Fitch affirms Adaro Indonesia at 'BB+'; outlook stable
Wednesday, January 29 2014 - 04:07 AM WIB
The ratings reflect Fitch?s expectation that Adaro Energy will maintain adequate through-the-cycle credit metrics for its ratings, its position as one of the world's lowest-cost producers of thermal coal, its solid liquidity and its low expected capex. The ratings of Adaro are based on the consolidated financial profile of Adaro Energy.
Ratings Linked to Adaro Energy: The ratings of Adaro are based on the consolidated credit profile of Adaro Energy, given their strong linkages. Fitch expects Adaro to account for about 75% of Adaro Energy?s consolidated EBITDA in 2013, and the majority of the earnings from the remaining divisions are derived through the provision of mining and related services to Adaro. Adaro has also raised debt that it lent to group companies for investments in supporting infrastructure. Adaro?s operating and financial policies are tightly controlled by the parent and its shareholders.
Credit Metrics Affected by Weaker Coal Prices: Coal prices have weakened substantially since 2011 due to weakened demand growth and slower-than-expected production cuts in the industry. As a result, Adaro Energy?s consolidated EBITDA fell to USD665m in 9M13 (from USD1,137m in 2012), which increased its financial leverage, as measured by FFO adjusted net leverage, to 2.8x (FY12: 2.5x). Fitch expects Adaro?s average selling price (ASP) to be around USD57/MT in 2014 (USD58/MT in 9M13) and to increase by USD2-3/mt per annum thereafter. Fitch believes the thermal coal market is unlikely to see any meaningful recovery in the next 12-18 months, and is also vulnerable to regulatory risks in Indonesia and some of its export markets.
Adaro Energy enjoys several advantages that provide space for the company to tolerate a lower ASP than our rating case assumption: It has low cash costs (about USD35/MT excluding royalties in 9M13) and a resultant EBITDA of about USD17/MT, strong liquidly arising from USD618m of cash holdings and USD418m of committed undrawn credit facilities at September 2013, and strong access to sources of funds. Its production costs place it among the lowest quartile of sea-borne thermal coal suppliers.
Limited Capex and Investment Spending: Adaro Energy has deferred the development spending required for most of its greenfield coal assets acquired since 2011. Adaro Energy retains operational control over these assets, allowing the company to defer spending until coal prices improve substantially. Fitch expects a total of USD300m-USD350m of investment spending on some of its power projects over the medium term, but this would not materially impact its credit ratios.
Single Mine Risk: The ratings remain constrained by Adaro's reliance on a single mining concession and the still-evolving mining regulations in Indonesia. Although Adaro Energy has diversified its resource base, the weak price environment has delayed the development of its recently acquired low calorific value (CV) assets. (ends)