Singapore, March 07, 2019 -- Moody's Investors Service has affirmed the B2 corporate family rating
(CFR) for Geo Energy Resources Limited.
At the same time, Moody's has affirmed the B2 rating on the
senior unsecured guaranteed notes issued by Geo Coal International Pte.
Ltd., a wholly owned subsidiary of Geo Energy.
Moody's has also revised the outlook on the ratings to negative from stable.
RATINGS RATIONALE
"The negative outlook reflects our expectation that Geo Energy's
credit profile will remain weak for its current ratings, in the
absence of a material increase in production at its existing mines,
and uncertainty over Geo Energy's ability to acquire suitable coal
assets in the near term to improve consolidated earnings and cash flow,"
says Maisam Hasnain, a Moody's Analyst.
Geo Energy's adjusted leverage, as measured by adjusted debt
to EBITDA, currently breaches the downward rating trigger of 4.0x
for its B2 ratings. Adjusted leverage increased to around 4.5x
in 2018 from 4.0x in 2017, due to lower earnings on the back
of lower sales volumes and higher operating costs, as it commenced
operations at its PT Tanah Bumbu Resources mine.
The company has obtained regulatory approval to produce eight million
tons of coal in 2019, relatively unchanged from the 7.9 million
tons produced in 2018. However, the eight million tons are
considerably lower than the 13 million tons of expected annual production
that Geo Energy guided to in November 2018.
"An inability to materially increase production in 2019 will constrain
Geo Energy's earnings growth and weigh on its credit profile,
which remains highly susceptible to changes in coal prices, given
its small scale," adds Hasnain, who is also Moody's
Lead Analyst for Geo Energy.
In the absence of an acquisition and in light of limited production growth
at its existing mines, Moody's expects that Geo Energy's
adjusted leverage will weaken further to around 5.5x over the next
12-18 months from Moody's earlier expectation of below 4.0x
on higher production volumes. Such high leverage levels on a sustained
basis cannot support Geo Energy's B2 ratings.
Nevertheless, Geo Energy has the financial flexibility to utilize
its large cash balance of $197 million as of 31 December 2018 to
make the acquisition of a coal mine to increase its scale, and improve
its consolidated earnings and cash flows.
Last week, the company announced a non-binding offer for
a producing coal mine in East Kalimantan, which is EBITDA and net
earnings accretive. However, further details on the proposed
acquisition are not publicly available.
Geo Energy's weak financial metrics could improve if it completes
an acquisition without materially raising incremental debt.
However, negative ratings pressure will rise further for Geo Energy,
if the planned acquisition is delayed, or if the acquisition,
should it proceed, not lead to a material improvement in its consolidated
financial metrics.
In addition, given the declining coal reserves at its existing operating
mines, Geo Energy is reliant on making a sizeable coal mine acquisition
or risk not meeting its minimum coal reserve requirements to prevent the
put option on its $300 million bond being triggered in April 2021.
Such a situation would give a material rise to liquidity and refinancing
risk.
Upward pressure on Geo Energy's ratings is unlikely, given
its negative outlook.
Nevertheless, the outlook could revert 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.
Credit metrics indicative of a change in outlook to stable include (1)
adjusted debt/EBITDA below 4.0x, and (2) adjusted (CFO-dividends)/debt
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 make an acquisition that improves its credit profile
in the near term and reduces the risk of its put option being triggered
in 2021.
Credit metrics indicative of a ratings downgrade include (1) adjusted
consolidated debt/EBITDA rising above 4.0x, (2) adjusted
(CFO-dividends)/debt below 10% on a sustained basis,
In addition, a reduction in Geo Energy's cash balance to below
$180 million — in the absence of an acquisition — or
any changes in laws and regulations, particularly with regard to
mining concessions, that adversely affect the business would likely
lead to a ratings downgrade.
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.
Geo Energy Resources Limited is a coal mining group, established
in 2008, which owns 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%. Macquarie Bank Limited acquired 5%
in November 2018, with warrants to increase this stake to 9.7%
by November 2020.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Maisam Hasnain, CFA
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
Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
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
