Geo Energy acquires majority stake in 2 Indonesia coal mines for US$25m

COAL producer Geo Energy Resources has acquired a majority stake in two South Sumatra coal mines for US$25 million.

It will buy PT Titan Global Energy (TGE) from PT Titan Infra Energy (TIE) and its affiliate, PT Jaya Utama Indonesia (JUI), giving Geo Energy a 51 per cent stake in producing coal mines PT Bara Anugrah Sejahtera (BAS) and PT Banjarsari Pribumi (BP).

TIE was established in Indonesia in 2004 and is a vertical energy infrastructure and logistic companies with primary operations in South Sumatra, Indonesia.

Mainboard-listed Geo Energy will pay for the deal with its existing cash - US$2.5 million for a refundable deposit payable upon execution of the purchase agreement, and US$22.5 million once the deal is completed.

The deal must be completed by its long-stop date of Dec 31, 2019.

Both mines have been in production since 2012, and produced a total of 3.8 million tonnes of coal in 2018.

After completing the acquisition, Geo Energy wants to increase total production to five million to seven million tonnes a year.

The average strip ratio for both mines is estimated at a maximum seven times. The ratio refers to the volume of waste material required to be handled in order to extract a tonne of ore, with a lower ratio usually signalling better profitability.

BAS and BP have a contract with TIE to supply coal to PT Perusahaan Listrik Negara, a state-owned electricity company, to fulfil a 25 per cent domestic market obligation (DMO) requirement from an approved annual coal production plan.

BAS and BP's DMO sales for the financial half year ended June 30, 2019 was 1.8 million tonnes.

Based on the proforma financial effects of the proposed purchase, Geo Energy said it expects to account a bargain purchase to its earnings.

The adjusted average cost of sales on the BAS and BP coal for H1 2019 was US$32.50 to US$33.60 per tonne against the current average of the Indonesian Coal Price Index for 5000 and 4200 GAR coal of US$39.43 per tonne on Sept 20, 2019.

Geo Energy said it expects the proposed acquisition to be positive and value accretive to the group.

The deal will increase its total proven coal reserves from 78 million tonnes to about 122 million tonnes as at June 30, 2019.

Coal prices have continued to show resilience, trading at a range of US$30.20 to US$40.40 per tonne between Jan 4, 2019 to Sept 20, 2019 for Indonesia's Coal Price Index, said the company.

South Sumatra has abundant coal and is located in close proximity to key export markets such as India, China and South-east Asian countries, including Indonesian domestic markets, it added.

According to Indonesia's Ministry of Energy and Mineral Resources, South Sumatra holds over 39 per cent of Indonesia's coal reserves but accounts for less than 10 per cent of the country's coal production in 2018.

Compared to Kalimantan coal, South Sumatra coal offers estimated freight and barging cost savings of US$5-10 per tonne to supply coal to power plants in West Java and Sumatra due to shorter hauling and shipping distance from the mine to the buyers' destination, said the company.

"The proposed acquisition is in line with the company's business strategy to expand its business operations and increase its coal reserves and production levels," said Charles Melati, executive chairman of Geo Energy.

"Since the issuance of our US$300 million senior note in 2017, we have been actively looking an earnings accretive and in-production coal asset with ready infrastructure, right price and conditions."

The firm had at the end of August submitted a revised non-binding proposal to acquire new coal assets for a producing coal mine in East Kalimantan, Indonesia.

Geo Energy shares closed flat at S$0.148 on Friday.