Geo Energy Resources Laid Foundation for Top and Bottom Line Growth

I have previously written about Geo Energy Resources ("GER") and their most recent half-year 2024 results announcement warrants further examination. At face value, the results appear positive. However, if we exclude "Other Gains", net income would have decreased to US$3.0m. This likely explains the low dividend declared as per the HY2024 report.

Geo Energy Resources Income Statement

In my view, it is wise to remain cautious given the decline in coal prices from record highs in 2022 to earlier in 2023. 

Coal Prices from 2020 till Aug 2024 / Source: tradingeconomics.com

That said, acting on impulses to bail out of your position now would be short-sighted. GER future looks promising due to the following reasons:

1. Spike in Energy Demand for South East Asia ("SEA") - Source: 1, 2, 3, 4, 5, 6, 7

The rapid development of AI and data centers in SEA continues to drive up enormous energy needs to power computing infrastructure. As data centers require reliable electricity sources, governments may turn to lower-cost options like coal-fired power if adequate supply cannot be ensured.

While China remains an important coal importing partner for GER, demand from other Southeast Asian markets is poised to increase substantially in the future. Greater SEA demand could significantly boost GER's regional revenue. Reliable and cost-competitive coal supplies will be critical to satisfy the surging energy needs of data centers across Asia in the coming years, representing a major opportunity for GER's business growth.

Evidence of this trend can already be seen. Countries like the Philippines, Indonesia, and Vietnam have grown their coal usage considerably in recent times. Consumption is expected to rise further once data centers currently under construction come online. SEA unrelenting digital transformation will sustain strong electricity and coal demand, benefiting major exporters like GER.

2. Haul Road Project to Lower Costs and Expand Production for GER - Source: 1, 2

GER appears well-positioned for substantial growth through their strategic integrated infrastructure development. The company is undertaking a haul road project aimed at minimizing transportation times and costs in their logistics operations. This could provide a captive market for natural resources in the local region while diversifying revenue as an infrastructure provider.

The project is scheduled for completion between late 2025 and early 2026. It will enable ramping up production to 25 million tonnes annually with up to US$10 per tonne in logistics savings. Assuming coal prices remain at current levels, GER could attain an estimated US$400-500 million in annual EBITDA.

Interestingly, the project structure allows GER to avoid cash burn over the next two years. Aside from initial costs and a 15% downpayment, the contractor will fund remaining development. This permits PT Marga Bara Jaya to settle payments later, giving the infrastructure sufficient time to generate cash flows and meet obligations. The arrangement effectively transfers project financing responsibilities, decreasing short-term capital demands on GER.

3. Fed Potential Rate Cut - Source: 1

Given expectations for declining interest rates, GER's finance costs may reduced significantly going forward. Interest expenses ballooned from USD 67k in HY2023 to over USD 9 million as of HY2024. However, the opportunity to refinance debts at lower rates in the future could substantially boost the bottom line. As rates drop, saving on interest should enhance profitability as financing expenses shrink from their currently high levels. The potential for low-cost refinancing in a lower rate environment bodes well for strengthening GER's earnings profile.

Conclusion

Considering the possibility for increased revenues in tandem with lowered mining and financing costs, GER's profitability appears set to ascend markedly in the years ahead. Projected growth in sales volumes may be supported by expanded production capabilities through infrastructure upgrades currently underway. Meanwhile, efficiency gains from the new haul road and prospective decreases to interest rates could simultaneously reduce operational and financial expenses.

The confluence of these positive dynamics suggests the company's earnings trajectory has turned a corner. All signs point to performance bottoms being attained, setting the stage for GER's trajectory to increasingly trend upward from the current point onward.

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