Evaluating Geo Energy Resources' Outlook Post March 2024

Vested

Prior to commencing, I must acknowledge that my previous post on Starhill Global REIT received substantial critical responses. Members in my Telegram group (Link in this post) pointed out loopholes in my article. Specifically, they highlighted that while the REIT boasted high occupancy rates, its revenue from properties outside of Singapore was dwindling. Furthermore, the dividend had experienced a consistent decline over the years, suggesting inadequate management. Hence, if you are contemplating an investment in Starhill REIT, do think twice - although I remain vested for now.

On a different note, I previously also wrote about Geo Energy Resource ("GER") (SGX: RE4.SI), and this article serves as a continuation of my previous piece. Although the time-sensitive information has now been disclosed and March 2024 is coming to an end, I still remain vested in GER. 

As we approach the end of March 2024, the question arises: what will happen if I continue to hold onto GER? 

To save you time, my hypothesis is that there will be a global upsurge in power demand driven by the fervor surrounding AI and Bitcoin mining. This surge is expected to benefit GER over the next two years.

This is my train of thoughts:

• The ongoing AI Craze and Bitcoin Mining Craze are leading to a significant demand for data centers. 
• This trend is observed not only globally but also in China. (Article 1 and 2)
• As a result of the increased need for data centers, there is a sudden surge in power requirements.
• China has been actively constructing numerous new Coal Power Plants since the second half of 2023 and continues to approve plans for additional plants. (Article 1 and 2 )
• China justifies this expansion by stating that coal power plants play a supportive role in stabilizing power supply while renewable energy sources are being developed.
• As of January 2024, as per Global Coal Plant Tracker, China accounts for 53% of the world's coal power generation.
• Per Fitch, China's introduction of a capacity tariff mechanism to facilitate the establishment of new Coal Power Plants is considered beneficial for coal-fired power generation companies as it enhances their cash flow visibility.
• The construction of new Coal Power Plants in China has created increased demand for coal due to concerns about insufficient coal reserves following past power crises that impacted industries and livelihoods.
• Additionally, China's thermal coal imports have continued to rise, with Indonesian coal being favored by coastal utilities in southern China due to its lower sulfur content, which allows for effective blending with higher sulfur domestic supplies.
• Per S&P, it is anticipated that China's coal imports will remain high in 2024, following a record-breaking fourth quarter in 2023. This information was emphasized in a press release by GER.

The Simple Review

GER primarily specializes in the production of Thermal Coal, which serves as a vital source of energy for electricity generation. Notably, GER's largest customer base is located in China. 

FY2024 Full Year Results

The company currently operates two mines that yield coal with low ash and low sulfur content, making it highly desirable by China. GER also recently made a strategic acquisition, acquiring up to a 73.11% stake in PT Golden Eagle Energy Tbk, which, in turn, holds an 85% stake in the TRA mine. This mine boasts 2P reserves of over 275 million tonnes of high-quality coal reserves, offers favorable low ash and low sulfur characteristics that command premium pricing.

In my previous article on GER, I emphasized the significance of the prepayment facility provided by EPR. This facility acts as a pre-shipment arrangement, supporting GER by providing necessary funding. Additionally, the investment from RES contributes to meeting GER's operational cash requirements.

However, it's important to note that the main risk factor lies in commodity prices, particularly the price of coal. According to the latest FY2023 press release, the average coal price stood at US$62.96 per tonne in 2023, a decrease from US$86.06 per tonne in 2022. Moreover, the current premium pricing of the TRA mine's coal is only USD58.98 per tonne.

Considering these factors, I anticipate that the gross margin may not experience a significant increase. Instead, any potential revenue growth is likely to be driven by higher sales volume to China. It's worth noting that this growth is not expected to result in a substantial increase in borrowing, as the prepayment facility and RES investment provide support. Furthermore, a potential reduction in interest rates could lead to lower interest expenses in the upcoming year.

Conclusion

In summary, the outlook for GER in 2024 appears favorable, with an expected increase in coal production without a corresponding significant rise in expenses. This could potentially result in a much-improved bottom line for the company.

Stay Tuned.