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Unaudited Financial Statements for the Period Ended 30 June 2019

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Unaudited Financial Statements for the Period Ended 30 June 2019


Profit & Loss Statement


Statement of Comprehensive Income for the 6 months ended 30 June 2019 and 30 June 2018



Balance Sheet




Review of Performance


Revenue

The Group's revenue comprises of revenue generated from Coal Mining and Coal Trading divisions as well as Non-coal Businesses. Total revenue increased by US$15.50 million or 7.4% from US$208.63 million in 2Q18 to US$224.14 million in 2Q19. The overall increase in revenue was mainly due to increase in revenue from the Group's Coal Mining division and Non-coal Businesses, partially offset by a decrease in revenue from Coal Trading division.

Coal Mining Division

The Group's Coal Mining division reported an increase in revenue by US$14.59 million or 7.7% from US$188.80 million in 2Q18 to US$203.39 million in 2Q19. The increase was mainly driven by higher sales volume partially offset by lower average selling price as compared to the corresponding period. Average selling price showed a decline of 11.7% from US$42.17 per metric tonne in 2Q18 to US$37.25 per metric tonne in 2Q19. The average Indonesia Coal Index 4 ("ICI4") in 2Q19, a better proxy for the majority of the Group's coal quality, was US$37.50 per metric tonne. The Group's coal production volume increased by 1.00 million tonnes or 22.5% from 4.44 million tonnes in 2Q18 to 5.44 million tonnes in 2Q19.

Coal Trading Division

Revenue generated by the Group's Coal Trading division decreased by US$0.20 million or 1.0% from US$19.33 million in 2Q18 to US$19.13 million in 2Q19. The decrease was mainly due to lower average selling price offset by higher sales volume as compared to corresponding reporting period.

Non-coal Businesses

Revenue in 2Q19 comprises dividend income and plywood sales. Revenue increased by US$1.12 million from US$0.50 million in 2Q18 to US$1.62 million in 2Q19 due to dividend income from Stanmore shares partially offset by a decrease in plywood sales and the absence of management fee income as compared to corresponding reporting period.

Cost of Sales

The Group reported an increase in cost of sales by US$12.08 million or 9.2% from US$130.77 million in 2Q18 to US$142.85 million in 2Q19. This was mainly due to increase in mining overheads, royalty expenses, coal freight and as a result of coal production ramp up and sales activities from the Coal Mining division. The increase was partially offset by a decrease in mining services costs and lower coal purchases from Coal Trading Division. Cash cost (excluding royalty) from Coal Mining division decreased from US$26.46 per tonne in 2Q18 to US$23.92 per tonne in 2Q19.

Gross Profit

Due to the factors above, the Group's gross profit increased by US$3.43 million or 4.4% from US$77.87 million in 2Q18 to US$81.30 million in 2Q19.

Other (expenses)/income

The Group's other income decreased by US$4.69 million or 117.7% from an income of US$3.98 million in 2Q18 to an expense of US$0.71 million in 2Q19, due to a decrease in miscellaneous income of US$3.73 million mainly arising from reversal of a one-off contract to transfer of coal sales quota under Domestic Market Obligation and a decrease in interest income of US$0.96 million derived from bank deposits and advances.

Expenses

Selling and distribution expenses

The Group's selling and distribution expenses increased by US$5.44 million or 19.2% from US$28.42 million in 2Q18 to US$33.86 million in 2Q19 mainly due to increase in freight and stockpile expenses as a result of the increase in coal sales volume from the Coal Mining division.

Administrative expenses

The Group's administrative expenses decreased by US$1.26 million or 5.5% from US$22.86 million in 2Q18 to US$21.60 million in 2Q19 mainly due to decrease in (i) repair and maintenance and (ii) corporate social responsibilities expense partially offset by an increase in (i) taxes and stamp duty fee and (ii) legal and professional fees relating to corporate exercises.

Other operating income/(expenses)

The Group's other operating income decreased by US$0.75 million or 40.5% from US$1.85 million in 2Q18 to US$1.10 million in 2Q19 mainly due to an increase in depreciation and amortisation expenses and miscellaneous expenses partially offset by an increase in foreign exchange gain.

Finance costs

The Group's finance costs increased by US$2.91 million or 51.9% from US$5.60 million in 2Q18 to US$8.51 million in 2Q19 mainly due to an increase in interest expenses resulting from additional loans.

Income tax expenses

Income tax expenses decreased by US$4.39 million or 37.1% from US$11.83 million in 2Q18 to US$7.44 million in 2Q19 as a result of lower operating profit.

Profit after tax

Due to the factors above, the Group's net profit decreased by US$4.72 million or 31.5% to US$10.27 million in 2Q19 as compared to US$14.99 million in 2Q18, and profit attributable to owners of the Company decreased by US$2.80 million or 34.8% to US$5.25 million in 2Q19 as compared to US$8.05 million in 2Q18.

Other comprehensive income

The Group's other comprehensive income increased by US$20.69 million or 492.4% from US$4.19 million in 2Q18 to US$24.88 million in 2Q19 mainly due to (i) Westgold share price recovery from A$1.26 as at 31 March 2019 to A$1.88 as at 30 June 2019 and (ii) an increase in Stanmore share price from A$1.16 as at 31 March 2019 to A$1.43 as at 30 June 2019.

Review of Statement of Financial Position

Assets and liabilities

Non-current assets

  • Property, plant and equipment increased by US$10.21 million to US$90.58 million at 30 June 2019 as a result of additions to property, plant and equipment partially offset by depreciation.
  • Right-of-use-assets increased by US$1.52 million at 30 June 2019 as a result of the adoption of SFRS (I) 16.
  • The increase in investment in securities of US$59.67 million to US$117.37 million at 30 June 2019 was due to (i) US$9.6 million related to 5.5% Stanmore Coal Limited's ("Stanmore") shares acquired in take-over offer, (ii) US$1.4 million due to reinvestment of dividend income from Stanmore shares, (iii) an increase in other investment of US$4.0 million; and (iv) US$44.68 million due to higher market value for Stanmore and Westgold shares.

Current assets

  • The decrease in inventories of US$6.14 million to US$13.51 million at 30 June 2019 was due to inventories sold during the period under review.
  • The decrease in advances to suppliers/vendors of US$7.88 million to US$96.85 million at 30 June 2019 was mainly due to decrease in advance payment of US$8.3 million to coal suppliers partially offset by an increase in other advances.
  • The increase in other current assets of US$3.39 million to US$38.54 million at 30 June 2019 was mainly due to an increase in prepaid insurance and royalty.

Current liabilities

  • Trade and other payables decreased by US$30.15 million to US$173.08 million at 30 June 2019 mainly due to decrease in coal purchases offset by an increase in other payables as a result of advances from customers.
  • Lease liabilities increased by US$1.56 million to US$1.56 million at 30 June 2019 as a result of the adoption of SFRS(I) 16.
  • Provision for taxation decreased by US$0.64 million to US$1.11 million at 30 June 2019 as a result of tax payment and lower corporate tax charged during the period under review.
  • Loans and borrowings increased by US$8.04 million to US$54.21 million at 30 June 2019 mainly due to the drawdown of working capital credit facility partially offset by the repayment of loans during the period under review.

Non-current liabilities

  • Loans and borrowings increased by US$41.58 million to US$264.44 million at 30 June 2019 as a result of drawdown of term loan for operation and a new loan facility for investment purposes.
  • Post-employment benefits increased by US$0.41 million to US$3.39 million at 30 June 2019 due to provision for employee benefits liabilities during the current reporting period.
As at 30 June 2019, the Group has net current assets of US$173.99 million and the Company has net current assets of US$87.43 million. The Group has loans and borrowings totalling US$318.64 million of which US$54.21 million is due within the next 12 months. The Group's cash and cash equivalents stood at US$124.53 million as at 30 June 2019.

Review of Statement of Cash Flows

For 2Q19, the Group had net cash inflows of US$6.76 million mainly due to the following:

Net cash generated from operating activities of US$7.4 million comprised of operating cash inflow before working capital changes of US$20.69 million, net working capital inflow of US$4.48 million, various taxes paid of US$16.37 million and interest and other financial charges paid of US$3.67 million. The Group also recorded interest income received of US$2.27 million. The net working capital inflow of US$4.48 million was mainly due to a decrease in trade and other receivables, advances and other current assets totalling US$35.06 million and a decrease in inventories of US$2.58 million, partially offset by decrease in trade and other payables of US$33.16 million.

Net cash flows used in investing activities of US$12.00 million mainly due to (i) purchase of property, plant and equipment of US$7.56 million; (ii) additions to mining properties of US$3.05 million; and (iii) increase in other non-current assets of US$0.85 million.

Net cash flows generated from financing activities of US$11.36 million was mainly due to proceeds from loans and borrowings of US$32.56 million, partially offset by repayment of loans and borrowings of US$20.59 million.

Commentary


Global demand for thermal coal has come under pressure, primarily due to the slowing economic growth in China. Notwithstanding the global headwinds, GEAR continues to experience robust thermal coal demand from its key export markets in Asia.

According to data by China's National Bureau of Statistics, the country generated a total of 544 TWh of electricity in April 2019, which represents a 3.8% increase year-on-year. However, the power generation was down 4.5% from 569.8 TWh in March 2019. The weaker power demand reflects the lower level of industrial production, which may turnaround if the country's policy stimulus accelerates.

Further to the declining demand from China, the country has launched a 3,324-kilometre long power transmission line that connects the coal-rich Xinjiang province in western China to Anhui province in the east. Upon completion, the transmission line is expected to reduce China's coal usage by about 30 million tonnes per year.

In South Asia, coal's share in the power mix continues to increase, with coal generation growing faster than power generation. Significant increases in coal consumption has been observed in countries such as Indonesia, Vietnam, the Philippines and Malaysia.

For instance, Vietnam, one of GEAR's new export markets, imported 3.9 million tonnes of coal in May 2019, surging 57.1% year-on-year, according to preliminary data released by Vietnam Customs. Between January 2019 and May 2019, Vietnam imported 17.2 million tonnes of coal, rising 103.8% from the same period in 2018, with imports mostly from Indonesia, Australia and Russia. The massive imports on the back of sharp declines in exports came as the state utility Vietnam Electricity announced that it will continue to buy as much electricity from coal-fired power plants as possible to feed rising electricity demand in the country.

In India, another key market, thermal coal imports are expected to grow by 12 million tonnes year-on-year to 184 million tonnes in 2019, while an additional 6.5 million tonnes is projected for 2020. The growing demand from India comes amid increased coal imports and upbeat views on the country's economic development driven by the expanding manufacturing sector and growing demand for grid power.

Indonesia's Ministry of Energy and Mineral Resources has set its July coal reference price at US$71.92 per metric tonne, representing a 31.3% decrease from US$104.65 per metric tonne in July 2018. July's price marks the 11th consecutive monthly drop for the benchmark price and the lowest price since July 2017.

Last year, the Indonesian government announced plans to phase out the older licenses, Coal Contracts of Works ("CCoW"), and to replace it with a special mining permit. Recently, the regulatory changes have resulted in uncertainties to the coal mining sector after a mining contract for one of the miners was revoked, raising concerns about upcoming contract renewals.

GEAR's key mining asset PT Borneo Indobara currently operates on a second generation CCoW which is valid until 2036 and hence is not subject to such uncertainties in the near future.

GEAR remains optimistic on the near to medium term outlook for thermal coal in the South Asian and South East Asian markets and believes that demand will continue to be supported by the growing energy requirements of developing countries in these regions. GEAR will continue to focus on maintaining profitability at current prices while keeping on track to achieve 25 million tonnes of production in 2019.

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