Geo Energy Resources ($RE4) Update

A surprisingly good dividend but further increase in costs.

Disclaimer: The information provided here is for general informational purposes only and should not be considered as investment advice. I am not a financial advisor and do not offer investment recommendations. Before making any investment decision, it is important to conduct your own research and seek the advice of a qualified financial professional.

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Geo Energy Resources recently released their FY2022 results. While the company's dividend for the fourth quarter was higher than expected, I am concerned about the overall increase in costs.

You can read my previous post regarding Geo Energy here:

Geo Energy Resources ($RE4) - Cheaper than ever? - 23rd Jan 2023.

Geo Energy Resources (RE4: SGX) - 29rd of September 2021.

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On the positive side, the dividend was higher than expected at 0.04 SG$ for Q4, with a payout ratio of 57%. I expected a lower dividend since Geo Energy is looking for an acquisition, so it seems to suggest that they are comfortable with their current cash position, and maybe we could expect similar payout ratios in the future.

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However, there were several negative aspects on the report. Costs have increased all across the board. Not only cash costs but G&A, ‘Other Expenses’ and the overall tax rate was higher than I expected. Additionally, an allowance loss of 15M$ was reported for Q4.

Regarding the production cash costs they have risen by around 5$/ton over Q3. This is a huge increase and only half of it (2.5$) is due to the increase in royalties. My expectation was that since production would rise in Q4, overall cash costs would remain flat and that they would only increase by the amount of the extra royalties.

At the same time G&A expenses have increased by around 2.5M$ over 2021, ‘Other Expenses’ have also increased and the tax rate was surprisingly higher than what I expected (34% for FY22). This suggests that they have moved a significant part of their cash from the Indonesian subsidiary to the Singapore entity.

The company's production has also been a significant disappointment. They missed their guidance of 11 Mt for FY22, producing only 10.2 Mt. I am surprised by such a big miss in the production, since their latest guidance was in the second week of november. While their guidance implied a production of 3.7 Mt for Q4, they have only produced 2.9 Mt.

The guidance for 2023 is also dissapointing at 8 to 10 Mt.

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FY23 Model

Let’s revisit the FY23 model I did on the last article and the updated inputs for the model.

The old model used the following assumptions:

·Pricing: 75$/t on export sales, 38$/t for their DMO.

·Million tonnes produced: 10Mt, 7.5 Mt export sales, 2.5 Mt DMO. I’m not accounting for the possible increase in DMO obligations, but I’m using a low-guidance of 10 Mt. For instance FY22 production should be around 10.6 Mt – 11 Mt.

·Cash costs: 42$ + 3% of ICI4 pricing (44.25$). I reduced the cash costs a bit since their costs are linked with the coal price aswell. Even though there is no precise numbers I estimate it to be a 30% of the coal price, so for a 10$ decrease the cash costs should decrease around 3$ all else being equal.

· Average G&A, other expenses and CAPEX of other quarters. In the past quarter “Other Expenses” went up due to a tax they have to pay to move money from their Indonesian subsidiary to the Singapore company, therefore I’m using an additional 5% expense on their pre-tax income.

· Tax rate: 23%

The updated model uses the following assumptions:

·Pricing: 75$/t on export sales, 38$/t for their DMO.

·Million tonnes produced: 10Mt, 7.5 Mt export sales, 2.5 Mt DMO.

·Cash costs: 46$ + 3% of ICI4 pricing (48.25$).

· Average G&A, other expenses and CAPEX of other quarters. I’ve increased it in line with the costs they’ve had over the past year.

· G&A: 18M$ | Other Expenses: 10M$ | Depreciation & Amortization: 25M$

· Tax rate: 30%. I’ve increased it since their average tax rate has increased to around 34%, which suggests they are moving money from their indonesian subsidiary to the Singapore entity.

With these new assumptions the difference in Net Income and Free Cash Flow is quite significant. While for the old assumptions they’d generate around 140M in Net Income and 150M in FCF for the new ones it would be around 90M in Net Income and 110M in FCF.

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My biggest concern regarding the results is the limited information provided regarding all these issues, including the factors contributing to the lower than expected production, the reasons for the consistent increase in costs, the large allowance loss for Q4 (amounting to 15M$, or 4.5% of the market cap), and any potential plans to address these concerns.

The other difference is that while I previously assumed 10 Mt of production for FY23 I believed their guidance would be around 10.5 to 11 Mt, and it seems that 10 Mt is the high end of the guidance for the current year.

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For full disclosure I have significantly reduced my position in Geo Energy Resources after these results. The difference in costs and tax rate would result in a 35% decrease in Net Income assuming the same ICI4 pricing and the same production, which I am not even sure they will reach.

Despite my concerns, I still believe that Geo Energy has potential. They still have a massive cash position and their dividend payout has been higher than expected. However, the company needs to address the issues with their costs and production if they want to maintain investor confidence.