Moody's assigns B2 rating to Geo Energy's senior unsecured guaranteed notes
Wednesday, September 27 2017 - 11:20 AM WIB
The outlook on the ratings is stable.
The proposed notes will be unconditionally and irrevocably guaranteed by Geo Energy and substantially all its subsidiaries. The bond proceeds will be primarily used for refinancing existing debt -- specifically the outstanding notes of SGD100 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.
The B2 rating is supported by Geo Energy's position as a low cost coal producer in Indonesia, its moderate financial profile, and its ongoing partnerships with significant operators within the Indonesian coal sector. Geo Energy has contracted Bukit Makmur Mandiri Utama (P.T.) (BUMA, Ba3 stable) as its mining service contractor for the life of its mines.
The company is well positioned on the cost curve as outsourcing its mining services to BUMA significantly reduces capex and working capital requirements. With expected cash costs of production in the range of US$26-28 at its existing mining concession (PT Sungain Danau Jaya "SDJ") and newly acquired mining concession (PT Tanah Bumbu Resources "TMB"), the company could weather minor coal price adjustments.
"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%," says Nidhi Dhruv, a Moody's Vice President-Senior Analyst.
The company's H1 2017 financial results were in line with expectations owing to the higher coal prices during the period. Geo Energy's realized coal prices ranged between approximately US$39-40 during H1 2017, resulting in an EBITDA of about US$48 million. Lower coal production of 1.5 MT in Q2 2017 was mainly attributable to seasonal rains and is expected to pick up in H2.
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. The rating also accommodates the refinancing pressure facing Geo Energy with respect to its US$73.7 million bond which matures in January 2018.
"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," adds Dhruv, also Moody's Lead Analyst for Geo Energy.
The ratings also consider Geo Energy's lack of diversification -- given its single operating concession (SDJ) and single product -- and its exposure to commodity cycles, as well as the uncertainty in the regulatory environment.
"The company also faces a high level of concentration risk, with Engelhart Commodities Trading Partners (ECTP) being the sole offtaker of coal from the SDJ mine. However, Geo Energy's coal trading experience and its relationships with the end-users of its coal provide some mitigation against this sole offtaker risk," adds Dhruv.
Geo Energy transitioned into a pure play coal producer in 2016, prior to which time it was an integrated mining company. The company sold its mining services and coal haulage business in June 2016.
"Pro-forma for the bond issue, Geo Energy will have a good liquidity position with cash holdings of US$100 million on an ongoing basis. However, absent the bond, the company will face imminent refinancing pressure and will need to tap other sources in order to meet its debt repayment of US$73.7 million in January 2018," adds Dhruv.
The stable outlook reflects our expectations that Geo Energy will execute its business growth strategy as planned, and successfully refinance its upcoming debt maturity 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. The rating could also be downgraded if the company is unable to successfully refinance its upcoming maturity on a timely 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.
The principal methodology used in these ratings was Global Mining Industry published in August 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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%. (ends)