Geo Energy Resources

Geo Energy Resources – Dropped 23% In The Past Week. What’s In Store?

I typically do not reveal the location of my travel pics, unless the travelling took place some time ago. No prizes for guessing this time around though. LOL!

534) Taj Mahal.jpg

All I can say is, don’t go during summer!

It’s shit ass crazy hot, and no amount of air conditioning can save you. Amazingly enough, the locals can wear long sleeved shirts and look perfectly comfortable. I’m doing all I can to stop myself from stripping bare naked.

Still, I figured that the Taj Mahal is classic, and it’s something I wanna check off my to do list. Perfectly beautiful, I’m told it’d be even nicer in the quaint moonlight (there are night tours) but our schedule just didn’t allow for it.

This, together with watching a funeral procession in the famed Ganges River, are cultural events that I wanted to see before I’m dead. I’d include photos, but this link, has photos that are by far superior to mine:

http://www.dailymail.co.uk/news/article-3248208/Where-funeral-fires-forever-burn-Incredible-photos-Manikarnika-Ghats-holy-festival-Ganges-Hindus-make-final-journey-moksha-reach-nirvana.html

When it comes to travelling, I’m not looking for leisure, not looking for comfort, not looking for the run of the mill stuff. I realized early on that what I really want, is to experience stuff.

Cos it is experiences that will lead to memories.

And it is the memories that are truly priceless.


I’ve been getting some email enquiries/requests for meet ups. I’m sorry to say that from now on, I’d have to decline politely. The last time I’ve done so is a couple of weeks ago, and it’s only cos the guy (you know who you are!) is a long time reader and would be a future colleague after he grads.

It’s just taking up too much of my time, and it’s not a productive endeavor.

TBH, I’m not that keen to share my thoughts or discuss about my options strategy right now anyway. It’s working out swimmingly for me thus far, I’ll post results here when I’ve longer term data.  I’ll reply any email questions about it too.

But to teach it… well, I’m not that keen. Sorry. It’s actually harder to put into words a specific thought process. I guess that’s what they call experience. You gotta try it, fail, rethink about it, experiment, implement changes, review, and ultimately, try again.


Now, on to Geo Energy. For some context, I’ve written extensively about the company previously:

Geo Energy Resources Investing Thesis – Part I

Geo Energy Resources Investing Thesis Part II

BBR Holdings FY17Q1, Geo Energy Resources FY17Q1, Results From Options Strategy (1 month)

Since the company released what looks like stellar results on paper, the share price has tanked 23% in a single week.

535) Geo Energy share price.jpg

Results were at the very least, expected, and in fact, the numbers look impressive. So what happened?

I’d attribute it to 2 main reasons.

China’s National Development and Reform Commission (NDRC) released new info about their plan to ban the import of low quality coal. This isn’t anything new; NDRC had previously gave indication that a reduction in the import of low calorific value coal is in the works.

http://in.reuters.com/article/china-economy-coal-imports-idINL3N1H12XC

Low calorific coal is unproductive, as lesser energy is derived per unit coal, as compared to higher calorific coal. Typically, Indonesia’s coal is associated with the low calorific, higher sulphur and higher ash content type of coal.

The 2nd reason relates to the drop in the chinese coal spot prices. For the past month, the coal prices for GAR 4,200 coal has been dropping.

As recent as the 21st April 2017 (1 month ago), prices for GAR 4,800 coal at the chinese end, was 610 yuan/tonne. Today, it’s at 530 yuan/tonne.

536) Chinese coal price may 2017.jpg

Associated with the drop in prices, at a most recent coal conference in Indonesia, experts and keynote speakers all warned that if all coal companies continue with their breakneck production expansion, inevitably the industry will swing to a situation of oversupply.

Now, let me address the 1st point above regarding China’s NDRC. It’s crucial that we understand a bit of background info, to try to ascertain what NDRC is trying to achieve and what their objective is when they’re crafting policies like these.

Pop quiz: Which are the 2 most indebted industries in China?

Answer: Coal and Steel Industries

https://www.ft.com/content/fdf89b02-015e-11e7-ace0-1ce02ef0def9

http://www.reuters.com/article/us-china-debt-coal-steel-idUSKCN0WO35T

Many highly indebted coal companies in China are kept on life support, simply to avoid the contagion that comes with massive defaults that snowballs. Many chinese banks are on the hook for big writedowns if these coal companies fail.

The chinese government cannot allow that. In fact, it’s no secret that they have been trying to tame this tiger for several years now. It’s just not an easy issue to solve. Every policy action has unintended consequences. It’s kinda like you have an infection, and the dr gives you an antibiotic, but most commonly given antibiotics have side effects such as nausea.

A perfect example is what happened in 2016. NDRC tried to avoid an over capacity issue and closed down inefficient coal companies, cut the number of working days (from 333 days to i think, 276 days) that miners can operate and directly and indirectly, limited the total coal production. Total coal production was cut by 150 million tonnes in 2016.

Yet, this had the effect of causing a massive spike in coal prices in the summer of 2016. With the sudden drop in production, coupled with the spike in energy requirements for summer (air conditioning takes up a lot of energy!), the utility companies had to scramble for coal as coal stocks dropped to multi year lows, and all this lead to a rapid spike in coal prices. Eventually, NDRC did a rapid about turn, and reinstated the number of working days coal companies could operate.

NDRC’s stated plan, to deal with local over capacity, inefficiency and potential defaults, is to force the smaller miners to close, while forcing the moderately sized miners to consolidate and merge with other miners.

They’re also forcing the banks/lenders to do debt for equity swap deals, in order to remove debt from the balance sheets of these miners.

537) coal companies debt for equity swap.jpg

NDRC has an unenviable task. It is important to note that there are a few parties involved here: the coal mining companies, the utility companies, the banks that have lent money to the coal mining companies, and of course, the foreign miners that supply coal to the chinese utilities, usually through middlemen (like ECTP, in Geo Energy’s case)

If NDRC allows coal prices to drop too much, many of these mining companies would not survive. They’d cut down on operations, default, go bankrupt etc. All that leads to massive job layoffs, banks having to face big writeoffs, and certainly unrest and discontentment.

If coal prices rise too much, sure the miners would be delighted, but the utility companies wouldn’t. Layer on to all these is concern about excessive smog and air pollution.

With the massive rise in chinese coal prices at the end of 2016, many utility companies have complained to NDRC about their decimating profits, and NDRC has finally taken note.

Check out Huaneng Power’s financials. Huaneng is one of the 5 top power producers in China:

538) Huaneng power generation.jpg

The company generated almost 25% more power compared to 2016Q1.

Yet, profitability dropped almost 90%!

539) Huaneng profits.jpg

Emphasis on the last statement:

“The decrease is mainly attributable to the increase of fuel price”

What I’m trying to illustrate here, is the multiple concerns of NDRC. And once we understand what NDRC is trying to achieve, in the context of the macro picture, we will then be able to intelligently postulate where the coal market would go from here.

So now we know that NDRC can’t let coal prices drop too much, they can’t let coal prices runaway and jump too much either. To achieve stability in energy prices, it is also in the interest of NDRC to ensure that utilities have some predictability in the fuel costs.

Aside from the potential ban on the import of low calorific coal, (which is mainly for productivity and for environmental concerns), NDRC has also moved to encourage (read: enforce! That’s what communist countries can do. They have control but are compromised by inefficiency. Anyone played SimCity before? What happens when you switch governments to “Communist”?) coal miners to offer long term coal futures to the utilities, so that utilities can have more stable fuel costs and predictability.

For the miners, this is both good and bad. Good in the sense that they too, would have predictability in terms of their volume. Bad in the sense that they would not be able to capitalize if the coal prices shoots up rapidly.

Now, at this point, readers would probably find it confusing. So how does all this affect Geo Energy? It is a complicated issue. There are multiple parties, and NDRC has to do a delicate balancing act. Many variables, and each can drastically affect the accuracy of our analysis.

Fortunately, NDRC made it a lot simpler for TTI.

They’ve stated that they’d be comfortable with coal prices in the range of 500 – 570 yuan a ton, for calorific value 5,500 coal, at the port of QinHuangDao.

https://www.bloomberg.com/news/articles/2017-02-15/china-said-to-consider-resuming-coal-output-curbs-for-six-months

Well, that range is where QinHuangDao spot coal prices are at right now.

540) Qinhuangdao coal price.jpg

The black line indicates the benchmark QinHuangDao prices. It reached a high of 610 yuan, and has now fallen to 560 yuan.

The most logical conclusion here, must therefore be that chinese spot coal prices would stabilize at current levels, or if they dip substantially below this range (500 – 570 yuan), we’d see NDRC intervening in some way or form.

That’s a good start to understanding the complicated dynamics in this industry.

How about volume?

All reports currently point to a dearth of deals completed at the ports. Utilities are loathe to commit to sizable quantities, as NDRC is sending out all sorts of unclear signals about their intention to ban low calorific coal.

Nobody knows for sure what’s NDRC’s requirements  at this stage, but Geo Energy’s 4200 GAR coal is not exactly low calorific. It’s not high calorific either. But their coal has <1% sulphur content, and moderately low ash content, so that’s the good news.

All this uncertainty is showing up in the lack of buyer interest, as the end clients await more clarity from NDRC:

541) Utilities demand remain tepid.jpg

Coal stockpiles at the utilities have been rising, and as of last week, the data indicates that the 6 major coastal utilities together have 12.07mil tonnes of coal, an increase of 2.6% from a week earlier. This would account for 19.6 days of consumption, 2.2 days less than a week ago.

https://www.linkedin.com/pulse/mounting-stocks-china-ports-utilities-pull-down-coal-prices-energy

Alright, let us recap here a bit.

We know that NDRC wants to cap coal prices into a range. Prices were spiking above this range the past several months due to NDRC’s previous policy of limiting coal production, and this has since come crashing down.

We also know that the current price is within the range that NDRC would be comfortable with, but we don’t know whether prices would stay within this range, or would it drop below. If it does though, it is safe to conclude that NDRC would intervene to support prices.

Volume at the end client side has been thin too, and utilities are all reluctant to commit to large volume purchases.

With all this info in mind, I’m currently seeing an opportunity to add to my positions in Geo Energy, and in fact, has recently added 100,000 shares at $0.26.

Why so?

For starters, I’d be more worried if prices continue trending higher, because logic dictates that NDRC won’t allow that. At this current price, there’s some support if it falls below the range.

Volume has been thin, but I believe reprieve is coming soon. Specifically, in 2 weeks.

Now, summer and winter are traditionally the periods whereby China energy requirements spike up. It’s true year in, year out. Nothing changes.

For substantiation, I found a very nice paper, I’ll have to give credits to these guys:

“A study on the electric power load of Beijing and its relationships with meteorological factors during summer and winter”

(Zi Y. Zhang,a,b* Dao Y. Gonga and Jing J. Mab et al)

 Now, I won’t waste space and upload the paper here, because I’m pretty sure nobody wants to read it. It’s as dry as summer. LOL!

Instead, I’ll just cut out this 1 self explanatory table from the paper:

542) China's electricity power requirements.jpg

We can see Beijing’s power requirement is trending up over the years. More importantly, the 2 peaks within a year, coincide with the June-August (summer) and the November-January (winter) months.

The volatility is also greater during the summer months (you see massive spikes up and down and up and down), probably because air conditioning doesn’t have to be kept on 24hrs a day during the summer, and cooling requirements drop in the night.

Whereas there are less exaggerated peaks to troughs in the winter months because heating is more constant.

Well, that’s not in the paper. Just my personal observation and postulation here.

Anyway, this means that as we move into the June period, and with the start of summer, we should be expecting a pick up in demand for utilities.

But that’s not all there is to it.

Traditionally, utilities start stockpiling a month ahead of the peak summer months. But since, as I’ve shown above, they’ve delayed buying coal recently, there’s a pretty good chance that utilities would have to play catch up, and we start seeing coal volumes transacted increase at a breakneck pace moving into summer.

Reuters seem to agree with me:

http://www.reuters.com/article/us-china-coal-power-idUSKBN17S1IV

I’ll quote:

“Coal inventories at major utilities stand at 50 million tonnes, their lowest in April since at least 2014 when they were 72 million tonnes, according to a survey by consultancy Fenwei.

Utilities consumed 300 million tonnes of coal in the July to September period last year, Fenwei said.”


OK, thus far, I’ve given a birds eye view of the chinese coal markets, and it’s current situation. Notice I haven’t really brought Geo Energy into the picture much.

Here’s the kicker:

All this that I’ve just said, may not even affect Geo Energy that much!

Geo Energy has an offtake agreement with ECTP for 7mil tonnes in 2017. We don’t know the formula in the offtake agreement to determine the selling price of the coal, but we know it’s pegged to Indonesia’s HBA index.

And the HBA, albeit lower than the start of the year, hasn’t even dropped <10%.

543) Indonesia HBA index.jpg

Instead, the chinese demand and prices would more likely affect the middleman, which is ECTP.

I still monitor chinese coal news and developments closely though, cos let’s not forget that Geo is still in the midst of concluding the acquisition of TBR mine, and is also negotiating for an offtake agreement for TBR.

At this stage, I’m excitedly awaiting for more news on this front (supposed to be concluded by Q2 end).

When TBR is in production, that’s when Geo Energy’s true strengths would be utilized. TBR and SDJ are adjacent sites, and thus far, their synergy has not filtered into the financials.

It is possible though, that with tepid chinese demand, the negotiations for TBR would be tougher. ECTP would be less onerous in giving in when dictating terms for the offtake agreement, if the end client demand is not there.

At this stage though, knowing what I know, I personally feel that the markets are overhyping the supposed low calorific coal ban, the supposed potential oversupply of coal and accompanying drop in coal demand.

Prices and volume transacted can change quickly, at the drop of a dime.

I currently own 500,000 shares of Geo Energy at an average price of $0.177, and in 2 weeks, will be expecting to collect a 1 cent dividend for 400,000 of those shares. That’ll further lower my ave price to $0.17.

Now, there’s actually a lot more DD that I could share, but I feel compelled to stop here cos this post is getting too long, and well, I’m on holiday. LOL. (And it is getting tiring to go on)

So just very very briefly, I’ll throw out bullet points on the remaining thoughts/DD and you guys looking can do your own digging.

Hydropower! Part of the reason why utilities have been delaying coal stockpiling is because hydropower has been stepping up of late. As we approach the summer months, rainfall drops drastically, and hydropower correspondingly drops as well.

There is a new analyst report from KGI on Geo’s peer, GEAR. It makes a good read, so do read that. There are differences between Geo and GEAR, and I think many have tried to dissect these differences.

My own take is that GEAR is more efficient, more productive, but I don’t like their substantial minority interests. In short:

GEAR’s GPM >>> Geo’s GPM

But

GEAR’s NPM (attributable to shareholders) <<< Geo’s NPM

Go figure out why and you’d see what I mean.

It is important to note though, that geographically, the bulk of Geo’s coal ends up used in China’s power plants whereas 51% (if i remember correctly! writing all this off the top of my mind) of GEAR’s coal is used domestically in Indonesia.

NDRC’s environmental considerations. Many of the chinese states have banned coal burning. Yet, coal will remain as the main energy source for China in the immediate to mid term. China though, is trying to shift the energy generation far away from their cities.

Domestic mine safety and inspections. In the past 2 months, several domestic mines have been shut or their production curtailed as China conducts safety checks, upgrades their mine infrastructure, or even check on the transportation.

Shanxi province is where the bulk of these inspections are occurring, due to the poor safety track record. Go read up on that. It is significant cos Shanxi accounts for 25% of all domestic production, and their production has been curtailed with the safety inspections and what not.

OK, I’ll stop here, that should be enough information diarrhea for now.

For now, let me go do what people normally do during holidays.

BBR Holdings FY17Q1, Geo Energy Resources FY17Q1, Results From Options Strategy (1 month)

A patient gave me some really good advice the other day: She said, “Dr XXX, now your kids still young, wanna go anywhere just go la! Next time go to school very hard already!”

I’ve just came back from a trip  barely 1 month ago, but I guess that advice really made sense to me. (Or perhaps I just want it to make sense. The mind sees whats the heart wants right? haha)

525) going on holiday.jpg

So, it looks like I’m gonna have to break the promise I made myself, which is no more travelling for the rest of the year as I try to get more work done. It’s kinda indicative that I might be having too much fun when on the plane back, my son asked “papa, so where are we going next?”

He’s barely 4 yrs old and he’s been on 5 trips to 5 different countries, with probably a 6th scheduled this year. I think I only made the 1st ever trip out of the region when I was… in my mid 20s. Kids these days are living better and better.


With the flurry of results that were released last week, I’ve only had time to work through 2: BBR Holdings and Geo Energy Resources. So here’s my quick take down on what transpired.

BBR Holdings. I’ve recently written about how they’re likely to show a turnaround, earnings wise, in FY17, with the contribution from Lakelife EC.

BBR Holdings – TTI’s Analysis Of The Latest Happenings

And they certainly did:

526) BBR Holdings FY17Q1.jpg

Just to give a sense of how much of a turnaround it is:

FY17Q1’s earnings alone, is about 3 times that of FY16 Full Year’s earnings!

EPS in Q1 alone is 1.75 cents, and if the company continues at this rate (highly unlikely), full year earnings would be 7 cents per share, which would be multi year highs. It is highly unlikely that would transpire though, I’ll elucidate why later.

527) BBR Holdings earnings FY17Q1

As we can see here, the long term track record of earnings looks like this:

FY10: 6.36 cents

FY11: 6.55 cents

FY12: 4.21 cents

FY13: 7.10 cents

FY14: 3.66 cents

FY15: 0.76 cents

FY16: 0.37 cents

So with FY17Q1’s 1.75 cents, management will really have to screw up the next 3 quarters to avoid showing an improvement in earnings from FY16 huh.

The problem is, there is a chance they really could do that…

Breaking down the earnings picture further, we see that the company raked in $5.54mil in profits in Q1. Of this $5.54mil, the lakelife EC project contributed $5.78mil.

Yup, that’s right. The project contributed more than what the group earned, meaning that BBR Holdings (less Lakelife) was very unfortunately, STILL bleeding money in Q1.

The devil is ALWAYS in the details. Damnit.

This is a major disappointment for me. I’ve always maintained that the basic premise of my investing thesis lies in the fact that I’m expecting BBR Holdings to stop bleeding money in its general construction projects. It’s been 2 years and counting for gods’ sake!

The only silver lining from this, and I’m really grasping at straws here, is that the loss (excluding lakelife), would have narrowed to an almost negligible $0.2mil.

On top of that, the company has recognized earnings from 296 units in 2016, and now, in FY17Q1, they’ve recognized earnings from a further 194 units. That means there’re 56 units left to be recognized, probably in Q2.

My rough estimation (which has been fairly accurate thus far) is that these 56 units would contribute approximately $1.6mil in Q2.

Other parameters came out to be fairly acceptable. FCF was flat in Q1, but that’s because the company spent $1.4mil on a new storage facility for their PPVC units. Going forward, PPVC is supposed to be a major competitive edge for the company.

Now, they are certainly not the 1st movers, or the only movers for PPVC. But BBR has had quite a few projects thus far involving PPVC (NTU, Wisteria, housing at Upper Aljunied Road), and as with any new tech, they’d have had a steep learning curve. By now, they should have ironed out any clinks in the workflow, and improve on their efficiency.

By right.  <—- emphasis.

If only we have a FF Wong running the show here. If only.

NAV has also increased from 42.48 cents in FY16Q4 to 44.12 cents currently.

This means that the company is currently trading at a mere 50% to book value. Come on, even for builders, that’s considered very very low isn’t it? The share price has risen from $0.16+ to the current $0.22 or so. I think it’s still not reflective of the value of the company though.

Wide discount to book value, minimal debt on its balance sheet, FCF +ve in the last FY.

BBR Holdings has a lot of pluses currently. The 1 and only bug bear that’s dragging down the share price, is the earnings picture. We just need the general construction arm to stop bleeding. Thus far, it’s bleeding longer than I expected, so I shall stop giving any projections.

The current earnings release also did not elucidate any further on their malaysian projects. Nothing on new contract wins, despite having hinted at winning contracts related to MRT2 and other malaysian government contracts. (See my earlier post on that) Current order books stands at 215mil, which is the lowest it’s been in the past 7 years that I’ve data on.


Geo Energy Resources’ FY17Q1 is really interesting. Although I traditionally take a bottom up, focused, deep value approach, for Geo Energy, my modus operandi has always been to focus on the macro picture.

This is because it’s obvious that the current and future coal price is by far the main consideration when it comes to Geo Energy.

Geo Energy Resources Investing Thesis – Part I

Geo Energy Resources Investing Thesis Part II

In this aspect, the markets are pretty forward looking when it comes to Geo Energy.

The company delivered on the earnings front:

528) Geo Energy Earnings FY17Q1.jpg

On paper, it looks pretty damn impressive. Revenue grew 735%, while earnings flipped from being negative a year, to a massive US$14.5mil.

Yet the share price dropped the next day.

Now, let me try to illustrate a point here.

On InvestingNote, someone said he bought just prior to earnings release, because he’s expecting stellar results, and he hoped to make a quick (probably small too) profit on this.

I warned then, that I’m not so sure that’s going to happen. The problem with this chain of thought is that it’s too simplistic, it’s pretty much level 1 thinking. As a matter of fact, I actually sold 200,000 shares at $0.32 just prior to earnings release.

My rationale for that is more macro in nature. But I was expecting the share price to dip after the earnings release, despite expecting good results all the same. I’ve since bought back the 200,000 shares at a lower price, further lowering my average price.

Now, the problem with thinking “ok, results are going to be stellar. I’ll buy before it comes out, and sell after it comes out for a quick profit”, is that EVERYONE knows the results are going to be good! Which is why I said that’s level 1 thinking.

It’ll only work out if you know and everyone doesn’t. Or if everyone expects it to be good, but it turns out to be SUPER good.

Why then did I sell 200,000 shares, and was confident I’d be able to buy back at a lower price?

The macro picture.

The company increased it’s average selling prices in FY17Q1, from US$38.93/tonne in FY16Q4 to the current US$39.45/tonne.

The slight disappointment is that they moved about 2.2mil tonnes of coal in Q1, vs 2.36mil tonnes of coal the previous quarter. The reason for the slight dip is that seasonally, it’s been raining and that resulted in some days where mining activity had to stop.

That’s not good, but it doesn’t just affect Geo Energy. Adaro Energy, the largest (i think, or the 2nd largest) coal miner in Indonesia, also gave the same reason for a flat coal production in Q1.

If that’s the case though, we’ve got a bit of a problem.

Because, Q1 is not even the period where Kalimantan has the highest rainfall!

529) South Kalimantan weather.jpg

The peak rainfall is usually towards the end of the year, around Q4.

The smaller “peak” each year, coincides with the March, April, May periods. Meaning the rainfall in South Kalimantan (Kalimantan is a big place, the SDJ mine is in the south) increases gradually from Jan to May period, before falling quickly in June, and we’ll have relatively dry days all the way till Nov/Dec when the rainfall received suddenly jumps up to the highest for the year.

So if Q1 rainfall is enough to limit coal miner’s coal production…. hmmm, won’t Q4 be a problem?

I checked the past records for Q1 2017:

530) South Kalimantan Q1 rainfall.jpg

Now, I’ve arbitrary taken 18mm of rainfall as the amount that would disrupt some mining activity for the day.

In Q1, I’ve counted that there are 18 days where the rainfall exceeded 18mm.

In Q2 thus far, and we’re smack in the middle of Q2, we’ve 12 days where the rainfall exceeded 18mm.

So yeah, you can make your own conclusions from this data.

In my personal opinion though, the rainfall, and it’s effect on coal production, is still not the biggest factor. The biggest factor, is of course, the coal prices that Geo Energy can sell it for. I’ve previously described why:

https://www.nextinsight.net/story-archive-mainmenu-60/938-2016/11059-geo-energy-to-buy-or-not-to-buy-overriding-consideration-is-coal-price

And the forward picture in Q2 is not good. Coal prices have been dipping since the start of Q2. Literally, since the start of April, it’s just been dropping relentlessly.

All credits to sxcoal.com:

531) sxcoal.jpg

On top of that, China’s NDRC has recently indicated that they’re going to limit the import of low quality coal, the bulk of which comes from Indonesia.

http://www.szdaily.com/content/2017-03/16/content_15669775.htm

http://energy.economictimes.indiatimes.com/news/coal/china-authorities-power-firms-discuss-curbing-low-quality-coal-imports/58610678

Essentially NDRC wants to limit the import of low calorific coal. So what exactly is low quality coal?

NDRC didn’t state clearly, except say that it’s usually “high sulphur content” coal , with high ash levels. These are usually the GAR 3200, GAR 3800 coal from Indonesia.

Geo’s coal characteristics, according to SDJ mine’s JORC report (page 21):

89 % of coal tonnes come within a TS range of 0.1 % to 0.3 % x

94 % of coal tonnes VM is greater than 39 % x

81 % of coal tonnes come within an Ash range of 4 % to 7 % x

89 % of coal tonnes GAR Energy come within a range of 3900 to 4300 Kcal/Kg

I’m not sure if Geo’s coal falls into NDRC’s classification of “low quality”. I suspect not. Geo’s sulphur content is well below the 1% limit that China sets.

Alright, so all that is bad news. Now for the good news.

Summer is coming! Traditionally, China’s power usage shoots up in the hot summer months, as the chinese crank up their air conditioners. The power plants know this, and they stock up on their coal stores 1-2 months before that. That means sometime towards the end of May – June, utilities would have to increase their buying.

Most coal traders believe that the utilities would have to pick up their buying towards the end of May. Coal price for GAR 4200 coal is currently being offered at US38-39/tonne at most ports.

The other good news, or rather, potential good news, is that the company is guiding that the acquisition of TBR mine will be completed sometime in 2Q. Personally, I believe they will announce an offtake agreement together with the acquisition. Now, completion of the acquisition of TBR would likely be a major catalyst for the share price, and right now, this is the main catalyst for in my investing thesis.

TBR would mean that the management’s guidance of 10mil tonnes in FY17 would be more likely to be met. And it’d be a major plus for the management’s strategy of amalgamating both plots of mines (SDJ and TBR sit side by side). Efficacy shoots up, as both mines use the same infrastructure, while total mined volume will rise exponentially.

So let’s go back to the financials and try to look at some tea leaves to predict the future.

Right now, the company just did 2.2mil tonnes of coal at US$39.45/tonne. The company also reported some earnings from coal trading, and from their mine management agreement with their neighbor AJE. I’ve also noted that these extra revenue generators lifted the gross profit margins from the coal mining segment. (Their GPM figures are higher than that of coal mining)

In my DD, I’ve played with the variables: total tonnage moved for FY17, Average selling prices, and the operating costs, to finally derive a range of possible share prices. It’s kinda cumbersome (and monotonous) to type all that out here though, so I’ll just take the lazy way out and assume the company performs the same for all the subsequent 3 quarters for FY17.

This means that assuming Geo Energy moves 8.8mil tonnes of coal in FY17 (they fail to meet their 10mil guidance), at an average price of US$39.45/tonne (ASP for Q1), approximately, we’ll be expecting US$58.54mil in earnings for FY17.

I’m going to loop off a huge 25% chunk from this for a bit of buffer as the coal prices have since dropped from Q1, and also because we are making some projections and these results are unrealized.

That leaves us with US$43.9mil. The current total share base is 1,212,273,113 shares, but I’m going to use 1,329,273,113 shares instead as the company is going to issue 117mil new shares as part payment for their acquisition of TBR.

That means that the projected full year earnings would be 3.3 US cents per share or SG 4.6 cents. Assuming a conservative PE ratio of 10, we have a fair value of 46 cents.

Obviously all this is contingent on many things going their way. There are so many variables, it’s hard to project with certainty. I think currently, the next major thing to look forward to, is the completion of TBR and the announcement of an offtake agreement.

Currently, I still own 400,000 shares, bought at an average price of $0.157, and upon receiving dividends at the end of May, my average price will be further lowered to $0.147.


Lastly, it’s been exactly 1 month since I’ve implemented a new options strategy. I’ve written about it at the halfway mark:

Bonus From Flyke (!!!) + Results From Enhanced Options Strategy

I’ve since tweaked it a bit to suit my personal style. It’s kinda hard to explain in detail, but it has mainly to do with my thoughts around exercised options. For certain companies, I’m now more willing to recognize exercised options and “book in” profits instead of selling more options on them. That increases my buffer to capitalize on days with bigger swings.

Anyway, the results look like this:

532) Options April 2017.jpg

533) Options May 2017.jpg

Total cashflow received from 12/04/2017 – 12/05/2017: US$13,657.25

That works out to be a very cool SG$19,120.15 in 1 month!

That’s more than double of my track record previously. I’m still amazed by how tweaking and making tiny changes, can compound and have mega results. Kinda like the butterfly effect. (Theory that something as tiny as a butterfly’s fluttering of wings can eventually lead to a tornado occurring half the globe away)

So much so that it justifies me increasing my allocation gradually. I’d like to see more data than just a single month, but it’s been very very satisfying indeed. Let’s see how it turns out, but at this stage, I’m likely to increase my ammunition here.

VRX has also done wonders with Q1 results and gone ballistic. Ballistic is probably under-describing it. It’s up >50% in the 2 days after ER. Ah, US is just a crazy place.

I haven’t done any calculation regarding my portfolio, but its certainly going to be a stellar Q2. I’m confident that SG TTI has beaten STI ETF in Q2 thus far at least. And I haven’t even received a cent of the dividends that’s all coming in at the end of May.

It’s likely that there’ll be less updates here, going forward. It’s kinda tiring actually to write about stuff. My thoughts obviously move way faster than typing.

As always, happy hunting!