Fitch Revises Outlook on Bayan Resources to Positive; Affirms IDR at 'BB-'

(Fitch Ratings - Singapore - 18 Feb 2022)-- Fitch Ratings has revised the Outlook on Indonesian coal miner PT Bayan Resources Tbk's Long-Term Issuer Default Rating (IDR) to Positive from Stable and affirmed the IDR at 'BB-'.

The Positive Outlook reflects Fitch's expectation of an improvement in Bayan's operational scale and a material reduction in operating risks from weather-related issues after the completion of its capex. Bayan expects to complete the construction of a hauling road connecting its key concession, Tabang, with the Mahakam river as well as the expansion of its barging and other related infrastructure by early 2023. The haul road will help Bayan avoid the disruptions that occurred in the past in barging coal through a small river during periods of low water levels.

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

Key Rating Drivers

New Infrastructure to Boost Production: Fitch expects the construction of the 101km haul road and the new barge loading and other facilities to raise Bayan's annual production to up to 50 million tonnes (MT) over the medium term from 27.3MT in 9M21. The construction was delayed slightly by rainfall in 4Q21. The company now expects to complete the work by early 2023 instead of its earlier plan of September 2022.

Regulatory Risk: Fitch believes a recent month-long export ban on coal by Indonesia highlights increased regulatory risk, especially for miners that are not in compliance with domestic market obligations (DMO). We, however, do not expect any material impact on Bayan's 2022 performance from the export ban. Bayan declared a force majeure on some of its contracts in January 2022, which hurt sales though we expect it to recoup some of its lost volumes in subsequent months during the year, limiting losses. All coal miners are mandated to sell at least 25% of their output locally under DMO regulations in Indonesia.

Bayan's main mine, Bara Tabang, has been paying a penalty for not being DMO compliant in the last three years. The penalty payment for 2021 is pending clarity from the government. The company expects to be fully compliant with its DMO obligations in 2022 for its approved production quota of 37MT. We expect Bayan's regulatory risk from the DMO to be manageable given its record and expect production volume to continue rising to above 45MT by 2024. However, risks remain as production is subject to yearly government approvals.

Strong Financial Profile: We expect Bayan's financial profile to remain strong with the net cash position over the medium term. We estimate record high coal prices raised EBITDA to around USD1.7 billion in 2021 from around USD340 million in 2020. The higher EBITDA and lower-than-expected capex of around USD160 million translated to net cash of around USD1 billion by end-2021, according to Fitch's estimates.

Capex to Decline: Bayan's key cash outlay is capex for infrastructure development of around USD350 million for the next two years. Capex in later years will mainly comprise maintenance spending of around USD40 million annually. We expect Bayan to generate free cash flow before dividends of around USD300 million per annum over the medium term based on our coal-price assumptions. This should provide adequate headroom to absorb any levies for DMO non-compliance, if any.

Long Reserve Life; Asset Concentration: Bayan has one of the largest reserves among its coal-mining peers in Indonesia, with proven and probable (2P) reserves of 1.74 billion tonnes as of 1 January 2021, translating into a reserve life of around 40 years, based on our base-case average annual production rate of 43MT between 2022 and 2024.

Tabang, including the North Pakar site, accounts for 85% of Bayan's 2P reserves. Tabang (including North Pakar) had proven reserves of 951MT as of 1 January 2021, or a reserve life of around 25 years, based on our base-case average annual production rate of 37MT between 2022 and 2024 from Tabang (including North Pakar). The contribution from Tabang is likely to remain high in the medium term, as it will account for most of the output increase in the next few years.

Low-Cost Position: Fitch expects Bayan's EBITDA per tonne to remain above that of most rated peers due to the low-cost structure of its key Tabang concessions. The Tabang operations benefit from an average life-of-mine strip ratio of 3.6x (1H21: 2.6x), and a well-connected infrastructure and logistics network. Fitch expects the average cash cost to stay around USD30/tonne for the next three-to-four years, translating to EBITDA/tonne of around USD24 in 2022 and USD12-15 in 2023-2024. Its 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 9M21 were the Philippines (28% of total sales volume), Malaysia (10%), China (17%), South Korea (14%) and India (10%). It 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-/Negative) as it has a similar operational risk profile. Indika's similar production scale, albeit with a longer operating record at its main Kideco Jaya Agung coal mine, and integrated operations are offset by Bayan's better cost position and stronger financial profile, with lower sensitivity to price and volume assumptions.

Bayan's Positive Outlook reflects our expectations of the increase in its scale, supported by its new infrastructure development, which will resolve its historical operational disruptions. Indika's operations are more integrated and it has a stronger record of uninterrupted production, but its Negative Outlook reflects a likely resurgence in leverage from its significant investment plans to diversify into non-coal earnings.

Golden Energy and Resources Limited (GEAR, B+/Stable) has higher reserves and a longer reserve life than Bayan, but Bayan's higher rating reflects its larger production scale and better cost structure. GEAR's financial profile is also weaker due to its acquisition capex. GEAR's rating will remain constrained until it is able to increase its production scale and earnings.

Key Assumptions

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

- Gradual increase in production volume to above 45MT by 2024.

- Selling price in line with Fitch's revised coal price assumptions with Newcastle coal at USD95/tonne in 2022, USD72/tonne in 2023 and USD66/tonne in 2024.

- Average cash cost of around USD30/tonne until 2024.

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

- Average dividend payout ratio of 60% for next three years.

RATING SENSITIVITIES

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

- Successful completion of infrastructure enhancement by 1Q23;

- Increase in production scale to 40MT or more a year, while maintaining a low-cost position and stable financial profile, with FFO net leverage below 1.5x.

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

- The Outlook could be revised to Stable if there is a significant delay in infrastructure development or annual production remains below 40MT on a sustained basis.

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

Strong Liquidity: We expect Bayan's liquidity to remain robust, based on an estimated cash balance of around USD1 billion against no debt maturity as it has a debt-free profile. Cash balance and projected cash flows from operations can comfortably cover planned capex over the next three-to-four years. Bayan's liquidity also benefits from access to around USD225 million in undrawn committed working-capital facilities with maturity beyond 12 months as of end-2021. This further supports Bayan's flexibility to absorb unforeseen expenses.

Issuer Profile

Bayan, whose thermal coal-mining assets are all based in Indonesia, produced 27.3MT of coal in 9M21.

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. (ends)