Fitch Revises Outlook on GEAR to Positive; Affirms IDR at 'B+'

(Fitch Ratings - Singapore - 10 Apr 2022)-- Fitch Ratings has revised the Outlook on Golden Energy and Resources Limited (GEAR) to Positive from Stable, and affirmed the Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B+'. The agency also affirmed the rating on GEAR's USD375 million notes due 2026 at 'B+', with Recovery Rating of 'RR4'.

The Outlook revision reflects our expectation that credit profile of GEAR's key subsidiary, Indonesia-based PT Golden Energy Mines Tbk (GEMS, B+/Positive), is likely to improve over the next 12 months with production scale reaching a level commensurate with that for 'BB-' rated peers in Indonesia.

Fitch assesses that the credit profile of GEAR's other key subsidiary, Australia-based Stanmore Resources, will benefit from the USD1.3 billion acquisition of Dampier Coal, which owns 80% in BMC's metallurgical coal operations in Australia. The transaction will increase Stanmore's scale and diversity. However, these business-profile improvements will be partially offset by the holding structure, with debt-servicing requirements at the acquiring-entity level.

Key Rating Drivers

Improving Credit Profile at GEMS: Fitch expects GEMS' credit profile to improve the operational scale sustainably and become comparable with other 'BB-' peers over the next 12 to 18 months. GEMS' IDR at 'B+' is constrained mainly by its production despite its financial profile being quite conservative.

We also expect GEMS' annual production to continue ramping up to 50-55 million tonnes per annum (mtpa) over the medium term, in line with management guidance. This, along with the miner's flexibility to manage costs to move in line with coal prices and its low-cost structure with a life of mine strip ratio of 4.5x, should lead to a sustainable increase in its operating cash flow.

Dampier Acquisition, Credit Neutral: The Dampier acquisition will improve Stanmore's financial and operational scale; metallurgical coal sales volume will substantially increase to 12.6 mtpa (2021 pre-acquisition: 2.3mpta) while proved reserves will rise to 145 million tonnes (2021 pre-acquisition: 33.8 million tonnes) with output from three mines versus one currently. Fitch expects the EBITDA for BMC mines to be around USD1.2 billion in 2022. The acquired mines have competitive cost positions. Stanmore's business profile will be comparable with that of mid-to-low 'BB' rated mining peers.

Acquisition Debt: We expect the improvement in Stanmore's business profile to be partly offset by an increase in debt for the acquisition. The debt's features include an amortising structure with back-ended repayment profile, cash-sweep sharing of excess cash and covenant restrictions on dividend payments to Stanmore. As a result, dividend payouts will depend on commodity prices. Fitch does not expect Dampier to pay any material dividends after 2023, when we factor in lower coal prices as per Fitch's commodity price deck and the loan's increasing amortising principal repayments.

High Prices to Accelerate Deleveraging: Stanmore's post-acquisition cash flow in 2022 should be strong on high coal prices, enabling it to materially deleverage within the acquisition's first year. We think it can fully repay all its standalone loans, including the USD120 million for the acquisition and the inter-company loan of USD70 million to GEAR, and be in net cash by end-2022. Higher coal prices will also help accelerate deleveraging at the acquiring entity, where we expect the acquiring entity to repay about USD100 million of acquisition debt in the first 12 months due to the loan's cash sweep feature.

Robust Financial Profile: We expect GEAR's consolidated financial profile to remain robust after the Dampier acquisition, as sustainably strong earnings from the acquired mines should keep the group's net debt/EBITDA below 0.5x (proportionately consolidated for GEMS and Stanmore) over the next four years. GEAR's consolidated debt will rise by USD835 million upon the acquisition, which includes a USD120 million new term loan at the Stanmore level, a USD90 million bond tap by GEAR and a USD625 million acquisition loan by Stanmore's acquiring subsidiary.

We expect that post-acquisition GEAR's standalone interest cover will remain at 5.0x in 2024 and 4.3x in 2025, after surging to above 7.0x in 2022 and 2023, on high thermal coal prices, resulting in strong dividends from GEAR's thermal coal subsidiary, GEMS.

Increased Buffer for Mid-Sized Acquisitions: Fitch expects GEAR to have sufficient financial headroom to make mid-sized acquisitions, while maintaining a conservative financial profile. Fitch expects the significant increase in commodity prices in 2022 will lead to higher dividends for GEAR, enabling it to build a comfortable cash balance to support mid-sized investments. However, any large acquisition, similar to the Dampier acquisition, will be treated as an event risk.

Long Reserve Life: GEAR has an adequate reserve life for all its key mines, including the ones under acquisition. The proved reserves for the two new BMC mines are adequate, averaging at 11 years. GEMS on the other hand has one of the largest reserves among coal-mining peers in Indonesia, with proven reserves of around 800 million tonnes (proven and probable reserves: about 1,000 million tonnes), or a reserve life of 20 years.

Derivation Summary

The ratings of GEAR are based on the financial metrics of the group, adjusted to proportionately consolidate GEMS and Stanmore to incorporate the presence and influence of significant minority shareholding. The ratings factor in the group's adequate financial profile, sufficient reserve base of all its key mining assets and enough liquidity at the holding company to service its debt.

Fitch thinks that post-acquisition, GEAR's business profile will be comparable to PT Indika Energy Tbk (BB-/Negative) and PT Bayan Resources Tbk (BB-/Positive) with better diversification and higher operational scale. However, this strength is partially offset by GEAR's distinct group structure, as we do not think the Dampier acquisition will benefit the credit profile of the holding company before there is material deleveraging at the acquired entity level. Even so, we expect the credit profile of GEAR's other key subsidiary, GEMS, to be on a par with 'BB-' peers because the operational scale growth coupled with the improving coal prices is reflected in our Positive Outlook.

We also think GEAR's consolidated operational scale will be comparable to PT Adaro Indonesia (BBB-/Stable) with 2022 Fitch-expected production size of 36mtpa for thermal coal (Adaro 40mpta) and 13mtpa of metallurgical coal. However, we think Adaro's more robust operations with a much longer record, the ability to maintain its financial profile in previous market downturns and no structural subordination of its debt, justifies the multiple-notch rating difference between the two entities.

Key Assumptions

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

GEMS

- Volume reaching 36mtpa in 2022 (2021: 29mtpa) and thereby increasing by 4-5mtpa until 2025. We then expect volumes to remain flat;

- Coal prices in line with the coal price deck on an energy adjusted basis. We assume an average selling price of USD55/tonne (t) in 2022 (2021: USD53.5/t), USD46.2/t in 2023, USD41/t in 2024 and USD38.3/t in 2025;

- Strip ratio for the BIB mine to stay at about 4.5x-4.6x in 2022-2026;

- Cash cost, excluding royalties, to remain between USD26/t and USD29/t until 2025;

- Capex to remain between USD25million and USD27 million in 2022 and 2023, with capex then settling at about USD12 million;

- Dividend payout ratio of 85% in 2022 on high coal prices. Thereafter maintained at 80%, in line with the shareholder agreement.

Stanmore Standalone

- Annual sales volume at 2.3-2.7mtpa;

- Coal prices in line with the hard coking coal price deck at USD300/t in 2022, USD160/t in 2023 and USD140/t thereafter;

- Total free on board (FOB) cost (ex-royalties) at AUD100-105/t in 2022-2023 and thereby increasing to AUD111/t in 2024-2025, in line with the mining plan;

- Capex of AUD70 million in 2022, and then decreasing to AUD10 million-15 million, in line with mining plan, with no expansionary capex requirements.

Dampier Coal (ongoing acquisition)

- Annual sales volume for Poitrel mine at 4.3mtpa in 2022 and 2023 and 4.1mtpa thereafter. Annual sales volume for South Water creek at 6.0mtpa in 2022, 6.1mtpa in 2023 and 6.3mtpa thereafter;

- Coal prices in line with Fitch's hard coking coal price deck at USD300/t in 2022, USD160/t in 2023 and USD140/t thereafter;

- Poitrel's total FOB cost (excluding royalties) at AUD110-112/t. South Creek's FOB cost at AUD89-94/t;

- Capex estimates in line with management expectations. Total capex of AUD110 million-130 million in 2022 and 2023, AUD77 million in 2024 and AUD50 million in 2025;

- Payment of the acquisition loan in line with the terms of repayment.

GEAR Standalone

- AUD30 million invested in Ravenswood towards its capex plan;

- 10% dividend starting 2023 and a 5% dividend payment in 2022, given the company is in the middle of the Dampier acquisition.

RATING SENSITIVITIES

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

- An upgrade of GEMS' IDR;

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

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

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

- Fitch would revise the Outlook back to Stable if the positive sensitivities are not met over the next 12 months.

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: We expect the GEAR holding company's liquidity to remain adequate over the next 12-18 months, given the extended debt maturity profile and strong dividend generation from its two subsidiaries in 2022 because of high commodity prices. GEAR's only sizeable debt maturity is its USD375 million bond due 2026. We expect the dividends from Stanmore to decline from 2022 levels, given the subsidiary's own debt-servicing requirements, with an amortising loan. Still, sustainable dividends from GEMS would keep the interest cover for the holding company above 4x over the next four years, even as we incorporate coal prices to normalise from current levels based on Fitch's coal price deck.

GEMS' liquidity is very comfortable and we expect it to be net cash through over the next four years. The subsidiary has solid EBITDA generation, in light of the recovery in thermal coal prices, and minimal capex requirements over the next four years.

We expect Stanmore's consolidated liquidity profile to remain comfortable in the next 12-18 months, given the strong recovery in metallurgical coal prices, which should accelerate the subsidiary's deleveraging. We expect Stanmore's standalone operations to generate enough free cash flow to repay almost all its existing debt, including the USD120 million facility it took for the BMC acquisition. In addition, strong EBITDA generation from the to-be acquired BMC mines should also be able to repay about USD100 million of the USD625 million acquisition facility in 2022 itself, as the debt has a cash sweep component along with amortising principal.

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)