Fitch Affirms Bayan Resources at 'BB-'; Withdraws Rating

(Fitch Ratings - Singapore - 27 Sep 2022)-- Fitch Ratings has affirmed PT Bayan Resources Tbk's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB-' with a Positive Outlook and has simultaneously withdrawn the rating.

The Positive Outlook reflects our expectation that Bayan's operational scale will improve and ease operating risks from weather-related issues after the company completes the construction of a hauling road connecting its key concession, Tabang, with the Mahakam river as well as the expansion of its barging and related infrastructure in 2023. The haul road will help Bayan avoid disruption in barging coal down a small river during periods of low water levels.

Bayan's rating reflects a solid financial profile with a debt-free position, low-cost mining operations and long reserve life.

Fitch has chosen to withdraw the ratings on Bayan for commercial reasons. Accordingly, Fitch will no longer provide ratings or analytical coverage for Bayan.

Key Rating Drivers

Production to Rise; Construction Delayed: We expect Bayan's annual production to exceed 40 million tonnes (mt) by 2024 (1Q22: 6.9mt; 2021: 37.6mt), subject to the timely completion of the construction of the 101km haul road, new barge loading and other facilities. Construction was impacted by rainfall in 4Q21 and 1Q22 and the company now expects to complete the work by end-2023, instead of its original plan of September 2022. Bayan expects the new infrastructure to support annual production of up to 60mt and aims to produce around 45mt by 2023.

Rising Regulatory Risk: We believe Indonesia's month-long export ban on coal in January 2022 highlights increased regulatory risk, especially for miners that are not compliant with domestic market obligations (DMOs). However, we do not expect the ban to significantly affect Bayan's 2022 performance. Bayan declared a force majeure on some of its contracts in January 2022. This hurt sales, but we expect the company to recoup some lost volume in subsequent months, limiting losses. All coal miners are mandated to sell at least 25% of output locally under the DMO regulations.

Bayan's main mine, Bara Tabang, has paid a penalty of USD11.3 million for not being DMO compliant in the last three years. It also recorded USD9.3 million in accruals in 1H22. The company expects to be fully compliant with its DMO obligations in 2022 for its approved production quota of 37mt. We expect regulatory risk from the DMO to be manageable, given Bayan's record, and forecast annual production volume to increase. However, risks remain, as production is subject to yearly government approval.

Strong Financial Profile; Falling Capex: We expect Bayan's financial profile to remain strong, with a net cash position over the medium term. We forecast Bayan to generate annual free cash flow before dividends of over USD1 billion until 2023, declining to around USD500 million thereafter with the moderation in our coal-price assumptions. This should provide adequate headroom to absorb any levies for DMO non-compliance. We expect Bayan's dividend pay-out to stay at around 90% of net income in the medium term; it paid dividends of USD990 million in 1H22, or 82% of 2021 net profit.

Bayan's key cash outlay is capex for infrastructure of around USD350 million for the next two years. Capex in later years will mainly comprise maintenance spending of about USD40 million annually.

Long Reserve Life: Bayan has one of the largest reserves among Indonesian coal-mining peers, with proven and probable reserves of 1.7 billion tonnes as of end-2021. This translates into a reserve life of around 41 years under our base-case average annual production rate of 41mt between 2022 and 2025.

Limited Asset Diversity: Tabang, including the North Pakar site, accounts for around 85% of Bayan's annual production and probable reserves. This concession had proven reserves of 919mt at end-2021, providing a reserve life of around 25 years under our base-case average annual production rate of 35mt between 2022 and 2025. The contribution from Tabang is likely to remain high in the medium term, accounting for most of the output increase in the next few years.

Low-Cost Position: We expect Bayan's EBITDA per tonne to remain above that of most rated peers due to the low-cost structure of its key Tabang concession. The Tabang operation benefits from an average life-of-mine strip ratio of 3.6x (1Q22: 4.4x, 2021: 3.9x) and a well-connected infrastructure and logistics network. We expect the average cash cost to stay at above USD30/tonne after 2023, translating to EBITDA/tonne of around USD16. EBITDA/tonne is likely to peak at USD66 in 2022 (2021: USD43). The low-cost mining operations provide a buffer against a coal price downturn.

Diversified Customer Base: Bayan's customers are more geographically diversified than those of most peers, which should continue to support stable demand for its coal. Bayan's main export markets in 2021 were the Philippines (29% of total sales volume), China (16%), South Korea (15%) and India (10%). The company also has a diverse product offering, as its coal ranges from Tabang's 4,000-4,300kcal low-sulphur and ash content coal to high calorific value (over 6,000kcal) coal from its other mines.

Derivation Summary

Bayan's closest peer is PT Indika Energy Tbk (BB-/Stable), as it has a similar operational risk profile. Indika's comparable production scale, albeit with a longer uninterrupted operating record at its main Kideco Jaya Agung coal mine, is offset by Bayan's better cost position and larger reserves. Bayan's financial profile is stronger, as we expect a continued net cash position, against our forecast for Indika's FFO net leverage of around 2x after 2022. The Positive Outlook on Bayan reflects our expectation that it will improve its scale and reduce operating risks after it completes its infrastructure enhancements.

PT Golden Energy Mines Tbk (GEMS, B+/Positive) has higher reserves and a longer reserve life than Bayan, but Bayan's higher rating reflects its larger production scale and better cost structure. Our expectation that GEMS' production scale will increase to be more in line with a notch-higher rating in the next 12 months is reflected in the Positive Outlook.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

- Gradual increase in production volume to around 43mt by 2024.

- Coal price assumptions in line with Fitch's mid-cycle Newcastle 6000kcal price assumptions, adjusted for the difference in calorific value. Newcastle per tonne coal price assumption of USD360 for 2022, USD240 for 2023, USD90 for 2024 and USD83 for 2025

- Average cash cost of around USD40/tonne until 2023, dropping to around USD35 thereafter

- Total capex of around USD500 million during 2022-2024, including both expansion and maintenance capex.

- Average dividend pay-out ratio of 90% for the next four years.

RATING SENSITIVITIES

No longer relevant, as the ratings have been withdrawn

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Robust Liquidity: Bayan's liquidity benefits from a strong cash balance of around 620 million at end-June 2022. It has no debt maturities, with a debt-free profile. The projected cash flow from operations can comfortably cover planned capex over the next three-to-four years. Bayan's liquidity also benefits from access to around USD280 million in undrawn committed working-capital facilities, with a maturity of beyond 12 months as of end-March 2022. This further supports Bayan's flexibility to absorb unforeseen expenses.

Issuer Profile

Bayan, whose thermal coal-mining assets are all based in Indonesia, produced 37.6mt of coal in 2021.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.