.

- Strip ratio to remain at above 3.0x (2021: 2.4x) and production cost at around USD33.0/tonne to USD37/tonne during 2022-2024.

- No acquisitions and modest capex over the medium term

- Dividend pay-out of 50% of net profit

RATING SENSITIVITIES

No longer relevant, as the ratings have been withdrawn.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Ample Liquidity; Compromised Funding Access: Geo's near-term liquidity benefits from its minimal capex requirements and net cash position after it bought back the last USD59 million of its US dollar notes outstanding in October 2021. Fitch believes Geo may have to rely primarily on its internal liquidity for future investments. Geo used USD129 million of cash to gradually buy back USD241 million of its US dollar notes at steep discounts on the secondary market. The notes had principal of USD300 million. Its consent solicitation to change the protective covenants on its US dollar notes and a tender offer was unsuccessful.

Issuer Profile

Singapore-based Geo holds thermal coal-mining assets in Indonesia. It produced 10.9mt of coal in 2021.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. (ends)