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

(Fitch Ratings - Singapore/Jakarta - 20 Apr 2020)--Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of Indonesian coal miner PT Bayan Resources Tbk and the rating on its outstanding bonds at 'BB-'. The Outlook on the IDR is Stable.

The affirmation reflects our view that Bayan's credit profile remains adequate for its current rating level, even as we have lowered our coal price and volume assumptions. Fitch cut Bayan's selling prices following the revision of our commodity price assumptions (see Fitch Ratings Updates Mid-Cycle Metals and Mining Price Assumptions, dated 6 April 2020). We have also revised down our sales volume forecast to 28.5 million tonnes (MT) in 2020 following our expectations of weakening demand due to the coronavirus. We expect volume to rise to 31.5MT in 2021 and remain at these levels over the next three years compared with our previous expectation of production reaching 40MT by 2022. The medium-term volume revision is in line with the company's revised guidance to keep production flat before it completes the construction of a hauling road at its mine.

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

KEY RATING DRIVERS

Temporary Suspension of Production: Fitch expects Bayan to be able to maintain its credit profile even as its stops production at its key Bara Tabang mine for seven weeks. Bayan has continued its sales, reducing the 7.6MT of inventory built up from last year. Bayan faced intermittent operational challenges in 2019 in shipping coal from Bara Tabang due to low river levels. It implemented a month-long force majeure in March and faced similar issues in 4Q19, leading to the high inventory build-up. We expect Bayan to resume to normal production in mid-May 2020 once inventory levels normalise.

Weaker Volume: We expect the company's sales volume to fall marginally in 2020 from 2019 due to weaker demand from the economic slowdown caused by the coronavirus pandemic. Volume in 2019 dropped by about 3MT from the company's estimate due to the problems it faced from the low river levels. Fitch has also lowered Bayan's volume assumptions for 2021-2022 as management now plans to ramp up production after completing the construction of the 100km direct coal-haul road from its Tabang mine to the Mahakam River to provide an alternative route to ship its coal.

The company started building the road in non-forested areas in December 2019 and expects to complete the project by end-2022, subject to timely receipt of permits. The road will help Bayan reduce operational risks related to low water levels at the tributaries used for barging coal to the Mahakam River.

Low-Cost Position: Bayan benefits from the low-cost structure at Bara Tabang, helped by the company's Tabang concessions. Their average life-of-mine strip ratio of around 3.6x (2019: 3.1x) along with the well-connected infrastructure and logistics of Bayan's mines contribute to its low-cost structure. Bayan's other mines, which have stable production levels, have higher cost structures and are more vulnerable to lower coal prices. Fitch estimates Bayan's average cash cost to remain between USD33-35, translating into an EDITDA of USD7/tonne in 2020 and USD10-11/tonne in 2021 and 2022, which will remain higher than that of most of its peers in Indonesia.

Strong Financial Profile: We expect Bayan's financial profile to continue to remain strong, even as we incorporate Fitch's revised coal price assumptions, supported by its steady production volume, modest capex and low-cost position. Bayan's payment of a dividend of USD300 million in 2019 and higher working-capital debt changed its net cash position to net debt, which we do not expect to reverse over the next three years.

We expect the FFO net leverage to rise to about 2.4x in 2020 (2019: 1.6x) and fall back to 0.8x in 2021, which remains below our negative rating triggers. The increase in Bayan's leverage in 2019 was also partly on account of higher tax payments, which we expect to be reversed over the next few years.

Customer Diversification: We expect Bayan's diversified customer base to continue to support stable demand for its coal over the medium term after the temporary weakness in 2020 due to the pandemic. Bayan's customer base is geographically more diversified than those of most peers. Bayan's exports were mainly to India (25%), the Philippines (20%), Malaysia (14%) and China (11%) in 2019. 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.

Adequate Reserves: Bayan's proved (1P) reserves are 612MT, which result in reserve life of around 15 years based on the planned increase in production to around 40MT over the medium term and the 1P reserves. Bayan's proven and probably (2P) reserves rose to about 964MT, excluding the South Pakar concession, from 764MT at end-2018 after the company completed a feasibility study in the North Pakar region. We estimate Bayan's reserve life based on the 2P reserves at around 25 years, higher than our previous estimate of 15 years based on its medium-term production scale of 40MT.

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 in the medium term, as most of the ramp-up in production 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 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.

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-/Negative). The two companies have comparable operational risk profiles. Indika's larger production scale, the longer operating record of its key coal asset - Kideco Jaya Agung - and integrated operations are offset by Bayan's better cost position and stronger financial profile with lower sensitivity to price and volume assumptions. However, Bayan has faced operational disruptions due to bottlenecks, whereas Indika's operations are more integrated and have a stronger record of uninterrupted production.

Golden Energy and Resources Limited (GEAR, B+/Stable) has higher reserves and reserve life than Bayan, but Bayan's higher rating reflects larger production scale and better cost structure. GEAR's financial profile is also weaker than that of Bayan, driven by its acquisition capex. GEAR's rating is constrained until it is able to generate higher earnings. (ends)