Moody's affirms Adaro Indonesia's Ba1 ratings; outlook stable

(Singapore, March 07, 2022) -- Moody's Investors Service has affirmed Adaro Indonesia (P.T.) (AI)'s Ba1 corporate family rating (CFR) and the Ba1 rating on its backed senior unsecured notes. The notes are guaranteed by AI's parent Adaro Energy Indonesia Tbk (P.T.) (Adaro Energy).

The outlook remains stable.

AI's Ba1 CFR reflects the credit quality of its parent, Adaro Energy , given the strong operational links between the two companies. These include (1) Adaro Energy holding the largest stake in AI at 88.5%, (2) AI benefiting from Adaro Energy's vertically integrated operations across the coal supply chain, and (3) Adaro Energy guaranteeing all of AI's debt.

"The ratings affirmation reflects our expectation that Adaro Energy will maintain strong credit metrics and very good liquidity over the next 12-18 months, and a conservative approach to investments and shareholder returns," says Maisam Hasnain, a Moody's Vice President and Senior Analyst.

RATINGS RATIONALE

Due to strong earnings at AI's thermal coal mining operations amid high thermal coal prices, Moody's estimates that Adaro Energy's adjusted leverage, as measured by adjusted debt/EBITDA, declined to around 0.8x in 2021 from 2.1x in 2020. Adaro Energy was in a net cash position as of 31 December 2021.

"Adaro Energy's credit quality remains supported by AI, which is its key subsidiary with substantial thermal coal reserves, low operating costs, and solid profitability through coal price cycles," adds Hasnain, who is also Moody's lead analyst for AI.

AI is one of the largest single-location coal producers in the southern hemisphere, with a reserve life of around 17 years, based on around 730 million metric tons of coal reserves as of 31 December 2021.

Assuming Newcastle thermal coal price of around $90-$110 per metric ton, Moody's estimates that Adaro Energy's leverage will remain around 1.0x - 1.5x over the next 12-18 months. Such leverage levels are supportive of the Ba1 ratings.

Moody's expects Adaro Energy to maintain a conservative approach toward new investments, such that they are not incurred at the expense of the company's overall credit profile. Adaro Energy is seeking to diversify its operations and reduce its earnings reliance on thermal coal.

In December 2021, Adaro Energy announced it had signed a letter of intention to invest $728 million in an aluminum smelter in Indonesia. This follows investments in recent years, including power projects and metallurgical coal.

However, non-thermal coal investments are unlikely to provide meaningful earnings over the next 1-2 years. Therefore, Adaro Energy's credit quality will remain constrained by its limited operational and geographic diversification, given its reliance on thermal coal sales at AI to drive most of its earnings over the next few years. Cash generated from AI will also be a key source of funding for Adaro Energy's diversification plans and will help Adaro Energy reduce its reliance on external debt to fund these investments.

The Ba1 ratings also reflect Moody's expectation that AI's coal contract of work (CCoW) mining license, which expires in October 2022, will be extended on broadly similar terms. Regulatory uncertainty around the extension of AI's mine license has decreased, following PT Arutmin Indonesia's 10-year license extension in November 2020. Arutmin, which is owned by Bumi Resources Tbk (P.T.) (Caa3 negative), was one of the first large Indonesian coal miners to have its CCoW expire and will likely serve as a precedent for other CCoW license holders, including AI.

Moody's expects Adaro Energy will maintain very good liquidity over the next 18 months with sufficient cash to meet its needs until 30 June 2023. Moody's also expects Adaro Energy to continue to proactively repay debt ahead of scheduled maturities, including the $750 million notes due in October 2024.

AI's US dollar notes are rated in line with AI's Ba1 CFR. Legal subordination risk for noteholders is mitigated as the notes rank pari passu with AI's unsecured bank loans. Structural subordination risk is mitigated as AI is an operating company, generating most of Adaro Energy's revenue.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Adaro's ESG Credit Impact Score is moderately negative (CIS-3), reflecting the company's very high exposure to environmental risks and high exposure to social risks. These risks are counterbalanced by the company's ability to operate with strong credit metrics, very good liquidity, and strong governance practices.

Adaro's exposure to environmental risk is very highly negative (E-5 issuer profile score), driven by very high carbon transition risk for thermal coal, which will continue to generate most of Adaro's earnings over the next 2-3 years.

Adaro's exposure to social risk is highly negative (S-4 issuer profile score), driven primarily by the high exposure of its coal mining activities to human capital, health and safety, responsible production, and demographic and societal trend risks.

Adaro's exposure to governance risk is neutral-to-low (G-2 issuer profile score), reflecting the company's sound financial strategy, and strong creditability and track record in terms of maintaining prudent financial policies, including operating with low leverage and proactive debt repayments even during coal price downturns.

OUTLOOK

The outlook is stable, reflecting Moody's expectation that Adaro Energy will effectively execute its growth strategy while adhering to conservative financial policies over the next 12-18 months.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade is unlikely in the next 12-18 months because of the company's lower scale and limited product diversification relative to its similarly rated mining peers.

Nevertheless, prospects for an upgrade could arise over time if Adaro Energy significantly improves its business profile through commodity and geographic diversification while adhering to conservative financial policies, maintaining very good liquidity and demonstrating a prudent approach toward further investments and shareholder distributions.

Moody's could downgrade the rating if (1) Adaro Energy experiences operational disruptions or industry fundamentals weaken such that its earnings and cash flow decline; (2) AI fails to extend its CCoW on similar terms; (3) Adaro Energy engages in aggressive shareholder distributions or capital investments, which would indicate a deviation from its stated prudent financial policies.

Specifically, adjusted debt/EBITDA above 3.0x or adjusted EBIT/interest below 4.0x on a sustained basis could prompt a review for downgrade.

The principal methodology used in these ratings was Mining published in October 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1292752. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Adaro Indonesia (P.T.) (AI) is one of the largest single-site coal producers in the southern hemisphere, and one of the world's largest sub-bituminous coal companies. AI is 88.5% owned by Adaro Energy Indonesia Tbk (P.T.), an integrated energy group listed on the Indonesia Stock Exchange with a market capitalization of around IDR83 trillion ($5.7 billion) as of 1 March 2022. (ends)