Is coal becoming a superstock theme? Last week I blogged on ADES , a company focused on refined coal and coal-related emission control. This...

Weekly Superstock Scan 7 Aug - 11 Aug: Geo Energy Resources Ltd (Singapore)

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Is coal becoming a superstock theme? Last week I blogged on ADES, a company focused on refined coal and coal-related emission control. This week, the potential superstock is Geo Energy Resources Ltd (SGX: RE4), a coal producer and mine contractor. 






Geo Energy used to have two segments: coal trading and mining services. After restructuring, Geo Energy currently only have one segment: coal mining. This includes production and sale of coal produced from operating owned coal mines.


Technical



Geo Energy has been on a strong uptrend since the middle of 2016. Price more than tripled from $0.10 to reach a high of $0.355 in April 2017. Thereafter, it retrace to the mid $0.20s. Since June 2017, it is trading in a range of $0.23 to $0.255.

Last week, price broke strongly above the range to close at $0.28, with 1.7 times its average weekly trading volume. There was no news released last week. The surge might be related to the upcoming release that should either be in the coming week or next.

On a broader view of the chart, the retracement since April 2017 to August 2017 can be seen as a bull flag. If this is so, we might only be half way through the move even though price has tripled and the measured move will be till the low $0.40s.

Fundamental



Including the current quarter, Geo Energy reported 5 consecutive quarters of year-on-year EPS growth. It is also worth mentioning that just two quarters ago, the trailing 12 months EPS is negative. Geo Energy has successfully turned the company around with restructuring efforts.

Transformation into Low-Cost Coal Producer

2016 was a year of transformation for Geo Energy. When Geo Energy was established in 2008 and listed in 2012, it was a company engaged in coal trading, mining and haulage services. This means that it will buy and sell coal from third parties, and also provide mining contracting and equipment rental services. Its profits in coal trading activities were often more than off-set by losses incurred in mining services, resulting in two years of losses.

After restructuring, its business model is way simpler. Basically, it will purchase and own coal mines. It will outsource mining services to mining contractor such as PT Bukit Makmur Mandiri Utama (BUMA). It also outsource sales and prepayments to major international commodity trading house such as Engelhart Commodities Trading Partners (ECTP).


This business model is not only simpler, but also helped Geo Energy to eliminate large amount of fixed cost and working capital from mining services.The prepayments from ECTP will also help Geo Energy to ramp up coal capacity and acquire more mines. Most importantly, this model is easily duplicated and allows Geo Energy to expand quickly.

Acquisition of New Mines

Geo Energy currently operates three mines - BEK, SDJ and PT STT with a combined proved and probably reserves of 54.1 million tonnes.. In July 2016, Geo Energy entered into a conditional sales and purchase agreement to acquire TBR's mining concession in South Kalimantan, Indonesia. This is a very big mine with 40.7 million tonnes of proved mineable coal reserves and 3.7 million tonnes of probable reserves. The production from this mine is expected to start in late 2H 2017.

There was a smaller acquisition in February 2016 for CSPA, with a reserves of 1.1 million tonnes.

These acquisitions will bring Geo Energy's coal reserves to be just short of 100 million tonnes. Geo Energy has set a production target of 10 million tonnes in 2017 and put themselves among the top 10 Indonesian coal producers by volume.

Global Supply-Demand Inbalance

In April 2016, China implemented a policy of reducing its domestic coal production by cutting the number of days allowed for coal mining from 330 days to 276 days. At the same time, China's consumption of coal is likely to fall by a much smaller extent and the shortfall will have to be filled by additional imports, and that will benefit Geo Energy.

In addition, India is also moving aggressively to coal-fired power plants to meet rising demand of its fast economic growth. Indonesia is expected to continue to be a key supplier for the region's coal requirements. Its domestic demand is also expected to increase with more coal-fuelled power generation.

Great Investor Relations Team

When I was reading the annual report of Geo Energy, I was impressed by how well written and organised the report was. Apart from the usual statements from the chairman and the CEO, the details of the operations and transformation was shown. It makes it easy for a person like me who knew nothing about coal mining to understand their operation. It is no surprise that they won an award at PR awards 2017 for Best IR Campaign.

Another weapon in their IR armoury was investing legend Jim Rogers. Jim Rogers is a shareholder of Geo Resource and also an Independent Director. Having a super-weight onboard definitely gives investor more confidence in investing in the company.

Matrices
+ Low P/E - The trailing twelve months EPS is 4 cents. At last week's closing price, Geo Energy is trading at a low P/E ratio of 7 times earnings.
- Large Float  - Geo Energy has a float of 361.6 million. With an average trading volume of 15.67 million shares, the float is approximately 64 times its average trading volume.

Risk Factors/ Things I do not like


  • Overhead resistance - Geo Energy not only has a short term resistance due to its recent peak in April, but also long term resistance as the stock IPO-ed at 32.5 cents and started trading in the 40 - 60 cents in its first year of trading. There may be many investors who are looking at getting out at breakeven.
  • Commodity Price - Jesse Stine avoids commodity stocks as potential superstocks. Geo Energy's business is subjected to fluctuations in price of coal.
  • Ability to Acquire Mines - Geo Energy has a coal reserve of 100 million tonnes and a yearly production target of 10 millions tonnes. If Geo Energy is unable to acquire more mines, profitability will fall as reserves run out.




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All information in The Trader Diaries (TTD) does not constitute to investment advice or recommendation to buy, sell or hold. Readers are advised to consult their financial advisors prior to making any investment or pursuing any investment strategy. TTD will not be liable for any losses resulted from information published or shared from the blog.