You can get a big lift-off from this stock -- but you have to wait a while first

Geo Energy's stock price has slipped and traded range-bound this year, so it may not look like an exciting investment, at least in the short term. But in a year or so, Geo Energy is expected to unfold as a strong growth story, as these 2 pictures may help convey.  They capture scenes of extensive initial work in building a road through rural areas in South Sumatra. Photos: Company In early August 2024, Geo Energy had signed a US$150 million contract for the construction of a 92-km road and a jetty at one end of it. Heavy equipment has been mobilized, and land clearing and cut-and-fill works are progressing on schedule, says the company. With completion expected by early 2026, this infrastructure is crucial for a lift-off in production at the PT Triaryani (TRA) coal mine to 25 million tonnes per annum. That's more than double Geo Energy's current production (fewer than 10 million tonnes a year) across all its other mines. The TRA mine could generate hundreds of millions in EBITDA annually. And if Geo Energy can get other miners to use their infrastructure, that's another potential revenue stream (more below).

 

One of the notable aspects of the infrastructure contract is its deferred payment mechanism.

Apart from initial costs and a downpayment amounting to ~15% of the contract value, the contractor will fund the remaining project costs.

This arrangement allows Geo Energy's subsidiary, PT Marga Bara Jaya (MBJ), to make payments two years later, giving the infrastructure sufficient time to generate cash flow to meet its payment obligations.

While 2024 is the year that Geo Energy attracted a Swiss private equity to invest in its growth story, and kick-started the infrastructure project, it is also one of challenges in delivering coal from its other mines.

3Q2024 saw bad weather impacting logistics, while 1H2024 bad weather was blamed for lower coal production. 


Here are some highlights of Geo Energy's 3Q results:

Improved Financial Performance in 3Q2024

The cash profit per tonne from coal mining increased to US$12.04 in 3Q2024 (3Q2023: US$9.80), despite a slight decrease in the average selling price (ASP).

This improvement was driven by better strip ratios, etc.

Geo Energy reported a net profit of US$7.0 million for 3Q2024, which was 39% lower y-o-y.

Reasons: Lower coal sales volume y-o-y (1.7 million tonnes vs. 2.2 million tonnes) as well as finance costs arising from the term loan facilities of US$220 million that was drawn down in October 2023.

Geo Energy declared an interim dividend of 0.2 SG cent per share, its second such dividend for FY24.

If you had held the stock for at least the last 7 months (ie before May 2024), you'd receive 0.6 cent final dividend for FY23 too, for a total of 1 cent/share so far (ie 0.6+0.2+0.2 cent/share). That is a yield to date of more than 3% based on May stock price level of 30 cents.

Infrastructure Progress:
Geo Energy said it has made "significant" progress in its Integrated Infrastructure project, which includes a 92-km hauling road and jetty.

Moody's Investors Service recently reported that data centers could significantly boost coal demand globally. As the world increasingly relies on data centers to power its digital infrastructure, the growing energy consumption associated with these facilities is expected to drive a sustained increase in coal consumption.

• Assuming the coal price remains at the current levels, Geo Energy says it would generate an estimated USD400-USD500 million EBITDA per annum when its TRA mine achieves 25 million tonnes of coal a year.

It's a gradual ramp-up.

• In addition: Assume Geo Energy is able to get third party miners using its new haul road to transport their own coal. At 10 million tonnes, the revenue is US$100 million a year assuming a US$10 per tonne fee.   

(Workings: Road will have capacity for hauling 40 million tonnes a year, of which up to 25 million tonnes will be reserved for Geo Energy's TRA coal. Geo Energy has said there's a potential up to US$10 per tonne cost savings in logistics for TRA mine which, by extension, could apply to other mines in the vicinity).

The development is a major undertaking that involves navigating potential challenges with local communities along the route.

Coal Market Outlook:
Coal prices have remained stable and are expected to rise slightly into 2025, driven by strong demand from major markets like China and India.

The futures market signals that the last quarter of 2024 will see stable prices at US$52.83 per tonne, and rising to an average of US$56.44 per tonne in 2025, says Geo Energy. 

This positive market outlook would benefit Geo Energy as it ramps up production.

Lower Production & Sales Volumes:
Coal sales in 3Q2024 were lower than in the same period last year (1.7 million tonnes vs. 2.2 million tonnes).

This decline was attributed to "short-term logistical challenges caused by lower tides", though Geo Energy has taken steps to address this through increased dredging activities.

Production volume in 3Q2024 of 2.1 million tonnes was marginally lower y-o-y but 9M24 figure of 4.9 million tonnes significantly trailed the 3Q2023 achivement of 6.2 million tonnes.

Dependence on Coal Prices: 
Geo Energy's profitability remains highly sensitive to fluctuations in coal prices, which are influenced by global supply and demand dynamics outside the company's control.

While prices are stable now, any significant drop could negatively impact future earnings.

See also: GEO ENERGY: 2H likely to be 2X better than 1H. Longer term even better. Why?