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

(Fitch Ratings - Jakarta/Singapore - 15 Mar 2024)--Fitch Ratings has affirmed PT Golden Energy Mines Tbk's (GEMS) Long-Term Issuer Default Rating at 'BB-'. At the same time, Fitch Ratings Indonesia has affirmed GEMS' National Long-Term Rating at 'A+(idn)'. The Outlook is Stable.

The affirmation reflects that GEMS' business profile is commensurate with that of 'BB-' rated peers in Indonesia, underpinned by its operational scale and ability to manage costs during coal-price downturns. GEMS' production continues to increase, reaching 46 million tonnes (mt) in 2023, and its financial profile, with a consistent net cash position, remains conservative for its rating level.

'A' National Long-Term Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category.

Key Rating Drivers

Enhanced Production Scale: GEMS' production scale continues to increase, with 2023 production reaching 46mt (2022: 38mt). This helped the company maintain its position among Indonesia's top-three thermal coal miners. We expect annual production to reach 52-54mt per annum in the next year or two, in line with management guidance, and then stabilise. However, this is contingent on receiving the necessary regulatory annual production quota approvals.

Modest Capex Requirement: We expect capex for infrastructure expansion to support a larger scale will remain minimal, at about USD25 million-30 million over 2024-2027, mainly to upgrade hauling roads, coal-handling plants and barge-loading facilities. GEMS' strong operating cash flow should comfortably fund its capex without the need for external funding. Furthermore, we expect that GEMS will have sufficient flexibility around the timing of capex, which it can delay during coal prices downturns.

Cost flexibility: GEMS' business profile benefits from a robust cost position, with a life-of-mine strip ratio of 4.5x (2023: 5.6x) and ability to curtail costs during periods of low coal prices. GEMS maintained reasonable EBITDA per tonne during the previous market downturn by curtailing costs. We expect the company's EBITDA per tonne to remain at about USD7-8 (2023: USD15) through 2024-2027, even as we assume substantially lower coal prices, in line with our commodity price deck.

Limited Asset Diversity: GEMS's mine, PT Borneo Indobara (BIB), accounts for more than 90% of its total production and about 67% of proven and probable (2P) reserves. The company's other mines do not have any substantial growth plans and are likely to remain small. We think GEMS' reserve concentration risk if mitigated by BIB's spread-out operation, supported by a large scale. Operational risk is somewhat managed by contracts with established mining service contractors with good records, such as PT Putra Perkasa Abadi and PT Cipta Kridatama, a subsidiary of PT ABM Investama Tbk (B+/Stable).

Long Reserve Life: GEMS has the fourth-largest reserves in Indonesia, with proven reserves of around 773mt and 2P reserves of about 957mt. This translates to a proven reserve life of around 20 years. GEMS' BIB mine contributes 73% of the proven reserves, at about 562mt, with the mining licence valid until 2036.

Conservative Financial Profile: We expect GEMS to maintain a conservative financial profile on strong operating cash flow from increasing volume coupled with minimal capex requirements. This is even as we expect the company to continue its policy of paying about 80% of free cash flow as dividends to shareholders. We forecast gross leverage, defined by gross debt/EBITDA, to remain below 0.1x and GEMS' net cash position to be maintained over the next four years.

Derivation Summary

GEMS's closest peer is PT Indika Energy Tbk (BB-/Stable). We think both companies have a competitive cost position with demonstrated ability to manage costs in line with coal price movements and an adequate reserve life for key mines. GEMS' moderately larger scale, with plans to expand further, offsets Indika's stable and well-established operations with a much longer record.

Indika's diversification strategy beyond thermal coal should help it mitigate the challenges arising from tightening funding access for thermal coal companies amid increasing environmental, social and governance considerations. However, we think this difference is offset by GEMS' more conservative financial profile, with a net cash position and limited dependence on external funding. This justifies the same ratings for both peers.

Key Assumptions

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

- Volume reaching 50mt per annum in 2024 (2023: 46mt per annum), before increasing to 52mt in 2025 and 54mt thereafter.

- Coal prices in line with the coal price deck on an energy-adjusted basis, which includes Indonesian coal price for GAR 4,200 at USD42/tonne in 2024 and USD40/tonne from 2025 onwards.

- Strip ratio for the BIB mine of 4.5x-4.7x in 2024-2027, as we factor in the company's flexibility to reduce costs amid lower coal prices.

- Annual capex of USD25 million in 2024-2027.

- Dividend payout ratio of 80%. Special dividend of USD300 million in 2024, USD100 million in 2025 and USD50 million in 2027 to maintain the cash balance in line with historical levels.

RATING SENSITIVITIES

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

We do not expect an upgrade in the near term, as we forecast the company's operational scale to remain commensurate with its current rating in the medium term.

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

- Sustained increase in the net debt/EBITDA ratio to above 2.0x (2023: xx).

- Evidence of weakened external funding access.

Liquidity and Debt Structure

Comfortable Liquidity: GEMS has strong free cash flow generation, and a net cash position, which support its comfortable liquidity position. We do not expect its debt to increase over the next three-to-four years because of its modest capex requirements. Its debt, which is all working capital related short term debt is about USD156 million, which is easily covered by its cash position of about USS202 million as of Oct-2023.

Issuer Profile

GEMS, a coal-mining company in Indonesia, operates three mining concessions. Indonesia based PT Dian Sentosa Swastika owns 55% of GEMS and ABM owns 30% via a subsidiary.

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.

The following information, which is not discussed in the criteria, was also used: high annual and special dividends to the parent. For details, please see the Limited Information section below.

Sinar Mas, a conglomerate with various businesses across Indonesia, is GEMS' ultimate parent, with an indirect majority stake. However, we do not have detailed financial information, as Sinar Mas is a private company. To take account of the limited information available on the parent, we factor in GEMS' high annual dividend payments, which include special dividends in addition to the 80% of free cash flow that maintain the cash balance in line with historical levels.

ESG Considerations

GEMS has an ESG Relevance Score of '4' for GHG Emissions & Air Quality, as its revenue is concentrated in thermal coal and it faces the risk of declining demand in the medium-term because of its high carbon footprint. Funding access for thermal coal companies has also progressively tightened, which has a negative impact on GEMS's credit profile and is relevant to the rating in conjunction with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores. (ends)