Fitch Publishes Bukit Makmur Mandiri Utama's 'A+(idn)' Rating; Rates Bonds 'A+(idn)'

(Fitch Ratings - Jakarta/Singapore - 13 Dec 2023)--Fitch Ratings Indonesia has published the 'A+(idn)' National Long-Term Rating of PT Bukit Makmur Mandiri Utama (BUMA), Indonesia's second-largest provider of coal mining services. The Outlook is Stable. The agency has also assigned BUMA's IDR1.5 trillion bond issuance a rating of 'A+(idn)'. The issuance is rated at the same level as BUMA's National Long-Term Rating because the bonds represent its senior unsecured obligations.

The rating reflects Fitch's expectation that BUMA can maintain a business profile in line with the current rating level, keeping leverage below its negative sensitivity over the next four years. We expect BUMA to maintain stable overburden removal volumes over the next two years, and thereafter be able to replace the majority of volumes lost after the maturity of a key customer contract in 2025. Its financial profile will be further supported by low capex over the next two to three years, building an adequate cushion for the next replacement capex cycle, likely in 2025-2026.

'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

Overburden Removal Volumes Recover: We expect BUMA Indonesia's annual overburden removal volumes to remain at about 425 million-430 million bank cubic metre (mbcm) in 2023-2024, and then to decline by about 5% in 2025 and 2026, factoring in some volume replacement risk after a key contract expires in 2025. BUMA's overburden volumes increased by 32% in 2022 to 430mbcm (2021: 326mbcm), led by volume growth from PT Adaro Indonesia's (BBB-/Stable) PT Bayan Resources.

BUMA's overburden volume of 352mbcm in 9M23 (9M22: 323mbcm) was largely in line with Fitch's expectation of flat volumes during the year for the Indonesian operations. We forecast BUMA Australia's volumes to expand to 160mbcm in 2023 (9M23: 110mbcm; FY22: 116mbcm) as it ramps up production.

Lower Capex: Fitch expects BUMA's consolidated capex to remain low at USD125 million-135 million a year until 2025, primarily relating to maintenance spends, supporting improvements in leverage. Up to 9M23, BUMA had spent total USD86 million in capex, including some spillover from 2022, in line with expectations (2022: USD148 million). The high capex in 2021 of about USD 340 million was mainly to expand capacity to support volume growth from customers, and should remain sufficient to support production until 2025 without any major growth capex.

Next Equipment Replacement Cycle 2026: BUMA's capex is cyclical due to the nature of its business, escalating every four to five years for equipment replacements. It expects its next equipment-replacement cycle to be in 2026, but the amount will depend on the volumes from the contracts on hand at that point.

Improving Diversification: BUMA's customer diversification has improved in the past 18 months, as it signed new contracts, expanded volumes for certain existing customers and acquired Downer EDI Limited's coal-contracting assets in Australia. We expect BUMA's diversification to improve further, in terms of counterparty and commodity exposure, after signing a new metallurgical coal contract in Australia in 2022 and extending existing contracts. BUMA Australia contributed about 15% to BUMA's total EBITDA in 2022, and BUMA's order book now has an 19% contribution from metallurgical coal.

About half of BUMA's revenue was from Berau until 2021, which declined to 25% in 9M23 (2022: 30%). The top three customers - PT Berau Coal Energy, Bayan and Adaro - contributed about 56% of BUMA's revenue in 9M23 (2022: 62%), as the contribution from BUMA Australia remains relatively modest. Still, we believe BUMA's long relationships with key customers and high contract-renewal rates mitigate the risk associated with customer concentration. Coal miners generally prioritise payments to mining contractors to ensure continuity of operations.

Volume Replacement Risk: BUMA Indonesia's contract with its largest customer, Berau, expires in 2025 following the depletion of reserves. We estimate the contract will account for 44% of its volume in 2024. Even so, we believe BUMA's strong market position, proven record in operations and expertise in managing large, complex mines give it a competitive edge in securing new contracts or expanding existing ones, although risks remain. BUMA also expects significant growth in Australian metallurgical coal, which can partially offset the loss of volumes from the Berau contract.

Evolving Business Profile: We expect BUMA's business profile to evolve over the medium term as it further increases earnings from non-thermal coal via both organic and inorganic means. Its strategy to diversify beyond thermal coal should mitigate challenges arising from tightening funding access for thermal coal players due to ESG considerations. BUMA plans to diversify within the mining sector as well, building on its expertise to limit execution risks.

Comfortable Rating Headroom: We forecast BUMA's EBITDA net leverage to be around 2.0x-2.3x during 2023-2026, remaining comfortably below our negative rating sensitivity of 3.3x, driven by improved volumes and low capex. In our rating case, we expect rating headroom to be maintained even as we factor in volume decline in 2025 and 2026. We believe the company has sufficient cost and capex flexibility to maintain its financial profile even if volumes decline beyond our expectations.

Derivation Summary

We believe BUMA has a comparable credit profile with Indonesian coal miner PT Golden Energy Mines Tbk (GEMS, A+(idn)/Stable), which has the fourth-largest coal reserves in Indonesia. GEMS operates three mining concessions, with 1P reserve life of 21 years and 2P reserve life of 25 years. GEMS's rating reflects its competitive cost position, long reserve life and strong financial profile.

We think the strengths and weaknesses of miners and mining contractors partially offset each other. BUMA has more earnings stability than GEMS as the impact of coal price volatility is less pronounced on contractors compared to coal miners, which are directly affected. BUMA's credit profile also benefits from diversification from various mining assets. However, BUMA's financial profile is worse than GEMS because it has a more capital-intensive business.

BUMA's rating is one notch above the rating of Indonesia's leading industrial and medical gas supplier, PT Samator Indo Gas Tbk (A(idn)/Stable). BUMA's operational scale is significantly larger with EBITDA size of USD220 million-260 million compare to Samator Indo Gas's at less than USD70 million. Samator Indo Gas's rating is constrained by its smaller operational scale relative to higher-rated national peers, but counterbalanced by its solid market position and strong EBITDA margin of above than 30%. Fitch expects BUMA to have better financial profile with stronger coverage and leverage profile in 2023-2026 than Samator Indo Gas.

Key Assumptions

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

- Indonesia volumes to remain almost flat in 2023 and 2024 from its 2022 volume, and then decline by about 5%-6% a year in 2025 and 2026 as some key contracts mature. Overburden volumes from Australia to increase to 160mbcm in 2023 and then increase to 180mbcm from 2024.

- Blended mining rates to remain flat in 2023, then decline by 5% in 2024, 2% in 2025 and 2% in 2026. This factors in the decline in coal prices and adjustment for oil prices, in line with Fitch's assumptions.

- Total capex (including both Indonesia and Australia) of USD135 million in 2023, USD125 million in 2024, USD160 million in 2025 and a rise to USD275 million in 2026 due to the expected equipment maintenance cycle. These figures include financial leases, which we expect to be 25%-50% for Indonesia.

- Dividend of USD15 million a year for 2023-2026, in line with management guidance.

- For BUMA Australia, EBITDA of USD70 million-75 million a year during 2023-2026.

RATING SENSITIVITIES

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

- An upgrade is unlikely in the near term, as the company's business profile is evolving as it transitions towards a more diversified earnings base. However, a material improvement in BUMA's business diversification beyond coal-related operations, while maintaining an appropriate financial profile, may lead to an upgrade.

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

- Weakening market position, including weak execution of its business strategy, and failure to obtain new customers to replace expiring contracts;

- Indications of an overly aggressive approach towards non-thermal coal-related diversification;

- Inability to timely secure its future refinancing and funding needs by successfully implementing its diversification strategy;

- EBITDA net leverage sustained above 3.3x.

Liquidity and Debt Structure

Comfortable Liquidity: BUMA's liquidity remains comfortable over the next two years with no major refinancing requirements, driven by its back-ended debt maturity profile. We expect BUMA's internal cash flow to be sufficient to repay the senior secured loan, which has a step-up amortising repayment structure and minimal repayment requirements until 2024.

BUMA's next major refinancing requirement is likely to be in 2026. Some of BUMA's contracts end in or around 2025 and, therefore, we believe BUMA will have to replace this earnings stream with new contracts or other acquisitions to fulfil these medium-term refinancing requirements.

Issuer Profile

BUMA is a subsidiary of PT Delta Dunia Makmur Tbk. It provides coal mining services and carries out mining-related works, such as overburden removal, coal mining, coal hauling, reclamation and land rehabilitation in Indonesia and Australia. BUMA serves seven customers in Kalimantan, Indonesia, and five customers in Queensland, Australia.

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. (ends)