Fitch Affirms Golden Energy Mines at 'B+'/'A(idn)'; Outlook Stable

(Fitch Ratings - Singapore/Jakarta - 12 Apr 2021)--Fitch Ratings has affirmed Indonesia-based PT Golden Energy Mines Tbk's (GEMS) Long-Term Issuer Default Rating (IDR) at 'B+' with a Stable Outlook. At the same time, Fitch Ratings Indonesia has affirmed GEMS's National Long-Term Rating of 'A(idn)' with a Stable Outlook.

The rating is based on the proportionately consolidated credit profile of parent Golden Energy and Resources Limited (GEAR, B+/Stable), which owns 62.5% of GEMS, based on our Parent and Subsidiary Linkage Rating Criteria, as we assess their linkage as moderate, due to moderate legal and operational ties. GEAR's standalone holding company credit metrics are moderate, mitigating structural subordination risk. The rating reflects the robust financial profile of GEMS, as its operating performance remained strong despite the decline in coal prices in 2020.

Fitch assesses GEMS's Standalone Credit Profile at 'b+' as it benefits from a competitive cost position, long reserve life and strong financial profile. GEMS's steady production ramp-up over the last four years should result in volume that is comparable with that of 'BB-' rated peers such as PT Bayan Resources Tbk (BB-/Stable) and PT Indika Energy Tbk (BB-/ Negative). We expect its production volume to rise further, subject to regulatory approval, which together with its large reserves and strong financial profile should support improvement in its Standalone Credit Profile.

We expect GEMS's EBITDA to increase to USD195 million in 2021 from USD150 million in 2020 on its increasing production scale and ability to maintain profitability even with low coal prices. The difference in their calorific value of coal means GEMS's current EBITDA scale is smaller than that of Bayan and Indika. GEMS's financial profile, however, is stronger than that of most of its coal mining peers, including Indika, in our view.

'A' National Ratings denote expectations of a low level of default risk relative to other issuers or obligations in the same country or monetary union.

KEY RATING DRIVERS

Cost Flexibility: We expect GEMS's flexibility to manage its costs to move in line with coal prices and its low-cost structure with a life-of-mine strip ratio of 4.2x to supports its operating cash flow. GEMS's EBITDA per tonne improved to USD4.4 in 2020 (2019: USD4.0), driven by its ability to meaningfully curtail cash costs from a reduction in the strip ratio, lower contract mining rates to third-party contractors and declining fuel costs. Fitch expects GEMS to maintain EBITDA per tonne at USD4-5 after peaking at USD5.5 in 2021.

Increasing Production Scale: We expect GEMS's production to rise to close to 40 million tonnes (mt) in 2022 (2021 forecast: 35mt, 2020: 34mt), in line with management expectations, subject to regulatory approval on the production quota. Fitch believes GEMS's strong compliance with regulatory requirements, including domestic market obligations, will help mitigate risks.

GEMS's capex on infrastructure to support the higher volume will be minimal, about USD20 million-25 million annually over the next three years to upgrade the capacity of hauling roads, coal-handling plants and barge-loading facilities. We expect GEMS's robust operating cash flows and limited capex to support its strong financial profile with a net cash position. We expect GEMS to continue its policy of paying about 80% of its net profit as dividends to its shareholders.

Limited Mine Diversity: GEMS's mine, PT Borneo Indobara (BIB), accounts for more than 90% of its total production and above 67% of proven and probable (2P) reserves. BIB's production ramp-up plans mean the contribution from GEMS's other mines will remain small, at least until 2024. The reserve concentration risk is partly offset by geographical diversification, with about 30% of the 2P reserves outside the island of Kalimantan.

We believe the operational risk is mitigated by GEMS's contracts with leading Indonesian mining contractors, such as PT Saptaindra Sejati, a subsidiary of PT Adaro Energy Tbk, and PT Putra Perkasa Abadi.

Long Reserve Life: GEMS has the fourth-largest reserves in Indonesia, with proven reserves of around 807mt at end-2020 and proven and probable reserves of 1,033mt, or a reserve life of 20.2 years based on its target annual production of 40mt. GEMS's BIB mine contributes to 72% of the proven reserves at 589mt, with a second-generation license valid until 2036.

GEAR's Robust Profile: We expect GEAR's consolidated financial profile to improve as GEMS's volume growth continues and Stanmore Coal Limited's operations settle into a new mining area. GEAR acquired a 60% stake in Stanmore, an Australia-based metallurgical coal-mining company, which supports its business profile diversification. We expect GEAR's consolidated net debt/EBITDA (with proportionate consolidation of GEMS and full consolidation of Stanmore adjusted for minority interests) to remain at or below 1x starting 2021 (2020: 1.5x).

Moderate Linkages with GEAR: GEAR retains majority representation on GEMS's board and is involved in GEMS's operations. GEAR's standalone operations are not significant and it depends solely on dividends from its subsidiaries, primarily GEMS, to service debt. An agreement between GEMS's shareholders ensures that it will maximise profit distribution by paying at least 80% of free cash flow as dividends. GMR Coal Resources Pte. Ltd, which owns 30% of GEMS, also appoints key management personnel and has veto power in major corporate transactions.

DERIVATION SUMMARY

The ratings of GEMS are based on the proportionately consolidated financial metrics of the GEAR group. The ratings factor in the group's adequate financial profile, large reserve base of both its key assets, GEMS's low-cost position and limited but improving scale of operations and track record.

Indika has more integrated operations across the thermal-coal value chain, but GEAR benefits from improving diversification after acquiring Stanmore, although the Australian company's contribution to cash flow will be minimal in the next two years. Indika's larger scale in terms of EBITDA and well-established operations justifies the one-notch difference in their IDRs, as GEAR's key assets, GEMS and Stanmore, are still boosting production. The Negative Outlook on Indika reflects the limited headroom in its rating because of our expectations of a weakening financial profile with high leverage.

The National Long-term Rating of GEMS is comparable with that of PT Tunas Baru Lampung Tbk (TBLA, B+/A(idn)/Negative). TBLA's business encompasses plantation and refining of palm oil and sugar. Both GEMS and TBLA are exposed to commodity price movement but the latter's sugar business has provided the company with stability when crude palm oil price was volatile. This results in higher EBITDA margin for TBLA at more than 20% versus around 10%-15% for GEMS. However, GEMS' much better leverage profile with net debt/EBITDA of less than 1.0x (TBLA: >3x) offsets this advantage and therefore the two companies are rated on the same level on the national scale.

KEY ASSUMPTIONS

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

- Index coal prices in line with Fitch's mid-cycle commodity price assumptions, adjusted for the difference in calorific value (thermal coal average Newcastle 6,000 kcal/kg, free on board (FOB)): USD72/tonne in 2021, USD66/tonne in 2022 and 2023 and USD63/tonne thereafter, and hard coking coal (Australia premium spot, FOB): USD135/tonne in 2021 and 2022, and USD140/tonne thereafter.

- GEMS's total coal sales volume to be at 34.9mt in 2021, thereafter increasing by 3mt-5mt a year until 2024.

- Capex incurred by GEMS at USD20 million in 2021, USD25 million-27 million in 2022-2023 before declining to USD12 million in 2024

- Outflow of USD50 million in 2021 at GEAR for the equity injection into Ravenswood gold mine.

- Metallurgical coal sales volume of 2.1mt-2.3mt in 2021-2024, and EBITDA contribution of around USD16 million-75 million from Stanmore from 2021-2024.

- Stanmore capex of USD35 million-45 million in 2021 and 2022, declining to USD12 million and USD8 million in 2023 and 2024, respectively.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- GEAR holding company's standalone EBITDA/interest cover above 2.5x on a sustained basis;

- Sustainable improvement in the group's operational scale;

- Net adjusted debt/EBITDA of less than 2x, based on a proportionate consolidation of GEMS and full consolidation of Stanmore adjusted for minority interests.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- GEAR holding company's standalone EBITDA/interest cover below 2.0x;

- Net adjusted debt/EBITDA of more than 3x, based on a proportionate consolidation of GEMS and full consolidation of Stanmore adjusted for minority interests.

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

Adequate Liquidity: The GEAR group's healthy cash flow generation and well-spread debt maturities underpin its adequate liquidity. The group had USD380 million of debt at end-2020 (end-2019: USD320 million), which includes USD110 million of short-term debt, of which USD58 million is a revolving working-capital facility at GEMS. In comparison, it had cash and cash equivalents of USD275 million. The debt increased primarily to fund the investment in Stanmore. The group's debt, both at GEMS and the holding-company level, has a gradual repayment structure except for a bond repayment in 2023. We expect the group to require partial refinancing of the bond before 2023. We regard the refinancing risk as low, taking into account GEAR's adequate credit profile and access to banks and capital markets.

On a standalone basis, GEMS has improving cash flow generation, moderate debt levels and well-distributed amortising debt, which support its adequate liquidity position. We do not expect the debt at GEMS to increase over the next three-to-four years due to its modest capex requirements. The entity's short-term debt is about USD75 million, which is easily covered by its cash position of about USD203 million as of end-2020. (ends)