Geo Energy divests non-core assets to focus more on coal production

By Romel S. Gurky

SGX-listed Geo Energy Resources Limited, an integrated Indonesian coal mining group, through its wholly-owned subsidiary, Geo Group Holdings Ltd (GGH), has entered into and completed a sale and purchase agreement (SPA) to sell 100 percent of All Win Holdings Pte. Ltd. to the purchaser for US$10.0 million.

Both GGH and All Win were recently incorporated in June 2016 with the purpose of restructuring the Group?s business and divesting MRP and GMT. GMT and MRP are presently held via All Win by GGH. Pursuant to the SPA and in accordance to ownership regulations in Indonesia, the Group?s Executive Chairman Charles Antonny Melati, would also dispose his 0.01 percent stake in MRP and the Group?s Executive Director Huang She Thong will dispose his 0.1 percent stake in GMT.

The intended sale of non-core assets would allow the Group to focus more on coal production as the Group targets 6 million tons of coal production for PT Sungai Danau Jaya (SDJ) coal mine. During 1Q2016, the Group announced proposed acquisitions of a 79.9 percent stake in PT Parisma Jaya Abadi (PJA) and a 99.5 percent stake in PT Cahaya Lembusuana (CLS). Both acquisitions are expected to boost the Group?s coal reserves and widen its range of calorific grade of coal output for sale.

Since listing on the Singapore Stock Exchange (SGX) in 2012, the Group was a mining services contractor leasing mining equipment for various coal mines in the region. Today, Geo Energy owns two coal mining concessions in East and South Kalimantan and is building up coal reserves to transform into one of Indonesia?s major coal producers.

The divestment of MRP?s mining services business and GMT?s coal haulage and coal trading business is also part of the Group?s strategy to lower its cost structure and streamline its operations to focus more on coal production. The expected sale would save the Group $1.7 million in operating expenses and $1.0 million in working capital per quarter while financial lease obligation would be substantially reduced by $8.6 million and net gearing is expected to improve going forward. While the sale of MRP?s heavy mining equipment and services and GMT would result in a net book gain of approximately $2.8 million to the Group.

In June 2015, the Group entered into a contract with PT Bukit Makmur Mandiri Utama (BUMA) for overburden removal and coal haulage services. BUMA is able to provide such services at a very cost competitive rate thereby allowing the Group to compete regionally in terms of coal pricing and is in accordance to the Group?s core strategy of lowering its cost of production. The long-term contract secured with BUMA has reduced the Group?s need to upkeep its mining services equipment and coal haulage services.

In July 2015, the Group has signed an off-take agreement with BTG Pactual Commodities (Singapore) Pte Ltd (BTG Pactual) to supply 23 shipments or equivalent of 1.5 million tons of coal. This contract for 23 shipments has since been completed in June 2016. The Group is currently in discussion to finalize new off-take agreements for 2H2016 and FY2017. Such off-take agreements not only resolve demands for the Group?s coal output but also reduce the inherent risks and operating costs required for coal trading and sales. Therefore, the Group has made the prudent decision to dispose GMT and focus more on coal production.

Commenting on the proposed divestment, Tung Kum Hon, Chief Executive Officer of Geo Energy said, ?The proposed disposal of our mining services, coal haulage services and coal trading businesses would allow our Group to reduce our operational costs significantly, streamline our operations, free up working capital and improve our cash flow and gearing. Spinning-off non-core assets would enable our Group to focus more on coal production as we target to increase the following months? production to 500,000 tonnes per month and more for SDJ coal mine.

Our Group?s strategies involve improving our cost structure, enhancing our integrated value chain and expanding our coal production. Since BUMA is already providing mining equipment for overburden removal and coal hauling at our SDJ coal mine, this represents an opportunity for us to reduce our heavy capital expenditure requirement on mining equipment via a proposed disposal. Whereas our Group would also explore more opportunities to outsource our coal trading and sales via off-take agreements with global trading houses to further reduce our operating costs and to mitigate market risks in coal trading.

Our Group is also encouraged by the improving outlook in the international coal market reflected by the persistent demand shown in China. Furthermore, the Indonesian Coal Index (ICI) for GAR 4200 has strengthened by $1.52 per ton to $28.38 per ton on 24 June 2016 from $26.86 on 6 May 2016. Given our low cost structure, our Group stands to yield better margins should the ICI appreciate further.

As our Group aims to become one of Indonesia?s top coal producers, we would continue to seek acquisition opportunities in the region and sale of non-core assets that complement our core strategy and to build up our coal reserves going forward.?

Editing by Johannes Simbolon