Fitch Upgrades Geo Energy Resources to 'CCC+'

(Fitch Ratings - Singapore - 24 Sep 2021)--Fitch Ratings has upgraded Geo Energy Resources Limited's Long-Term Issuer Default Rating to 'CCC+' from 'CCC'. The agency has also upgraded the rating on the outstanding senior unsecured guaranteed notes of Geo's subsidiary, Geo Coal International Pte. Ltd., to 'CCC+' from 'CCC' with a Recovery Rating of 'RR4'. The notes are guaranteed unconditionally and irrevocably by Geo.

The upgrade follows Geo's materially improved liquidity profile on record high coal prices. Geo intends to fully repay the remaining USD59 million of its senior notes by 10 October 2021 using its reported cash balance of USD120 million as of September 2021, leaving it close to debt free. Fitch expects Geo's EBITDA to rise to over USD200 million in 2021 from USD40 million in 2019 and the company to continue accumulating cash for a balance of around USD100 million by end-2021 due to strong coal prices.

The rating is constrained by Geo's operating profile, characterised by 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.

Fitch believes Geo will continue seeking investments, including in non-coal sectors, following its financial capacity improvement. Fitch may upgrade Geo's ratings further if it is able to improve its operational profile materially, which would be dependent on acquisitions. An upgrade would also be contingent on Geo maintaining adequate internal liquidity and obtaining external funding, as we think its fund-raising ability is now compromised.

Key Rating Drivers

Coal Prices Underpin Improvement: Fitch expects the Indonesian 4,200kcal coal price to average USD55/tonne in 2021 from USD29/tonne in 2020, underpinning Geo's earnings improvement. The company's selling prices are closely linked to the Indonesian 4,200kcal coal price index. Fitch, however, expects Geo's EBITDA to drop to USD130 million in 2022 and gradually fall to USD40 million by 2024, in line with our expectations of easing coal prices (See Fitch Ratings Raises Thermal Coal Price Assumptions on Tight Supply, dated 7 September 2021).

Declining Reserves; Limited Scale: Geo's operating profile reflects its small scale relative to peers, with production of about 10-11 million tonnes (mt) of coal per annum, and limited reserves. Geo's operating reserves comprised 22.2mt at its PT Sungai Danau Jaya (SDJ) mine and 61.8mt at PT Tanah Bumbu Resources (TBR) at end-December 2020, translating to mine life of around seven years, which will continue to decline due to the absence of options for organic reserve replacements.

Geo has demonstrated some cost flexibility during price downturns, but Fitch thinks its ability to curtail costs is weaker than that of its higher-rated Indonesian peers due to its limited reserves. Geo has two other mines, but one is in the exploratory phase and the other has a weak cost position, making mining operations unviable.

Investment Record: The company raised USD300 million from senior notes in 2017 to invest in a coal asset, but has not been able to make any sizeable investments. Geo has also made provisions for USD13.8 million in receivables, which were part of an attempted acquisition of two south Sumatran coal mines. GEO also faces litigation from the minority shareholders of these assets, amounting to about USD35 million.

We believe potential investments will be key towards its medium-to-long-term business sustainability in light of its declining reserves. Its investment record and the uncertainty over its plans remain key constraints for the rating.

Compromised Fund-Raising Ability: Fitch thinks Geo may have to rely on its internal liquidity, with no support from external liquidity. It sought a consent solicitation to change the protective covenants of its US dollar notes and made a tender offer of USD400-430 for each USD1,000 of the notes. The distressed debt exchange failed, but GEO bought back about USD240 million of the notes at steep discounts via the secondary market.

Derivation Summary

Geo's Indonesian coal-mining peer, PT Golden Energy Mines Tbk (GEMS; B+/Stable), has a stronger credit profile, with a larger reserve base, longer reserve life and comfortable liquidity profile, which justifies rating Geo multiple notches below GEMS.

The ratings of PT Agung Podomoro Land Tbk (APLN; CCC), an Indonesian property developer, reflect its weak liquidity that undermines its ability to service debt beyond the next six months. The company's plan for bulk land sales to boost liquidity faces significant execution risks, in our opinion. GEO's ratings are higher as it does not face liquidity risks.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

- 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: USD115 in 2021, USD87 in 2022, USD72 in 2023 and USD66 in 2024);

- Annual total coal production from SDJ and TBR mines of 10mt to 11mt over the medium term.

- No acquisitions and modest capex over the medium term

- Dividend payout of 30% of net profit

- Strip ratio to remain at around 3.1x to 3.2x (2020: 2.4x) and production cost at around USD27.0/tonne to USD29/tonne over 2021-2023.

KEY RECOVERY RATING ASSUMPTIONS

Recovery analysis for Geo is on a going-concern basis in the case of a bankruptcy and assumes that the company would be reorganised and not liquidated. We have assumed a 10% discount to enterprise value to account for bankruptcy-related administrative claims.

- The going-concern EBITDA estimate of around USD44.5 million reflects Fitch's view of a sustainable, post-reorganisation EBITDA upon which we base the enterprise valuation. The going-concern EBITDA is 5% below the mid-cycle EBITDA, based on Fitch's long-term average thermal coal-price expectation.

- An enterprise value multiple of 3.5x EBITDA is applied to the going-concern EBITDA to calculate a post-reorganisation enterprise value.

- The waterfall results in a recovery of 100% for the US dollar noteholders, or a Recovery Rating of 'RR1', but a soft cap of 'RR4' is applied as the assets are located in Indonesia, which is a group D country.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- Fitch may consider upgrading GEO's ratings further if it able to materially improve its operational profile, which would be contingent upon acquisitions. An upgrade would also depend on GEO maintaining adequate internal liquidity and obtaining access to external funding channels.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- Adverse changes to GEO's operations that result in a material deterioration of its internal liquidity and/or business disruption; or

- Any potential acquisitions that could materially weaken GEO's business and financial profile.

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

Net Cash Position: GEO's near-term liquidity will benefit from its net cash position. The company will have insignificant debt outstanding after its proposed repayment of the USD59 million of senior notes in October 2021. We estimate Geo will report net cash of around USD100 million by end-2021.

Issuer Profile

Singapore-based Geo holds thermal coal-mining assets in Indonesia. It produces 10 mt to 11mt of coal per annum.

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)