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Rating Action:

Moody's upgrades Geo Energy to Caa1; outlook stable

08 Dec 2020

Singapore, December 08, 2020 -- Moody's Investors Service has upgraded the corporate family rating (CFR) of Geo Energy Resources Limited to Caa1 from Caa3.

In addition, Moody's has upgraded to Caa1 from Caa3 the senior unsecured guaranteed notes issued by Geo Coal International Pte. Ltd., a wholly-owned subsidiary of Geo Energy.

The outlook on these ratings remains stable.

"The ratings upgrade reflects the elimination of near-term refinancing risk for Geo Energy, as the company announced that it has met the conditions required to prevent triggering a put option on its US dollar notes in April 2021," says Maisam Hasnain, a Moody's Assistant Vice President and Analyst.

RATINGS RATIONALE

On 2 December, Geo Energy announced that its updated coal reserve report showed its combined reserves at its two operating mines, PT Sungai Danau Jaya (SDJ) and PT Tanah Bumbu Resources (TBR) were 86 million tons (MT) as of 30 October 2020 [1]. This follows the company's announcement in August that it had secured mine license extensions at the two mines to 2027 and 2028, respectively, from their previous 2022 expiry dates.

These two factors mean the company has satisfied the minimum reserve conditions needed to prevent the triggering of a put option on its outstanding US dollar notes in the next four months. These minimum reserve conditions included (1) extension of existing mining licenses at SDJ and TBR to beyond 4 October 2025 and (2) having more than 80 MT of coal reserves, with the reserves measured no earlier than six months before 4 April 2021.

As a result, the US dollar notes will mature as originally scheduled in October 2022, affording the company time to increase cash generation prior to the maturity.

Over the past 12 months Geo Energy has cumulatively repurchased around $241 million of the notes' original $300 million principal amount, at a considerable discount to the original par value, crystalizing a significant loss of value for creditors relative to the original obligation. The remaining notes outstanding total only $59 million.

"Despite significantly lower leverage and lower interest costs, Geo Energy's credit profile remains constrained by its small scale and limited financial flexibility, including a low cash buffer which hinders its ability to make acquisitions in order to grow and replenish its declining coal reserves," adds Hasnain, who is also Moody's Lead Analyst for Geo Energy.

Moody's estimates Geo Energy will generate sufficient internal cash to repay the outstanding notes at maturity while maintaining a minimum cash balance, similar to its $25 million balance as of 30 September 2020. However, this limited buffer could erode in the event of persistently low coal prices or cuts in production volumes over the next 12-18 months.

Moody's expects the company may seek to raise money via prepayment facilities under its existing coal offtake agreements to help bridge any small funding gap when its notes come due in October 2022.

However, Moody's expects Geo Energy's ability to raise large amounts of capital to invest in growth will be challenging because the company's credit profile will weaken as its existing coal reserves continue to decline. With total proved and probable reserves of 86 MT as of 31 October, Geo Energy has a relatively short reserve life of about seven years at its target production level of 12 MT per annum.

In addition, Geo Energy has not yet established a track record of executing on its growth plans. While a majority of proceeds from its $300 million notes issued in September 2017 were earmarked for coal mine acquisitions, the company has been unable to complete an acquisition in the last three years. At the same time, its cash available to make acquisitions has eroded primarily due to continued discounted buybacks of its US dollar notes.

ESG CONSIDERATIONS

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.

Geo Energy's two operating mines are adjacently located in South Kalimantan and vulnerable to adverse weather. For example, operations at one of its mines were temporarily halted for around a week in June 2019 due to prolonged flooding.

Geo Energy is 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 issues such as workplace health and safety procedures, and local community development.

With respect to governance, Geo Energy's ownership is concentrated in its promoter shareholders, who own around 39% of the company. Other governance risks entail the company's financial policies, including its willingness to use cash for discounted notes repurchases, resulting in a loss of value for creditors relative to the original obligation.

OUTLOOK

The outlook is stable, reflecting Moody's expectation that Geo Energy will maintain profitable and cash-generative operations, and sufficient cash sources to meet its cash needs over the next 12-18 months. The stable outlook also assumes Geo Energy does not make further discounted notes buybacks.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade is unlikely over the next 12-18 months given Geo Energy's small scale, short reserve life and limited financial flexibility to grow its business while repaying its outstanding notes in full at maturity.

Nevertheless, prospects for an upgrade could arise over time if Geo Energy improves its business profile by growing its coal reserves, while adhering to conservative financial policies and maintaining a prudent approach toward investments and shareholder distributions.

On the other hand, Moody's could downgrade the ratings if Geo Energy's cash generation declines, such that its cash sources are insufficient to meet its needs over the next 12-18 months.

The principal methodology used in these ratings was Mining published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739. Alternatively, 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 in 2012, 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 around 39% of the company.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] Geo Energy SGX announcement 02-Dec-2020

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
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

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
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JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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