Corporate watch: Geo Energy eyes HK listing, plots green future in longer term
As governments, companies, and various bodies push for sustainability to be a key agenda, the investment community has generally avoided coal companies and other investments deemed unfriendly to the environment. Local banks, for example, have joined their global counterparts in cutting back lending to coal-related companies.
Yet, coal remains a desired commodity in today’s energy landscape. Bloomberg reported that coal usage in Europe jumped 10% to 15% this year, amid reports of gas supplies running low due to a longer winter. As such, Tung Kum Hon, CEO of Geo Energy Resources, believes that his SGX-listed company, which operates coal mines in Indonesia, is not going to wither on the vine.
For the most recent 1QFY2021 ended March 31, 2021, the company reported a record revenue of US$114.5 million ($153.85 million), up 30% y-o-y. Despite a strong monsoon and extreme weather leading to a 17% decline in coal production in Indonesia, it managed to increase production and sales “due to prior mine planning and utilisation of our coal exposed”.
For the quarter, it fetched an average selling price of US$38.85 per tonne, up from US$33.22 in 1QFY2020. It sold 2.9 million tonnes, versus 2.5 million tonnes in 1QFY2020. While the company’s gross profit surged 346% y-o-y to US$40.8 million, its net profit fell 10% y-o-y to US$28.3 million, due to booking gains from the early repurchase of bonds in 1QFY2020.
Bond repurchase
The company got itself into a tight financial corner in recent years. In October 2017, Geo Energy issued a US$300 million bond due in October 2022, giving bond holders a per annum interest of 8%. This bond was used to retire the remaining US$70 million–80 million of a US$100 million medium term note taken earlier. With the remaining US$200 million cash from the more recent issue, Geo Energy had wanted to acquire additional mining assets.
The company looked around but did not eventually, as one of the conditions attached to the bond was that Geo Energy’s target got to be producing at least one million tons of coal per year.
But some targets were too small in terms of production, and some were what Tung calls “greenfields” — the term used for unexplored coal fields carrying higher risks. Others had sizeable reserves of up to 150 million tonnes, but digging that all out would take longer than company plans to. It looked for a target with only about 50 to 60 million tonnes of reserves but nothing came to fruition.
Last year, the bond market was down, along with many other asset classes. As such, some of Geo Energy’s bondholders, which were funds facing withdrawals from their own clients, asked to sell back their holdings ahead of maturity and even though the principal was way below par. According to Tung, the company bought back US$240 million worth of bonds by spending only US$140 million.
Currently, the bond has only just under US$60 million outstanding, and with more than US$77 million in cash and cash equivalents, Tung is confident the company can buy back the bond when it matures and be debt-free eventually.
Part of the Paris Accord
Now, with ESG investing already a mainstream action and not a niche thought, how is Tung dealing with the fact that he is running a company producing “dirty fuel” and therefore shunned by many?
According to the US Energy Information Administration, even the cleanest form of coal, known as bituminous coal, produces 205.7 pounds of carbon dioxide for every million British thermal units (Btu) of energy. In comparison, oil produces at most 161.3 pounds of carbon dioxide for the same amount of energy, while natural gas produces just 113 pounds.
Tung believes that coal will remain relevant for the next 20 to 30 years and be a low-cost and reliable source for power generation. He points out that renewables like wind, hydro and solar power depend a lot on weather conditions, and the power generated, without a battery, cannot be stored.
To manufacture batteries, rare earth metals such as cobalt and nickel must be mined, which, in itself, is not environmentally friendly and comes with its attendant list of problems. Child labour, for example, is widely reported to be used to mine cobalt in Congo. There is also the issue of properly disposing of the used electronic devices when the batteries are depleted. “You talk about the end-product, but you don’t talk about the process to make the end-product,” says Tung.
Natural gas, meanwhile, has been touted as the cleanest fossil fuel, and is used by Singapore to generate 95% of its power. Tung says that the gas has to be pressurised to be transported or stored, and if not handled properly, can result in the release of methane, a greenhouse gas that traps even more heat in the atmosphere than carbon dioxide.
In contrast, coal is less fussy in terms of transportation and storage. “We mine it, and we deliver it to the power plant,” he says. “It can
be under the sun, open air, whatever it is, and you just transport and store in a silo.”
His view is echoed by a KGI Securities report in June, which notes that clean energy “has been undoubtedly the most popular investment theme over the past three years”. However, the final output needed, regardless of source, is electricity. “Apart from nuclear power, which is the most efficient source of electricity but attracts an equal amount of controversy, other forms of renewable energy have not reached optimal efficiency,” the report says.
“In addition, renewable sources of power are not widely deployable due to limitations. Solar farms and wind farms have to be located in areas with abundant sunlight and wind. Therefore, as of now, coal-fired power remains the major source of supply and is still decades from being completely replaced.” As such, coal still provides a lucrative outlook for investors in the near term, says KGI, which has a “buy” call on Geo Energy and a 27 cents target price.
Rather than eradicating coal, Tung believes that there should be more focus on developing better carbon capture technologies in power plants. “Imagine if you could generate all this power from coal, without the carbon dioxide,” he says.
Reuters reported in May that the coal industry is betting it can survive the decarbonisation of electricity and industry and keep fossil fuels in the mix by leaning on carbon-capture technology.
The head of the World Coal Association, Michelle Manook, told Reuters that such technology “are a key part of the Paris Agreement on climate change”, and will help keep coal relevant as governments and companies quicken efforts to cut emissions that are warming the planet and polluting the world’s densely populated cities.
The agreement calls on countries to use all available technologies, such as carbon-capture and storage (CCS), in which emissions are stored underground or used in industrial processes.
“Go back to the International Panel on Climate Change and they have been really clear and consistently saying that we are not going to get there [meeting the climate targets] without CCS,” Manook says in the Reuters report.
Alternative green route
The way Geo Energy’s share price moved — or didn’t — reflects the general aversion the market has for coal companies. It closed at 22 cents on June 29, which translates to just 2.49 times historical earnings. At this level, it is a 7.4% discount off its net asset value of 23.77 cents per share as of March 31.
Tung says that even with the “great results”, the share price more or less stays put; when Macquarie took a 5% stake in November 2018 — which means Geo Energy has passed all the ESG assessments imposed by the Australia bank, its share price hardly budged as well.
Getting shunned by investors here is nothing new for Tung. As far back as 2018, the company was already making plans to have a dual listing in Hong Kong, where liquidity is supposedly better and where more miners are listed, making the sector more familiar to investors there. However, despite the pandemic putting a pause on those plans, Geo Energy is prepared to revisit this “at an appropriate opportunity”. The company also revealed that it has also been encouraged to pursue a listing of one of its subsidiaries on the Indonesian Stock Exchange, which “it will consider on its own merits”.
As CEO of a coal mining group, Tung of course needs to defend coal. However, he is looking at other revenue streams as well if Geo Energy is to be a sustainable business for the longer term. It now has around 80 million tons of coal reserves, which at its current pace of production, will keep it in business for another six to eight years.
Interestingly, Geo Energy is eyeing a share of the booming renewables space. Now, rather than invest significant capex to build a wind farm or something similar, it is looking at opportunities along the supply chain of these renewables, such as mining cobalt and nickel. Indonesia has huge deposits of these metals, attracting the likes of Tesla to take part in setting up an EV battery supply chain venture.
Even with the stigma surrounding coal, Tung is optimistic that Geo Energy will continue to grow, given that it is in developing regions like Indonesia and Southeast Asia. As these countries develop, their power needs will grow, and as such, he thinks that there will still be an appetite for cheap power sources, such as coal.
“They are not like developed countries in the US and Europe, where you can easily switch to renewables. Smaller economies in Southeast Asia, you cannot ask them to spend big money,” Tung says.