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KGI initiates coverage on coal miner with 137% target upside despite push for renewables

Jovi Ho
Jovi Ho8/25/2021 10:32 AM GMT+08  • 3 min read
KGI initiates coverage on coal miner with 137% target upside despite push for renewables
"Whether we like it or not, coal powered plants are still growing."
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KGI Securities is initiating coverage of Golden Energy and Resources (GEAR), the “fastest-growing coal producer in Asia”.

In an Aug 25 note, KGI Securities analysts Chen Guangzhi and Joel Ng are starting the company on “outperform” with a target price of 64 cents, which represents an upside of 137%.

GEAR is a diversified mining and natural resources investment company, write Chen and Ng. Having its roots as one of Indonesia’s largest coal miners, the group has since branched out into precious metals over the past four years.

GEAR will further diversify into base metals that will be utilised for clean energy uses such as copper, cobalt, zinc and nickel, they add.

“While other coal miners have plateaued or are reporting only single digit production growth, GEAR is expected to increase production by 30% over the next three years,” write Chen and Ng.

GEAR, through its 50% owned Ravenswood Gold (Ravenswood) gold mine, is estimated to produce around 200 thousand ounces (koz) of gold per annum by 2022. Its ASX-listed company Stanmore Resources Limited (Stanmore) will ramp up production to 2.4 million tonnes per annum of metallurgical coal in 2H2021, they add.

See: GEAR diversifies into gold and metallurgical coal for more resilience

See also: GEAR reports higher earnings of US$16.5 million for 1H20

Chen and Ng see double-digit production growth over the next three years for the company. “We estimate GEAR’s Indonesian thermal coal output to increase from 33.5 million tonnes in 2020 to 36 million tonnes in 2021, and surging another 30% to 47 million tonnes by 2024.”

That is not all. This is amid favourable coal prices that are providing a windfall for current coal producers, say Chen and Ng. “All this points to a bright outlook for GEAR in the next couple of years.”

GEAR benefits from assets that have long life of mines of between 10 to 15 years, which is an advantage as it provides visibility and gives long-term clients the confidence to enter into supply contracts with the group, they add.

“GEAR also has one of the largest reserves in Indonesia of more than 1 billion tonnes of thermal coal. With one of the lowest stripping ratios of around 4.0 for large-scale coal operators, GEAR is able to withstand the cyclical impact of volatile coal prices,” say Chen and Ng.

In addition, coal demand is projected to decline in North America and Europe, but rise in Asia. “Coal is expected to remain a major part of China’s electricity generation beyond 2030, alongside growing capacity for renewables. In 2020, coal still dominated China’s energy mix at 59% of market share, and Platts Analytics expects the country’s coal-fired power generation to only peak by 2027,” say Chen and Ng.

Therefore, coal demand in the world’s largest coal consuming country will continue to grow from 2021 to until at least 2025.

See also: China's renewables giant jumps in debut after biggest 2021 China IPO

But what about the push towards renewable energy? “Whether we like it or not, coal powered plants are still growing,” say Chen and Ng. “Despite all the negative media coverage over coal use, there are still 354 coal-fired power plants under construction as of July 2021, and more than 600 plants have been announced or pre-permitted. We cannot deny the fact that coal is still the cheapest source of energy supply in the world, and this points to growing demand in Asia over the next decade.”

For more stories about where the money flows, click here for our Capital section

As at 10.19am, shares in GEAR are trading 2.5 cents higher, or 9.26% up, at 29.5 cents.

Photo: Bloomberg

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