This Mining Company Is Trading Near Its 52-Week Low: Is It Time To Invest?


know investors might not be ready to start looking at mining companies as a possible investment target given what’s happened in Singapore over the past year: The last few mining-related companies that caught the public’s attention here – Blumont Group SGX: A33) and Liongold Corp (SGX: A78) – had resulted in horrific losses for their investors.

However, I don’t think we should be grouping all mining companies in the same category. This company I’m introducing shortly might actually be worth studying further and is in fact able to generate profits from its mining operations.

The company in question is Geo Energy Resources (SGX: RE4). It is a coal mining outfit with operations in Kalimantan, Indonesia. It currently operates a mining concession covering an area of 4,570 hectares in Kutai Barat, East Kalimantan. In 2013, Geo Energy Resources managed to mine about 1.5 million tonnes of coal. Geo Energy also provides mining services to two other mines through mining services contracts.

The reasons for its decline

Any typical commodity business would always be affected greatly by the demand and supply dynamics and prevailing prices of the commodities in question.

As it happens, Indonesia’s coal mining industry is currently facing an issue of oversupply as its largest export customer, China, is slowing down its purchase of the commodity. China, for its part, is seeing a slower growth rate in its domestic economy and that has affected its demand for Indonesian coal. This chain of events is actually reflected quite clearly on Geo Energy’s latest quarterly financial statement: in the first quarter of 2014, the company’s net profit plunged by 99% from US$5.1 million a year ago to only US$721,000.

Over the past 12 months, with such corporate results, it’s perhaps not much of a surprise to see the company’s share price fall by a third from its 52-week high of S$0.43 to its current level of S$0.29, which is just a tad higher than its 52-week low of S$0.27.

Looking at its balance sheet, Geo Energy is not a heavily leveraged mining company given its net debt to equity ratio of only 10.1%.

However, there are still some balance sheet risks that exist for the company. For instance, its cash holding is only at US$10.7 million and it had a cash outflow of US$6.3 million from its operations in the first quarter of 2014 alone. Given that the current situation with the coal industry in Indonesia does not seem to be able to turn around anytime soon, the company might need to find ways to increase its cash holdings significantly or risk facing liquidity issues.

Foolish Summary

On that front, Geo Energy is certainly being proactive: It has already established a S$300 million medium term note programme (i.e. a borrowing programme) in order to access capital if it requires.

The company is also looking at ways to grow its business and has plans to acquire five more mining concessions in East Kalimantan. If successful, this would greatly increase the mining reserves of Geo Energy and might even help the company become a much larger mining outfit in the future – that is if it survives this current downturn in the coal mining industry.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.