Fitch affirms Adaro Indonesia at 'BB+'; outlook stable
Friday, October 1 2010 - 06:31 AM WIB
The affirmations reflect Adaro's large, low cost operations with strong track record of growth, supported by its longstanding relationship with leading customers, and its robust financials. However, the ratings remain constrained by the company's exposure to single-site operations.
Fitch notes that earlier this year, Adaro Energy acquired a 25% stake in Indomet Coal Project for USD335m as part of the Group's strategy to diversify into coking coal. The agency expects the Group to make additional investments as part of its strategy to secure additional coal resources to support long-term growth, and to further integrate and improve its operations. Other rating concerns include regulatory uncertainties in the Indonesian coal mining industry.
Adaro recorded lower EBITDAR margin of 31.7% in H110 (2009: 37.7%) due primarily to a lower average selling price (ASP) of USD55.2/t in H110 (2009: USD58.6/ton). This is because most of the sales realised during H110 were derived mainly from contracts priced during H109 when the spot market was weak. The agency notes that movements in Adaro's realised selling price typically lag global price fluctuations by six to 12 months as Adaro sells most of its coal via long-term fixed volume contracts with index-linked prices that typically reset annually. Furthermore, Adaro recorded higher production cost of USD31.7/t (excluding royalty) against USD30.1/t in 2009 due to adverse weather during the same period. The agency however notes that despite the heavy rainfall, Adaro managed to increase its production by 20% yoy to 21.6mt in H110.
As a result of lower profitability in H110, and some cash outflows for tax payments and dividends, Adaro recorded a higher financial leverage (as measured by net debt / operating EBITDAR) of 0.9x at the end of the period (2009: 0.2x). Fitch believes this increase is temporary and expects Adaro and Adaro Energy to quickly deleverage driven by medium-term price and order visibility. This expectation drives the Stable Outlook.
Changes in the company's business environment including adverse changes in the global thermal coal industry dynamics, prolonged disruption of operations and adverse changes in the regulatory environment would be the most likely drivers of any negative rating action. Adaro's current strong balance sheet means that a credit ratio driven negative rating action is not likely unless the company changes its financial policies to allow a sustained increase in financial leverage. A positive rating action will be considered only when the company's scale of operations increases meaningfully, which is not envisaged in the short to medium term.
Adaro owns and operates the single largest coalmine in Indonesia, with an expected production of 43mt in 2010. It is Indonesia's second largest coal producer and operates under a 30-year Coal Contract of Work that remains valid until 2022. In the first six months to end-June 2010, the company recorded revenues of USD1.2bn, and EBITDA of USD378.2m.(ends)