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

(Fitch Ratings - Jakarta/Singapore - 10 Apr 2022)-- Fitch Ratings has revised the Outlook on PT Golden Energy Mines Tbk (GEMS) to Positive from Stable, and affirmed the Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B+'. At the same time, Fitch Ratings Indonesia has revised the Outlook on GEMS to Positive from Stable, and affirmed the National Long-Term Rating at 'A(idn)'.

The Outlook revision reflects our expectation that GEMS' credit profile is likely to improve over the next 12 months with production scale reaching a level commensurate with that for 'BB-' rated peers in Indonesia. The rating reflects GEMS' competitive cost position, long reserve life and strong financial profile.

GEMS' ratings reflects its Standalone Credit Profile, in line with our updated Parent and Subsidiary Linkage (PSL) Rating Criteria. We assess the credit profiles for both GEMS and its parent, Golden Energy and Resources Limited (GEAR, B+/Positive), at the same 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

Increasing Production Scale: Fitch expects GEMS' credit profile to improve, driven by the operational scale with production rising close to 36 million tonnes per annum (mtpa) in 2022 (2021: 30mtpa, 2020: 34mtpa). We also expect GEMS' annual production to continue ramping up to 50-55mtpa over the medium term, in line with management guidance, subject to regulatory approvals on production quotas.

Limited Capex: GEMS' 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' robust operating cash flow and limited capex to support its strong financial profile with a net cash position.

Cost flexibility: We expect GEMS' 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 4.5x (2021: 4.6x) for its key mine to supports its operating cash flow through the commodity cycle. The miner has been able to sustain its EBITDA per tonne above USD4, even during previous market turns, displaying its competitive cost position and its ability to meaningfully manage costs.

Limited Mine Diversity: GEMS' 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' 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' contracts with leading Indonesian mining contractors, such as PT Saptaindra Sejati, a subsidiary of PT Adaro Indonesia (BBB-/Stable), 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 800 million tonnes and proven and probable reserves of about 1,000 million tonnes, which translates to a reserve life of 20 years. GEMS' BIB mine contributes to 72% of the proven reserves at about 580 million tonnes, with a second-generation licence valid until 2036.

Conservative Financial Profile: We expect GEMS to be able to maintain a conservative financial profile on account of strong operating cash flow from increasing volumes coupled with minimal capex requirements. This is even as we expect GEMS to continue its policy of paying about 80% of its free cash flow as dividends to its shareholders. We forecasts GEMS' gross leverage, defined by gross debt/EBITDA, to remain below 0.2x and maintain its net cash position throughout our over the next four years.

Derivation Summary

GEMS' closest peers are PT Indika Energy Tbk (BB-/Negative) and PT Bayan Resources (BB-/Postitive). We think both GEMS and Indika have a competitive cost position and adequate reserve life for their key mines. Indika's larger scale and well-established operations justify the one-notch difference in their IDRs. However, our expectation that GEMS' production scale will be similar to that of Indika in the next 12 months is reflected in our Positive Outlook on GEMs. The Negative Outlook on Indika reflects a weaker financial profile and uncertainties around its investment plans in non-coal businesses, but the current high coal prices should improve the buffer in its financial profile to support such investments.

Bayan's higher rating reflects its better cost structure, larger production and earning scale and higher profitability, which is also on account of the higher calorific value of its coal. However, we think that the difference in their scale will be comparable in the next 12 months, and is reflected in our Positive Outlook on GEMS. Both entities have a strong financial profile.

Key Assumptions

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

- 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 increase to about 4.5x-4.6x in 2022-2026;

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

- Annual capex to remain between USD25 million-27 million in 2022 and 2023, with capex then settling at about USD12 million.

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

RATING SENSITIVITIES

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

- Increase in scale to about 35mtpa while maintaining its financial profile with net debt/EBITDA below 2.0x;

- GEAR's IDR remains at 'B+' or above.

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

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

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

Comfortable liquidity: GEMS has improving cash flow generation, moderate debt levels and well-distributed amortising debt, which support its comfortable liquidity position. We do not expect the debt at GEMS to increase over the next three to four years because of its modest capex requirements. The entity's short-term debt is about USD59 million, which is easily covered by its cash position of about USD193 million as of end-2021.

Issuer Profile

GEMS is a coal mining company in Indonesia with the fourth-largest coal reserves in the country. GEMS operates three mining concessions, with BIB the largest. Its 1P reserve life is 21 years and 2P reserve life is 25 years. Singapore-based GEAR owns 64.5% of GEMS and Indian entity GMR Coal Resources 30%.

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.

Public Ratings with Credit Linkage to other ratings

Rating of PT Golden Energy Mines Tbk, is subject to a cap of "consolidated +1" based on our Parent Subsidiary Linkage criteria. Hence the rating of GEMS cannot be more than 1 notch higher than the rating of its parent Golden Energy and Resources Limited (B+/Positive).

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)