This article by Jennifer Tan (left, Director, Research & Products, Equities & Fixed Income, at the Singapore Exchange) was published in SGX's kopi-C: the Company brew series on 24 February 2017. The article is republished with permission.
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Growing up on a farm in Malaysia, Tung Kum Hon dreamed of becoming an architect.
"An architect creates and sets direction for change. |
We expect coal prices to remain range bound, supported by Chinese import demand following domestic coal production cuts.
Transforming Vision
Established in 2008 and listed on SGX Mainboard since 2012, Geo Energy has a current market capitalisation of over S$350 million. It owns two coal mining concessions through wholly owned subsidiaries PT Bumi Enggang Khatulistiwa (BEK) and PT Sungai Danau Jaya (SDJ) in East and South Kalimantan.
These concessions have total Joint Ore Reserves Committee (JORC)-compliant reserves of 53.5 million tonnes of coal averaging 3,600-4,200 GAR (gross as received), which refers to calorific value. Currently, its primary focus remains on coal production in SDJ.
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- Tung Kum Hon Geo Energy Resources |
The 4,200 GAR grade is commonly used in coal-fired power plants throughout the region, including China and Indonesia, due to its low sulphur and ash content.
Between 2012 and 2015, the company averaged annual revenues of US$65.7 million.
It made net losses of US$12.6 million and US$16.3 million in 2014 and 2015 respectively, after reporting earnings of US$18.9 million and US$12.6 million in 2012 and 2013.
To ensure a sustainable business, Tung revamped Geo Energy's operations.
When the company was first founded by the Melati family, capital spending was high, with heavy investments in equipment leading to rising depreciation and leasing expenses.
The company had also expanded beyond its original plans, leading to poor returns on assets, he said.
"I took steps to sell off assets, even though they were very dear to the controlling shareholders," Tung recalled.
"The Melati family understood, and really wanted change. And I believe this was necessary for the company - to create a platform that could ultimately translate the 2016 coal price recovery into profits."
Tung's vision involved transforming Geo Energy into a cost-competitive, low-capex, easily scalable business that could maximise profits in industry booms and withstand price shocks during depressed cycles.
"Outsourcing mining services to BUMA, and rapidly divesting our non-core assets brought our cash costs down to US$23 per metric tonne for 3Q 2016," he said. PT Bukit Makmur Mandiri Utama, or BUMA, is Indonesia's second-largest coal mining contractor.
"Production volume was also prepared for scaling up, and on the sales side, offtake agreements with ECTP were also secured last year," he added. The Group had inked a contract with global commodities firm Engelhart Commodities Trading Partners (ECTP) in July 2016 to supply about 42.0 million tonnes of coal for the lifespan of its wholly owned mine.
The sum of these moves resulted in a net profit of more than US$2 million for the second quarter of 2016, and earnings of over US$7 million in the subsequent quarter. "We expect to do better, as coal prices continued to rise in the fourth quarter of 2016," Tung noted.
Coal (left) versus overburden. (NextInsight file photos)
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Geo Energy has set a 2016 production and sales target of 6 million tonnes of coal, with this figure rising to more than 10 million tonnes in 2017. "
Geo Energy also entered the high calorific value (CV) coal market last November with the acquisition of PT Surya Tambang Tolindo (STT), which is in the pre-production stage. |
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Holding Steady
Meanwhile, Tung remains sanguine that the rebound in coal prices - from about US$28 per metric tonne for the 4,200 GAR grade last June to above US$40 per metric tonne this month - is sustainable.
"We expect coal prices to remain range bound, supported by Chinese import demand following domestic coal production cuts," he said.
In April 2016, China implemented a shorter, 276 working-day policy per year for coal miners that resulted in a supply crunch and low inventory levels. This has given imported coal a significant boost.
"The size of China's domestic coal market compared to the seaborne market means its role as a major driver of price formation will continue, while Indonesian producers perhaps have more flexibility than producers elsewhere due to their lower cost of transportation to ports," he added.
Recovering coal prices have given Geo Energy a much-needed fillip. The stock has tripled in value over the past six months, but is still more than 50% below its historical high of 63.5 cents reached on 8 January 2013. It hit a 52-week high of 29.5 cents on 22 February 2017, up from the all-time low of 9.5 cents on 1 August 2016.
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- Tung Kum Hon Geo Energy Resources |
"We want to grow Geo Energy into a US$1 billion market cap company by doubling its capacity to generate over US$500 million in revenue, at the lowest cost, and with the highest productivity and efficiency," Tung said.
"It takes strong leadership, focused on constructive change, to bring about growth," he added, noting that many companies reap little because they sow little.
Rather than re-investing profits to build their businesses, they have under-invested, or are focused on buying back their shares to boost value.
"Together, the Board has more than 25 years in coal mining, and more than 50 years in corporate finance, management, legal, M&A, commodities and investments, to steer Geo Energy toward greater heights."
While the journey so far has been riddled with difficulties, Tung believes it's important to adopt a glass half-full approach.
"Do not be discouraged by what life throws at you. Difficult roads often lead to beautiful destinations. We should choose to shine even after experiencing the storms," he added.
Life can be totally unpredictable, he acknowledged. Some of his school mates who didn't score good grades in school are now successful businessmen, while those who topped their classes have merely taken on middle-management roles in small companies. "I firmly believe life is about how you seize the opportunities that come your way."
Opportunities aside, details do matter.
"Small details keep me awake at night," Tung admitted. "Little things make big things happen, and they often have a significant impact on what we do if we're not careful in managing them."
Having said that, failure is not a foe, but a friend, he emphasised. "Never be afraid of taking on a new challenge - be adventurous! Even if you fail, you can learn from the experience, and that will allow you to eventually triumph over adverse circumstances."
Obviously, learning is a lynchpin of Tung's life philosophy. "If you are the smartest person in the room, you are in the wrong room," he grinned.
The father of a son, 20, and daughter, 22, dreams of retiring on a farm, growing tomatoes, basil and chilli, with an orchard and a pond teeming with fish.
"I would like to return to my roots. But first, I need to convince my wife!"
Financial results
| Year ended 31 Dec (USS$ '000) |
FY2016 | FY2015 | FY2014 | FY2013 |
| Revenue | 182,109 | 18,209 | 53,107 | 108,594 |
| Gross profit / loss | 41,919 | 3,144 | -2,423 | 30,548 |
| Net profit / loss | 22,189 | -16,587 | -12,780 | 13,030 |
| Quarter ended 31 Dec (USS$ '000) | 4QFY2016 | 4QFY2015 | yoy chg |
| Revenue | 91,950 | 3,000 | nm |
| Gross profit | 27,690 | 303 | nm |
| Net profit / loss | 14,671 | -6,528 | nm |
Source: Company data
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Geo Energy Resources Ltd
Geo Energy Resources is a coal mining specialist with an established track record in the operation of coal mining sites for coal production and sales since 2008. The Group's operations are primarily located in Indonesia. Geo Energy owns major mining concessions and coal mines in East and South Kalimantan, with JORC-marketable coal reserves of 53.5 million tonnes. The Group is currently in the process of completing its acquisition of a mining concession in South Kalimantan, which will increase its JORC-marketable coal reserves to over 90 million tonnes.
For its full year results media release for the period ended 31 December 2016, click here.
The company website is: www.geocoal.com.
The ccompany's Stock Facts page is here.
