Moody's upgrades Geo Energy to Caa1; outlook stable

(Singapore, December 08, 2020) -- Moody's Investors Service has upgraded the corporate family rating (CFR) of Geo Energy Resources Limited to Caa1 from Caa3.

In addition, Moody's has upgraded to Caa1 from Caa3 the senior unsecured guaranteed notes issued by Geo Coal International Pte. Ltd., a wholly-owned subsidiary of Geo Energy.

The outlook on these ratings remains stable.

"The ratings upgrade reflects the elimination of near-term refinancing risk for Geo Energy, as the company announced that it has met the conditions required to prevent triggering a put option on its US dollar notes in April 2021," says Maisam Hasnain, a Moody's Assistant Vice President and Analyst.

RATINGS RATIONALE

On 2 December, Geo Energy announced that its updated coal reserve report showed its combined reserves at its two operating mines, PT Sungai Danau Jaya (SDJ) and PT Tanah Bumbu Resources (TBR) were 86 million tons (MT) as of 30 October 2020 [1]. This follows the company's announcement in August that it had secured mine license extensions at the two mines to 2027 and 2028, respectively, from their previous 2022 expiry dates.

These two factors mean the company has satisfied the minimum reserve conditions needed to prevent the triggering of a put option on its outstanding US dollar notes in the next four months. These minimum reserve conditions included (1) extension of existing mining licenses at SDJ and TBR to beyond 4 October 2025 and (2) having more than 80 MT of coal reserves, with the reserves measured no earlier than six months before 4 April 2021.

As a result, the US dollar notes will mature as originally scheduled in October 2022, affording the company time to increase cash generation prior to the maturity.

Over the past 12 months Geo Energy has cumulatively repurchased around $241 million of the notes' original $300 million principal amount, at a considerable discount to the original par value, crystalizing a significant loss of value for creditors relative to the original obligation. The remaining notes outstanding total only $59 million.

"Despite significantly lower leverage and lower interest costs, Geo Energy's credit profile remains constrained by its small scale and limited financial flexibility, including a low cash buffer which hinders its ability to make acquisitions in order to grow and replenish its declining coal reserves," adds Hasnain, who is also Moody's Lead Analyst for Geo Energy.

Moody's estimates Geo Energy will generate sufficient internal cash to repay the outstanding notes at maturity while maintaining a minimum cash balance, similar to its $25 million balance as of 30 September 2020. However, this limited buffer could erode in the event of persistently low coal prices or cuts in production volumes over the next 12-18 months.

Moody's expects the company may seek to raise money via prepayment facilities under its existing coal offtake agreements to help bridge any small funding gap when its notes come due in October 2022.

However, Moody's expects Geo Energy's ability to raise large amounts of capital to invest in growth will be challenging because the company's credit profile will weaken as its existing coal reserves continue to decline. With total proved and probable reserves of 86 MT as of 31 October, Geo Energy has a relatively short reserve life of about seven years at its target production level of 12 MT per annum.

In addition, Geo Energy has not yet established a track record of executing on its growth plans. While a majority of proceeds from its $300 million notes issued in September 2017 were earmarked for coal mine acquisitions, the company has been unable to complete an acquisition in the last three years. At the same time, its cash available to make acquisitions has eroded primarily due to continued discounted buybacks of its US dollar notes.

ESG CONSIDERATIONS

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.

Geo Energy's two operating mines are adjacently located in South Kalimantan and vulnerable to adverse weather. For example, operations at one of its mines were temporarily halted for around a week in June 2019 due to prolonged flooding.

Geo Energy is 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 issues such as workplace health and safety procedures, and local community development.

With respect to governance, Geo Energy's ownership is concentrated in its promoter shareholders, who own around 39% of the company. Other governance risks entail the company's financial policies, including its willingness to use cash for discounted notes repurchases, resulting in a loss of value for creditors relative to the original obligation.

OUTLOOK

The outlook is stable, reflecting Moody's expectation that Geo Energy will maintain profitable and cash-generative operations, and sufficient cash sources to meet its cash needs over the next 12-18 months. The stable outlook also assumes Geo Energy does not make further discounted notes buybacks.

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 limited financial flexibility to grow its business while repaying its outstanding notes in full at maturity.

Nevertheless, prospects for an upgrade could arise over time if Geo Energy improves its business profile by growing its coal reserves, 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's cash generation declines, such that its cash sources are insufficient to meet its needs over the next 12-18 months. (ends)