Excerpts from KGI Securities report
Analyst: Joel Ng
Overburden removal at GEAR's mine. NextInsight file photo
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Golden Energy & Resources |
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Share price: |
Target: 78 c |
Firm coal prices. GEAR achieved an ASP of US$42.6/tonne in the quarter, higher than the benchmark ICI4 coal index, which averaged US$40.1/tonne in the same period.
In comparison, our long-term coal price forecast is US$40/tonne. Our coal price assumption is also at a 10% discount to the 8-year average of the 4,200kcal Indonesian coal price.
Valuation & Action
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GEAR’s current price assumes long-term coal price of US$34/tonne and a US$22/tonne cash cost.
This price would mean a 20% discount to the 8-year 4200 kcal Indonesian coal price average and a US$22/tonne cash cost (it achieved US$21 in 1H17 and US$20 in FY16) to arrive at GEAR’s current share price (see Figure 3 for our DCF calculation).
We believe these assumptions seriously undervalue GEAR’s long-term potential given its free cash flow generating capabilities and track record in consistently increasing its coal production every year over the past five years. We maintain our BUY recommendation with an unchanged DCF-derived TP of S$0.78.
Risks
Decline in coal prices due to weaker demand/increased production from China and India. Regulatory risks in Indonesia, which we believe is offset by GEAR’s strong Indonesian parentage.
Our DCF valuation is dependent on GEAR meeting its production targets as set out in the Independent Qualified Persons’ Report.
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