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With the increase in stake of Stanmore Coal Limited ("Stanmore") to 75.33% on 18 May 2020, the Group has embarked into metallurgical coal business and changed its reportable segment into Energy Coal, Metallurgical Coal and Non-Coal Businesses (as compared to Coal Mining, Coal Trading and NonCoal Businesses in FY2019, with the combination of Coal Mining and Coal Trading into the Energy Coal segment).
The Group's revenue comprises revenue generated from Energy Coal and Metallurgical Coal segments as well as Non-coal Businesses. Total revenue increased by US$46.87 million or 4.2% from US$1,115.82 million in FY2019 to US$1,162.69 million in FY2020. The overall increase in revenue was due to the Group's Metallurgical Coal segment resulting from the consolidation of Stanmore, partially offset by decrease in revenue from Energy Coal segment and Non-coal Businesses.
Energy Coal Segment
Revenue from the Group's Energy Coal segment reported a decrease in revenue by US$50.05 million or 4.5% from US$1,114.28 million in FY2019 to US$1,064.23 million in FY2020. This was mainly due to a decrease in average selling price (energy coal - mining) of 11.3% from US$34.99 per metric tonne in FY2019 to US$31.03 per metric tonne in FY2020, which was partially offset by increase in sales volume from 31.10 million tonnes in FY2019 to 34.02 million tonnes in FY2020. The average Indonesia Coal Index 4 ("ICI4") in FY2020, a better proxy for the majority of the Group's coal quality, was US$29.40 per metric tonne. The Group's energy coal production volume increased by 2.63 million tonnes or 8.5% from 30.83 million tonnes in FY2019 to 33.46 million tonnes in FY2020.
Metallurgical Coal Segment
Revenue from the Group's Metallurgical Coal segment of US$97.23 million was a result of the consolidation of Stanmore after the Group gained control on 18 May 2020.
Revenue from non-coal businesses comprises plywood sales and consultancy services. The decrease of US$0.31 million from US$1.53 million in FY2019 to US$1.22 million in FY2020 is mainly due to consultancy services rendered in FY2019 not present during the year.
The Group reported an increase in cost of sales of US$34.75 million or 4.6% from US$751.32 million in FY2019 to US$786.08 million in FY2020. This was mainly due to increase in sales volume and coal production costs as a result of coal production ramp up from the Energy Coal segment and inclusion of Metallurgical Coal segment which include consolidation of Stanmore's cost of sales. Cash cost (excluding royalty) of Energy Coal segment was relatively lower at US$21.04 per metric tonne in FY2020 compared to US$24.11 per metric tonne in FY2019. This reduction was achieved from strict controls on cash cost through mine planning and cost optimisation resulting in lower strip ratios and contractor rates.
The Group's gross profit increased by US$12.12 million or 3.3% from US$364.49 million in FY2019 to US$376.61 million in FY2020 as a result of the above factors.
The Group's other income increased by US$3.55 million or 21.2% from US$16.75 million in FY2019 to US$20.30 million in FY2020, mainly due to an increase in miscellaneous income of US$7.27 million for a business interruption insurance claim of US$6.82 million, which is partially offset by a lower dividend income received from Stanmore.
Selling and distribution expenses
The Group's selling and distribution expenses increased by US$15.97 million or 8.6% from US$185.42 million in FY2019 to US$201.38 million in FY2020 mainly due to the consolidation of Stanmore's results and increase in barging and trucking expenses as a result of the increase in sales volume.
The Group's administrative expenses increased by US$5.28 million or 7.1% from US$74.06 million in FY2019 to US$79.34 in FY2020 mainly due to the consolidation of Stanmore's result.
Other operating expenses
The Group's other operating expenses decreased by US$4.56 million or 23.5% from US$19.41 million in FY2019 to US$14.85 million in FY2020 mainly due to the remeasurement and reversal on provision of rehabilitation and mines closure expenses. The impact has been partially offset with the increase in foreign exchange loss by US$3.20 million or 138.3% from US$2.31 million in FY2019 to US$5.51 million in FY2020 mainly due to the appreciation in Australian Dollar against United States Dollar and a provision of impairment on trade receivable of US$0.18 million subsequent to an assessment on collectibility.
Fair value gains
The Group recorded a fair value gain of US$7.68 million in FY2020 mainly due to remeasurement of provisions arising from consolidation of Stanmore's results.
The Group's finance costs increased by US$2.82 million or 8.1% from US$34.58 million in FY2019 to US$37.40 million in FY2020 mainly due to unwinding of discount of provision, which resulted from the consolidation of Stanmore's result and an increase in interest expenses resulting from loan drawdown.
Share of loss of a joint venture (net of tax)
The Group's share of loss of a joint venture (net of tax) amounting to US$4.90 million in FY2020 arise from the investment in the Ravenswood Gold project.
Income tax expenses
Income tax expenses decreased by US$5.17 million or 13.8% from US$37.43 million in FY2020 to US$32.26 million in FY2019 mainly due to reduction in Indonesia's corporate income tax rate from 25% to 22% and deferred tax expense recognised during the year. The decrease has been partially offset by the higher withholding tax expense in relation to higher dividends received from overseas subsidiary during the financial year.
Profit after tax
Due to the factors above, the Group's net profit increased by US$1.58 million or 4.8% to US$34.47 million in FY2020 as compared to US$32.89 million in FY2019, and profit attributable to owners of the Company decreased by US$1.86 million or 18.7% to US$8.09 million in FY2020 as compared to US$9.95 million in FY2019.
Other comprehensive income
The Group's other comprehensive income decreased by US$13.39 million or 38.9% from a net gain of US$34.40 million in FY2019 to a net gain of US$21.01 million in FY2020 due to a decrease in share price of Westgold Resources Limited (“Westgold”) during the year from A$2.29 as at 31 December 2019 to A$2.13 as at 31 Aug 2020 (before full disposal of Westgold shares) as compared to increase in share price from A$0.88 as at 31 December 2018 to A$2.29 as at 31 Dec 2019. In addition, there was a decrease in share price of Stanmore Coal, from A$1.05 as at 31 December 2019 to A$1.00 as at 18 May 2020 (when Stanmore became a subsidiary) as compared to increase in share price from A$1.00 as at 31 December 2018 to A$1.05 as at 31 December 2019. The decrease in share price of Westgold and Stanmore was partially offset by foreign currency translation gain due to the strengthening of Australian Dollar against United States Dollar which resulted from the consolidation of Stanmore.
Assets and liabilities
As at 31 December 2020, the Group has net current assets of US$172.20 million and the Company has net current assets of US$132.97 million. The Group has loans and borrowings totalling US$379.17 million of which US$111.92 million is due within the next 12 months. The Group's cash and cash equivalents stood at US$262.80 million as at 31 December 2020.
The Group had net cash inflows of US$80.08 million mainly due to the following:
Net cash generated from operating activities of US$110.06 million comprised of operating cash inflow before working capital changes of US$133.72 million, net working capital inflow of US$20.35 million, various taxes paid of US$21.86 million and interest and other financial charges paid of US$30.75 million. The Group also recorded interest income received of US$8.60 million. The net working capital inflow of US$20.35 million was mainly due to decrease in trade and other receivables, advances and other current assets totalling US$38.31 million, partially offset by (i) a decrease in trade and other payables of US$9.38 million and (ii) an increase in inventories of US$5.18 million.
Net cash flows used in investing activities of US$75.72 million mainly due to (i) Cash outflows on acquisition of subsidiary (Stanmore) of US$50.16 million; (ii) Investment in Ravenswood Gold project of US$53.46 million and (iii) Purchase of property, plant and equipment of US$14.73 million; partially offset by cash inflow from disposal of investment securities (Westgold) of US$54.82 million.
Net cash flows generated from financing activities of US$45.73 million was mainly due to (i) proceeds from loans and borrowings of US$128.85 million; (ii) Capital contribution from non-controlling interest of a subsidiary of US$27.47 million; partially offset by (i) repayments of loans and borrowings of US$83.45 million; (ii) payment of dividend to NCI of subsidiaries of US$25.56 million and (iii) lease payment of US$1.57 million.
With the acquisition of Stanmore in FY2020, GEAR has successfully diversified its product offerings to include Metallurgical Coal. This also translates to a reduced dependence on thermal or energy coal. Today, GEAR has an expanded suite of products with mining concessions that are geographically distributed across different sovereign jurisdictions, thereby providing diversification at several levels.
Moving forward, GEAR will leverage on the acquisition synergies to fuel longer term gains for stakeholders
China’s thermal coal imports are likely to remain strong moving into 2021 on robust demand, high utilisation at domestic suppliers and exceptionally high local prices. China’s coal imports surged to 39.08 million tonnes in December 2020 from 2.77 million tonnes a year earlier, as China relaxed a soft cap on import restrictions to ease supply constraints domestically amid an unusually cold winter, an uptick in economic activity, permit inspections in Inner Mongolia and a soft cap on Australian coal imports.
Amid China’s political tensions with its second-largest supplier Australia, Indonesian coal miners are deemed to be the beneficiaries of strong Chinese imports with the Indonesia 4,200kcal/kg coal index rising to US$45/metric tonne in January 2021, from an average of US$26/metric tonne in the seven months to November 2020.
In February 2021, Indonesia’s Ministry of Energy and Mineral Resources set its February thermal coal reference price at US$87.79/metric tonne, an increase of 16% from January 2021, and a 33% increase from February 2020. Strong Chinese demand and higher gas prices which led to the boost in thermal coal prices are anticipated to provide strong support for Indonesian coal producers.
Southeast Asia remains as one of the few regions in the world where coal-fired generation has been expanding, with close to 20 Gigawatts of new coalfired generating capacity under construction, mostly in Indonesia, Vietnam, and Philippines . Thermal coal imports in the region are expected to rise 29% to 128 million metric tonnes in 2020 from realized imports of 99 million metric tonnes in 2019.
Indonesia is expected to remain at its top position as the world’s top thermal coal exporter post-pandemic. In November 2020, the Indonesian Coal Mining Association and China Coal Transportation and Distribution Association signed a cooperation agreement to increase the coal exports from Indonesia to China, where under the agreement, China will purchase US$1.47 billion worth of thermal coal from Indonesia in 2021 , which will further support Indonesia exports.
In view of the above, the Group’s mining operations in Indonesia are well positioned to tap the anticipated rising demand of coal from China and the Southeast Asia region.
Demand for metallurgical coal has been impacted by lower steel production brought by disruptions due to the COVID-19 pandemic with global crude steel production reaching 1,860.0 million tonnes in 2020, down by 0.9% compared to 2019.
The S&P Global Platts Premium Low-Vol Hard Coking Coal benchmark stood at US$139/metric tonne FOB Australia on 30 September 2020, up from US$116/metric tonne on 30 June 2020, with prices falling to as low as US$105.50/metric tonne in the July-September quarter before recovering strongly on improved demand as global steelmakers restored production.
Notably, China’s crude steel production in 2020 reached 1,053.0 million tonnes in 2020, representing a 5.2% increase from 2019. China steel demand continues to be supported by a rebound in investments in fixed assets, which recorded a 2.9% increase in 2020 to RMB51.9 trillion. More specifically, investment in infrastructure increased 0.9% and real estate development rose by 7.0%. China’s crude steel production is estimated to hit 1,068 million metric tonnes in 2021, increasing from an estimated 1,045 million metric tonnes in 2020.
Metallurgical coal and coke markets entered 2021 in the wake of a transformative fourth quarter of 2020, which saw significant shifts in trade flows and price dislocations due to China’s temporary halt on Australian coal imports.
China has previously relaxed its import quotas each January, but in 2021 the market is less sure that Australian imports will resume, given the state of relations between the two countries.
In 2019, India surpassed Japan as the world’s second largest steel producer with crude steel production of 111.2 million tonnes and steel consumption grew at a Compounded Annual Growth Rate of 5.2% during FY2016-2020 to reach 100 million tonnes. The steel industry in India continues to be supported by government initiatives such as the National Steel Policy, 2017, which envisage India’s production capacity to reach 300 million tonnes by 2030-2031, with steel demand to grow by 7.2% in 2019-2020 and 2020-2021. Demand for steel in India is expected to be supported by increased infrastructure construction and the thriving automobile and railways sectors.
The gradual recovery of the global economy and resumption of business activities shed a positive light on GEAR’s metallurgical coal segment through Stanmore. With steel production activities expected to increase as countries continue to boost their economy through infrastructure investments, the resultant rise in demand in metallurgical coal is seen to be beneficial to GEAR.
On the supply side, the impact of La Nina looks set to be less severe than previously envisaged. Australia’s Bureau of Meteorology has suggested the current La Nina is already approaching its peak, reducing the likelihood of any severe weather-related curtailment of coal exports.
GEAR remains cautiously optimistic on the near to medium term outlook recovery for energy and metallurgical coal demand and prices.