Singapore, November 18, 2019 -- Moody's Investors Service has downgraded the corporate family rating
(CFR) of Geo Energy Resources Limited to B3 from B2.
In addition, Moody's has downgraded to B3 from B2 the senior unsecured
guaranteed notes issued by Geo Coal International Pte. Ltd.,
a wholly-owned subsidiary of Geo Energy.
The outlook remains negative.
RATINGS RATIONALE
"The downgrade reflects our expectation that Geo Energy's
credit metrics will remain very weak over the next 12-18 months,
despite incremental earnings from its planned mine acquisitions in South
Sumatra," says Maisam Hasnain, a Moody's Assistant Vice
President and Analyst.
Geo Energy's adjusted leverage has continued to rise due to lower
coal prices, limited production growth and elevated operating costs
at its existing mines. Its adjusted leverage -- as measured
by adjusted debt/EBITDA -- increased to around 18.0x as of
September 2019 from 4.5x in 2018 and 4.0x in 2017.
Including dividends from mines currently being acquired, Moody's
expects Geo Energy's adjusted leverage to remain high for its B3
rating at 6.0x -- 6.5x by end-2020. Given
its small scale, Geo Energy's operating performance remains
susceptible to slight changes in coal prices and production costs.
The company is in the process of acquiring a 51% effective interest
in two coal producing mines in South Sumatra for $25 million,
which it expects to complete by December 2019.
"In addition to its weak credit metrics, the negative outlook
also reflects uncertainty over Geo Energy's ability to prevent the
put option on its $300 million bond being triggered in April 2021,
which if triggered would lead to elevated liquidity and refinancing risk,"
adds Hasnain, also Moody's Lead Analyst for Geo Energy.
The company's ability to prevent the put option from being triggered
will be contingent on Geo Energy (1) extending its existing mining licenses,
which currently expire in 2022, to beyond 2025, and (2) having
at least 80 million tons of coal reserves on 4 April 2021. The
reserves must be measured no earlier than six months prior to this date.
With the minimum reserves from its South Sumatra mine acquisitions and
based on its current production run rate at its existing mines,
Moody's estimates Geo Energy will likely have around 85 million
tons of coal reserves by the end of 2020, only slightly above the
80 million ton threshold.
This thin estimated buffer elevates Geo Energy's risk of falling
short of the minimum reserve requirement, particularly if it increases
production beyond its current run rate or if future coal reserve calculations
are lower than currently estimated.
Therefore, Moody's expects Geo Energy will continue to pursue
further acquisitions, though the timing and amount remain uncertain.
The company's previously announced target to acquire a large,
operating mine in East Kalimantan has been put on hold as the sellers
have postponed the sale process.
Geo Energy had a large cash balance of around $180 million as of
September 2019, which is sufficient to meet its capital spending,
South Sumatra mine acquisitions, scheduled debt maturities and dividends
over the next 12 months. However, the liquidity buffer will
decline if Geo Energy uses its cash to acquire additional coal assets.
The rating also considers Geo Energy's exposure to environmental,
social and governance (ESG) risks as follows:
First, Geo Energy faces elevated environmental risks associated
with the coal mining industry, including carbon transition risks
as countries seek to reduce their reliance on coal power. However,
the risk is somewhat mitigated as Geo Energy's customers are primarily
located in Asia, a region with growing energy needs. Also,
Geo Energy has off-take agreements with global commodity traders
to purchase Geo Energy's coal for export.
Geo Energy's two operating mines are adjacently located in South
Kalimantan, and are vulnerable to adverse weather. For example,
operations at one of its mines were temporarily halted for around a week
in June due to prolonged flooding. However, the company's
planned mine acquisitions in South Sumatra will reduce such operational
concentration.
Second, Geo Energy is also exposed to social risks associated with
the coal mining industry, including health and safety, responsible
production and societal trends. The company has implemented an
Environmental and Social Management System, which seeks to address
its issues such as workplace health and safety procedures, and local
community development.
Finally, with respect to governance, Geo Energy's ownership
is concentrated in its promoter shareholders, who own 39%
of the company. However, this risk is somewhat balanced against
the company's listed status in Singapore and the fact that half
its board consists of independent directors.
The outlook is negative, reflecting Geo Energy's weak credit
metrics and uncertainty over its current ability to prevent the put option
on its $300 million bond being triggered in April 2021, which
if triggered would lead to elevated liquidity and refinancing risk.
Upward pressure on Geo Energy's ratings is unlikely, given its negative
outlook.
Nevertheless, the outlook could return to stable if Geo Energy improves
its financial profile, and effectively executes on its plan to acquire
new mines to ramp up production and improve its mine reserve life,
effectively removing risk from the bondholder put option.
Credit metrics indicative of a change in outlook to stable include (1)
adjusted debt/EBITDA falling below 5.5x, and (2) adjusted
(CFO-dividends)/debt rising above 10% on a sustained basis.
On the other hand, Moody's could downgrade the ratings if Geo Energy's
operating performance does not materially improve, or if it fails
to acquire coal assets that improve its credit profile in the near term
and eliminate the risk of its put option being triggered in April 2021.
In addition, an inability to extend the licenses on its current
mining concessions at substantially similar terms would likely lead to
a rating downgrade.
Credit metrics indicative of a ratings downgrade include (1) adjusted
consolidated debt/EBITDA rising above 6.0x, and (2) adjusted
(CFO-dividends)/debt below 10%, both on a sustained
forward looking basis.
The principal methodology used in these ratings was Mining published in
September 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Established in 2008 and listed on the Singapore Stock Exchange,
Geo Energy Resources Limited is a coal mining group with mining concessions
in South and East Kalimantan. Its promoter shareholders,
including Charles Antonny Melati and Huang She Thong own 39% of
the company, while the public owns 45%.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
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Maisam Hasnain, CFA
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Ian Lewis
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
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Moody's Investors Service Singapore Pte. Ltd.
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