Fitch Affirms Bayan Resources at 'BB-'; Outlook Stable

(Fitch Ratings - Singapore/Jakarta - 22 August 2019)--Fitch Ratings has affirmed the Long-Term Issuer Default Rating of PT Bayan Resources Tbk at 'BB-'. The Outlook is Stable.

The affirmation reflects the low-cost position of Bayan's key coal mine, adequate reserves, diversified customer base and a strong financial profile. This is partially offset by mine concentration, regulatory risk and the cyclical nature of the coal industry.

Key Rating Drivers

Low Cost Position: Bayan benefits from the low-cost structure at its key mine, Bara Tabang, which contributes from the company's Tabang concessions. According to the company, Tabang's cash cost is among the lowest in the first-quartile of the global seaborne coal supply curve on an energy-adjusted basis, with average life-of-mine strip ratios of around 2.75x-3.00x (2018: 2.60x). The well-connected infrastructure and logistics of Bayan's mines also contributes to its low-cost structure. Bayan owns and operates Balikpapan coal terminal, one of Indonesia's largest, along with floating transfer stations.

Our expectation of higher production volume of above 30 million tonnes (mt) from the Tabang concessions in 2019 (2018: 23mt) should further support Bayan's robust operating cash flow in the medium term despite lower coal price assumptions compared to 2018. The rising production together with strong coal prices supported improvement in Bayan's average EDITDA/ ton to USD25 in 2018, from around USD13 in 2016. Bayan's other mines, which have stable production levels, have higher cost structures and are more vulnerable to lower coal prices.

Operational Issues at Tabang: Bayan implemented a month-long force majeure in March 2019 on shipping coal from Bara Tabang due to low river water levels. It was able to ship the stockpiled coal in the following months, limiting the effect on overall sales volume, but we believe frequent or prolonged recurrence of such events could hurt Bayan's reputation as a reliable supplier and its ability to renew or sign new contracts in the long term. This could affect the company's plan to increase sales volume to over 40mt by 2021.

Bayan plans to build a 100km road from the Tabang concession to the Mahakam River in the medium-term to provide an alternative route to ship its coal. It expects the road to be ready by 2022-2023, subject to timely receipt of permits.

Customer Diversification: We expect Bayan's diversified customer base to support stable demand for its coal over the medium term. With none of the countries taking more than 20% of their total production voilume, Bayan's customer base is geographically more diversified than those of most peers. Bayan exports are mainly to India (19%), Philippines (16%), South Korea (15%), Malaysia (11%) and China (11%). It also has a diverse product offering, as its coal ranges from Tabang's 4000-4300kcal low-sulphur and ash content coal to high calorific value (over 6000kcal) coal from its other mines.

Increasing Production Scale: We expect production to increase to 35mt in 2019 (2018: 29mt), primarily driven by production from Tabang. The company targets 44mt of annual production over the medium term, supported by further ramp-up at Tabang and contribution from North Pakar (scheduled to start production in 2022-23), which is an extension of the Tabang concession and currently under exploration and development. Bayan's infrastructure can support sales of about 45mt; capacity will expand to 50my by the end of the year when capacity at Balikpapan will increase to 25mt, from 20mt.

Adequate Reserves: Bayan's 2P reserves rose to about 900mt, from 764mt at end-2018 (2018 proved (1P) reserves: 385 mt), after the company completed a feasibility study in the North Pakar region. Bayan's acquisition of the remaining stake in Kangaroo Resources Limited in 2018 also increased its reserve life. We estimate Bayan's reserve life to be at around 20 years, up from our previous estimate of 15 years (based on 2P reserves), with a planned increase in production to about 40mt over the medium term.

Limited Mine Diversity: Tabang (including North Pakar) accounts for more than three quarters of Bayan's 2P reserves and total production. We expect Tabang's contribution to remain high, as most of the production ramp-up is likely to come from existing operational mines at Tabang and the North Pakar concession. That said, we believe risks related to Bayan's coal mining operations itself are minimised by its contracts with PT Petrosea Tbk and PT Bukit Makmur Mandiri Utama (BB-/Stable), two of Indonesia's largest coal mining contractors.

Strong Financial Profile: We expect Bayan's financial profile to continue to remain strong based on our coal price assumptions. Bayan's financial profile should remain supported by its rising production volume and low-cost position. Bayan's financial profile improved substantially after it prepaid all its restructured debt in 2017 and improved its profitability post commencement of its Tabang operation and from higher coal prices. Bayan paid a dividend of USD 300mn in 2H2019 which in our view would have changed their net cash position to net debt; however we expect the company to return to net cash position by over the next 6-12 months absent any further large payouts/ investments. We expect Bayan to maintain a strong financial profile over the medium term given our dividend assumptions and limited capex.

Cyclicality of Coal Industry: Bayan remains vulnerable to the commodity cycle, as its earnings and cash flow are linked to the thermal coal industry. However, these risks are mitigated by the low-cost position of its key mine.

Derivation Summary

Bayan's closest peer is PT Indika Energy Tbk (BB-/Stable). The two companies have comparable business profiles; Indika's larger production scale, longer operating record of its key coal asset - Kideco Jaya Agung - and integrated operation are offset by Bayan's better cost position and stronger financial profile. With adequate cash flow, we expect both companies to maintain a healthy cash balance over the medium term, which would also give Indika the flexibility to address its lumpy debt maturities.

PT Golden Energy Mines Tbk (GEMS; B+/Positive) has higher reserves and reserve life than Bayan, but this is balanced by Bayan's larger and increasing production scale and better cost structure. Both companies have strong financial profiles. The Positive Outlook on GEMS reflects Fitch's expectation that the company will likely continue its production ramp-up to a level commensurate with a 'BB-' rating.

Key Assumptions

- Coal price assumptions in line with Fitch's mid-cycle at Newcastle 6000kcal price assumptions, adjusted for the difference in calorific value; coal price for 2020 at USD78/mt, 2021 at USD76/mt and 2022 at USD75/mt

- Coal production to increase to 35.0mt in 2019, 40.2mt in 2020 and 42.5mt thereafter. We expect the Tabang concession to be the key driver of production growth.

- Dividend payout to remain high at around 60%.

- Total capex of around USD375 million until 2022. (ends)