Golden Energy & Resources kept at 'buy' by RHB on ability to deliver

And to ensure the ramp-up in coal production, GEAR has appointed two coal industry veterans -- Bonifasius and R Utoro -- as president director and director respectively of its 66.9% subsidiary, Golden Energy Mines (GEMS) from Jan 1, 2017.

Utoro was formerly Kaltim Prima Coal’s (KPC) chief operating officer and instrumental in increasing that company’s coal production to more than 60 million tonnes pa from 2 mtpa.

"We believe GEAR would be able to deliver its FY18 coal production target of 18m tonnes as it has renewed its contract with mining contractor Saptaindra Sejati (SIS), a subsidiary of Adaro Energy, for a period up to Dec 2020," says RHB in a Friday report.

While coal prices have rallied to above US$100/tonne, RHB expects they should soften by April, as China’s winter season is likely to end at end March, and the La Nina weather effect is expected to end in April.

However, RHB does not expect coal prices to soften significantly as it anticipates Newcastle coal price to soften to not lower than US$85/tonne.

Positive factors supporting high coal prices include another cut in China’s coal production capacity of 360 million tonnes in 2018; healthy China coal consumption as its Purchasing Managers' Index (PMI) stays in an expansion mode with 147GW of new coal-fired power plants under construction as well as Indonesia’s declining coal supply for export markets.

"We upgrade our coal price assumptions to US$90/tonne, US$85/tonne and US$78/tonne for FY18-20 respectively," says RHB.

Maintain "buy" with a revised target price from 71 cents to 68 cents, implying 13.1 times FY18 earnings. A key main catalyst is a sizeable increase in earnings ahead due to the substantial increase in coal production.

As at 10.48am, shares in GEAR are trading at 47 cents or 8.3 times FY18 recurring earnings.