Moody's downgrades Geo Energy to B3; outlook remains negative

(Singapore, November 18, 2019) -- Moody's Investors Service has downgraded the corporate family rating (CFR) of Geo Energy Resources Limited to B3 from B2.

In addition, Moody's has downgraded to B3 from B2 the senior unsecured guaranteed notes issued by Geo Coal International Pte. Ltd., a wholly-owned subsidiary of Geo Energy.

The outlook remains negative.

RATINGS RATIONALE

"The downgrade reflects our expectation that Geo Energy's credit metrics will remain very weak over the next 12-18 months, despite incremental earnings from its planned mine acquisitions in South Sumatra," says Maisam Hasnain, a Moody's Assistant Vice President and Analyst.

Geo Energy's adjusted leverage has continued to rise due to lower coal prices, limited production growth and elevated operating costs at its existing mines. Its adjusted leverage -- as measured by adjusted debt/EBITDA -- increased to around 18.0x as of September 2019 from 4.5x in 2018 and 4.0x in 2017.

Including dividends from mines currently being acquired, Moody's expects Geo Energy's adjusted leverage to remain high for its B3 rating at 6.0x -- 6.5x by end-2020. Given its small scale, Geo Energy's operating performance remains susceptible to slight changes in coal prices and production costs.

The company is in the process of acquiring a 51% effective interest in two coal producing mines in South Sumatra for $25 million, which it expects to complete by December 2019.

"In addition to its weak credit metrics, the negative outlook also reflects uncertainty over Geo Energy's ability to prevent the put option on its $300 million bond being triggered in April 2021, which if triggered would lead to elevated liquidity and refinancing risk," adds Hasnain, also Moody's Lead Analyst for Geo Energy.

The company's ability to prevent the put option from being triggered will be contingent on Geo Energy (1) extending its existing mining licenses, which currently expire in 2022, to beyond 2025, and (2) having at least 80 million tons of coal reserves on 4 April 2021. The reserves must be measured no earlier than six months prior to this date.

With the minimum reserves from its South Sumatra mine acquisitions and based on its current production run rate at its existing mines, Moody's estimates Geo Energy will likely have around 85 million tons of coal reserves by the end of 2020, only slightly above the 80 million ton threshold.

This thin estimated buffer elevates Geo Energy's risk of falling short of the minimum reserve requirement, particularly if it increases production beyond its current run rate or if future coal reserve calculations are lower than currently estimated.

Therefore, Moody's expects Geo Energy will continue to pursue further acquisitions, though the timing and amount remain uncertain. The company's previously announced target to acquire a large, operating mine in East Kalimantan has been put on hold as the sellers have postponed the sale process.

Geo Energy had a large cash balance of around $180 million as of September 2019, which is sufficient to meet its capital spending, South Sumatra mine acquisitions, scheduled debt maturities and dividends over the next 12 months. However, the liquidity buffer will decline if Geo Energy uses its cash to acquire additional coal assets.

The rating also considers Geo Energy's exposure to environmental, social and governance (ESG) risks as follows:

First, Geo Energy faces elevated environmental risks associated with the coal mining industry, including carbon transition risks as countries seek to reduce their reliance on coal power. However, the risk is somewhat mitigated as Geo Energy's customers are primarily located in Asia, a region with growing energy needs. Also, Geo Energy has off-take agreements with global commodity traders to purchase Geo Energy's coal for export.

Geo Energy's two operating mines are adjacently located in South Kalimantan, and are vulnerable to adverse weather. For example, operations at one of its mines were temporarily halted for around a week in June due to prolonged flooding. However, the company's planned mine acquisitions in South Sumatra will reduce such operational concentration.

Second, Geo Energy is also exposed to social risks associated with the coal mining industry, including health and safety, responsible production and societal trends. The company has implemented an Environmental and Social Management System, which seeks to address its issues such as workplace health and safety procedures, and local community development.

Finally, with respect to governance, Geo Energy's ownership is concentrated in its promoter shareholders, who own 39% of the company. However, this risk is somewhat balanced against the company's listed status in Singapore and the fact that half its board consists of independent directors.

The outlook is negative, reflecting Geo Energy's weak credit metrics and uncertainty over its current ability to prevent the put option on its $300 million bond being triggered in April 2021, which if triggered would lead to elevated liquidity and refinancing risk.

Upward pressure on Geo Energy's ratings is unlikely, given its negative outlook.

Nevertheless, the outlook could return to stable if Geo Energy improves its financial profile, and effectively executes on its plan to acquire new mines to ramp up production and improve its mine reserve life, effectively removing risk from the bondholder put option.

Credit metrics indicative of a change in outlook to stable include (1) adjusted debt/EBITDA falling below 5.5x, and (2) adjusted (CFO-dividends)/debt rising above 10% on a sustained basis.

On the other hand, Moody's could downgrade the ratings if Geo Energy's operating performance does not materially improve, or if it fails to acquire coal assets that improve its credit profile in the near term and eliminate the risk of its put option being triggered in April 2021.

In addition, an inability to extend the licenses on its current mining concessions at substantially similar terms would likely lead to a rating downgrade.

Credit metrics indicative of a ratings downgrade include (1) adjusted consolidated debt/EBITDA rising above 6.0x, and (2) adjusted (CFO-dividends)/debt below 10%, both on a sustained forward looking basis.

The principal methodology used in these ratings was Mining published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Established in 2008 and listed on the Singapore Stock Exchange, Geo Energy Resources Limited is a coal mining group with mining concessions in South and East Kalimantan. Its promoter shareholders, including Charles Antonny Melati and Huang She Thong own 39% of the company, while the public owns 45%. (ends)