Moody's upgrades Geo Energy to B3; outlook stable

(Singapore, September 15, 2021)--Moody's Investors Service has upgraded the corporate family rating (CFR) of Geo Energy Resources Limited to B3 from Caa1.

In addition, Moody's has upgraded to B3 from Caa1 the senior unsecured guaranteed notes issued by Geo Coal International Pte. Ltd., a wholly owned subsidiary of Geo Energy.

The outlook remains stable.

"The ratings upgrade to B3 reflects the elimination of refinancing risk following the redemption of its remaining outstanding notes next month with cash on hand," says Maisam Hasnain, a Moody's Vice President and Senior Analyst, "Although the company will be effectively debt free, Geo Energy's credit profile remains constrained by its small scale, declining coal reserves and uncertainty over its diversification strategy."

RATINGS RATIONALE

On 12 September, Geo Energy announced that it has exercised a call option to redeem the remaining outstanding $59 million notes due October 2022 at 102 cents on the dollar. Following the completion of this transaction, Moody's estimates the company's reported debt will consist of only around $2 million of finance leases, against around $60 million of cash.

Amid rising coal prices this year, Geo Energy's earnings and cash flow have increased considerably, driving its cash balance to $120 million as of 5 September 2021 from $53 million as of 31 December 2020.

Moody's also expects Geo Energy to generate record earnings this year with a Moody's-adjusted EBITDA of around $190 million in 2021, against around $40 million in 2020. Based on a Newcastle thermal coal price assumption of around $85 per ton in 2022, Moody's estimates Geo Energy's adjusted EBITDA will remain healthy at around $90 million.

Despite its planned notes repayment with cash, Geo Energy will maintain very good liquidity. Moody's estimates that Geo Energy residual cash balance and projected operating cash flows will be sufficient to cover its capital spending, dividends, and scheduled finance lease repayments over the next 12-18 months.

Nonetheless, the company's operating performance remains susceptible to slight changes in coal prices and production due to its small scale. Also, Geo Energy's credit profile will weaken as its coal reserves continue to decline.

With total proved and probable reserves of around 79 million tons (MT) as of 30 June 2021, Geo Energy has a relatively short reserve life of about seven years at its target production level of 11 MT-12 MT per annum.

The company's diversification strategy, which includes investing in new businesses and divesting some of its coal assets, will also raise execution risks as potential investments will likely be unrelated to the company's core coal mining operations.

Moreover, the company has had a limited track of executing on its stated growth plans. For example, although the majority of proceeds from its $300 million notes issuance in September 2017 were earmarked for coal mine acquisitions, the company did not complete any acquisitions.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Geo Energy's ESG Credit Impact Score is highly negative (CIS-4). The score reflects Geo Energy's very high exposure to environmental risks and high exposure to social risks, and high exposure to governance risks around its financial policies which have resulted in large discounted notes buybacks in 2020, which Moody's classified as a distressed exchange.

The company's exposure to environmental risk is very highly negative (E-5 issuer profile score), driven by very high carbon transition risks for thermal coal. While coal demand in Asia will be stronger than in other regions, Asian coal miners are already exposed to material credit implications, including reduced access to funding. In addition, policies favoring renewables, the declining costs of renewables and the development of disruptive technologies will increase the long-term risk for coal miners.

Geo Energy's exposure to social risk is highly negative (S-4 issuer profile score), driven primarily by coal mining's high exposure to human capital, health and safety, responsible production and demographic and societal trends. The company has implemented an Environmental and Social Management System, which seeks to address issues such as workplace health and safety procedures, and local community development.

Geo Energy's exposure to governance risk is highly negative (G-4 issuer profile score). The score reflects Geo Energy's financial strategy, which includes its willingness to use cash for discounted notes repurchases, resulting in a loss of value for creditors relative to the original obligation, and an inability to execute on its stated acquisition plans since 2017.

OUTLOOK

The outlook is stable, reflecting Moody's expectation that Geo Energy will maintain profitable and cash-generative thermal coal mining operations, and sufficient cash sources to meet its cash requirements over the next 12-18 months.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade is unlikely over the next 12-18 months given Geo Energy's small scale, short reserve life and uncertainty over its diversification strategy.

Nevertheless, prospects for an upgrade could arise over time if Geo Energy executes a diversification strategy that improves its business profile, while adhering to conservative financial policies and maintaining a prudent approach toward investments and shareholder distributions.

On the other hand, Moody's could downgrade the ratings if Geo Energy undertakes large debt-funded investments that weaken its credit quality, or if Geo Energy's cash generation declines, such that its cash sources are insufficient to meet its needs over the next 12-18 months.

Credit metrics indicative of a rating downgrade include adjusted debt/EBITDA above 3.0x, or adjusted EBIT/interest below 2.0x on a sustained basis.

The principal methodology used in these ratings was Mining published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739. Alternatively, 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 in 2012, 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 around 39% of the company.