Geo Energy Resources: A Time Sensitive Trading Opportunity

Vested

It has been some time since I last wrote an article on any platform or on this blog. However, I am still been actively managing my portfolio. I just needed some time to recharge, as there were moments when I felt burned out recently. Nevertheless, I have returned and today I will be sharing information about an intriguing trading opportunity.

I am currently vested in this company but it represents less than 2% of my portfolio. This is because I have not had any additional funds in my portfolio as my primary goal has been to restore it back to its original value of 100%. Furthermore, this is a trading opportunity and I will most likely sell it prior to April 2024.

The Company

The company that I would like to discuss is called Geo Energy Resources Ltd ("GER") (SGX: RE4.SI). The decision to enter into this trade was based on two press releases issued on February 7th and March 1st, 2024.

Image taken from Singapore Business Review

To provide a brief overview, there are two important pieces of information that you should be aware of:

1. One of GER's subsidiaries has entered into a coal purchase contract with EP Resources AG ("EPR"), a subsidiary of Energetický a průmyslový holding, a.s. This contract entails the supply of up to 12 million tonnes of coal per year, priced at an index-linked rate reduced by the offtake margin. Additionally, it includes a standby prepayment facility of up to US$20 million for the Coal Offtake agreement.
2. Furthermore, ResInvest, a private commodities investment company, has expressed its intention to invest US$35 million in GER. This investment is aimed at acquiring a minimum 5.5% equity stake in the company by March 31st, 2026. For the initial investment, ResInvest may acquire the equity stake through market purchases and/or directly from GER at a price of S$0.45 per share, amounting to S$6.6 million by March 28th, 2024. It is important to note that there are various other agreements associated with this deal, which add complexity to the transaction.

The Simple Review

GER stands to benefit both in the short and long term from these developments. The key advantage lies in their ability to re-accumulate funds at a lower rate, thanks to the prepayment facility provided by EPR and the fresh investment from ResInvest. This is particularly advantageous considering the prevailing high interest rates in the market. Moreover, it will bolster their balance sheet following their recent investment, allowing them to reduce interest payments and contribute to future net profit.

On the other hand, while many may argue that coal is a "dying" energy source, with clean energy taking center stage, it is worth noting that according to the International Energy Agency (IEA) website, coal continues to play a crucial role in iron and steel production until alternative technologies become widely available. Additionally, coal is also a vital component in the production of cement. Given that cement, iron, and steel production are primarily driven by infrastructure demands, it is noteworthy that China and Indonesia represent GER's largest clients. If these countries decide to inject more funds into their infrastructure plans, there is a strong likelihood of a resurgence in the coal business for these nations.

My Take

Given my current limited cash position and the inherent uncertainty surrounding the long-term outcome of this trade, my preference is to hold the position in the short term, specifically until April 2024. This decision is based on the anticipated upward pressure that will likely drive the share price towards S$0.45, potentially resulting in a gain of 23% (from its current share price of S$0.365). It is important to note, however, that I do not intend to wait until the share price reaches S$0.45. I have already entered the market at a lower price, holding a relatively small position. My intention is to likely exit the position somewhere between S$0.38 to S$0.40, and I plan to do so before the end of March 2024.

Stay Tuned.