Moody's affirms Inalum's Baa2 ratings; changes outlook to negative

(Singapore, April 13, 2020)--Moody's Investors Service has affirmed Indonesia Asahan Aluminium (Persero) (P.T.) (Inalum)'s Baa2 issuer rating and the Baa2 ratings on the company's senior unsecured notes. At the same time, Moody's has changed the ratings outlook to negative from stable.

RATINGS RATIONALE

Inalum's Baa2 issuer rating reflects the application of Moody's rating methodology for government-related issuers — published in February 2020 — that combines: (1) its ba2 baseline credit assessment (BCA); and (2) a three-notch uplift based on Moody's expectation of a high likelihood of extraordinary support for the company from the government of Indonesia (Baa2 stable) in times of need.

"The negative outlook reflects the weaker than expected operating performance of some of Inalum's subsidiaries, mainly on account of margin contraction amid softer commodity prices, and slower than expected capacity and downstream expansion," says Nidhi Dhruv, a Moody's Vice President and Senior Analyst.

Moody's expects Inalum's weaker financial performance, coupled with the proposed debt-funded acquisition of a 20%-25% stake in Vale Indonesia, will drive debt levels to around $6.5 billion, and gross adjusted leverage to 8.0x-8.5x in 2020 from 6.2x in 2019.

However, the interest on the additional debt can be serviced out of dividends upstreamed from its 65%-owned coal subsidiary, PT Bukit Asam (Persero) Tbk, which Moody's expects will account for over 90% of dividends at the Inalum level. Inalum's other subsidiaries, both also 65%-owned, PT Aneka Tambang (Persero) Tbk (ANTAM) and PT Timah (Persero) Tbk, are relatively small and financially weaker.

"Inalum's ba2 BCA continues to benefit from the company's diversified mining portfolio across coal, gold, nickel, tin, copper and aluminium, as well as its low cost, globally competitive operations," adds Dhruv, also Moody's Lead Analyst for Inalum.

Inalum's rating also incorporates its 51.2% ownership (beneficial equity limited to 41.2%) of PT Freeport Indonesia (PTFI), which operates the world's second largest copper mine and largest gold mine at Grasberg. The development of the underground mine at Grasberg is progressing as per plan, although Moody's expects PTFI to contribute material dividends only in 2022-2023.

Inalum's liquidity is weak, and its cash sources will not be sufficient to meet capex requirements across the group, and debt maturities of $1.0 billion at the holding company over the next 12-18 months. Nevertheless, refinancing risk is low given the company's government ownership and access to the bank and bond markets. As such, Moody's expects Inalum to refinance in a timely manner.

Inalum is the government-appointed holding company for mining state-owned entities. It is responsible for managing the country's mineral reserves and developing Indonesia's downstream industry. The government also appoints board-level staff at Inalum and plays a key role in Inalum's budget planning, investments and financing decisions. (ends)